Behavioral economics and the Social Security full benefit age

August 14, 2008

I recently gave a talk at the Retirement Research Consortium conference on the behavioral economics lessons gleaned from retirement research and how those lessons may be applicable to other pressing policy discussions. (I blogged about it here). In that speech I argued that the full benefit age seems to have a signaling effect on social security claiming behavior. The webcast of the speech is available here. A recent blog posting argues that my discussion overlooked the role of the retirement earnings test.

It is true that if people don't understand how the retirement earnings test (RET) works, knowing that it no longer applies starting at the full benefit age could cause some people to claim at that age. (Those who do understand the RET know that the recalculation that occurs when a beneficiary subject to the RET reaches the full benefit age compensates them for the benefits offset while they were still working--again making the benefit actuarially fair).

Whatever is or is not understood about the operations of the RET, the response to it is not large enough to drive the response that we see at the full benefit age. In a recent CBO working paper, Jae Song and Joyce Manchester found that the elimination of the RET in 2000 for people at the full benefit age through age 69 led to an increase of about 5 percentage points for men and about 2 percentage points for women in claiming at age 65 (the full benefit age) in 2000-2002. Hence the RET cannot explain the full peak of 12-14 percent moving out as the full benefit age rises.