One of the biggest mistakes people make when it comes to Social Security is claiming too early at a much lower benefit.
Americans can boost their chances of not outliving their savings by delaying taking Social Security benefits, which will increase their monthly check substantially for decades.
But even understanding that economic argument gets trumped by more powerful psychological factors, according to a new working paper published by the National Bureau of Economic Research. Instead, many people start claiming Social Security benefits as soon as they possibly can — at age 62.
"They give up money to be able to do that," Suzanne Shu, a professor of marketing at Cornell University’s Dyson School of Applied Economics and Management and one of the co-authors of the paper, told Yahoo Finance. "They front load."
Psychological explanations for early claiming
Approximately 40% of men and 47% of women claim at age 62, according to the Social Security Administration. Only 3% of men and 4% of women claim at age 70, when they get the most in benefits. Roughly 17% — averaged across men and women — claim at their full retirement age. These levels do shift slightly from year to year, but not by a lot.
While there are "clearly good personal reasons for claiming early, such as poor health or financial constraints due to no other source of retirement income, claiming earlier versus claiming later reflects significant psychological variables," said John W. Payne, the paper’s other co-author and a professor emeritus of business administration at the Fuqua School of Business at Duke University and a professor of psychology and neuroscience.
The authors’ research was conducted over the past decade and consisted of four studies with roughly 4,000 participants in total between the ages of 40 and 62, who have not claimed their benefit yet.
"We wanted to understand what people are thinking about as they're working through the trade-offs of earlier versus later claiming," Shu said.
Perhaps the biggest factor in the grab-the-money-ASAP decision is the psychological ownership of one’s Social Security benefits, according to the research.
"Many people get fixated on wanting to get the money sooner," Justin Smith, a fee-only certified financial planner with Savant Wealth Management in Phoenix, Ariz., told Yahoo Finance.
That’s exactly what Shu and Payne discovered.
The second psychological factor that results in early claiming is a feeling that if you don't live long enough, the government gets to keep some of your money.
"The more you feel like it's your money that the government has been sitting on, the sooner you want it back," Shu said.
"That your money is waiting for you is not technically true," Shu added. "That is not how our Social Security system works in the US, which uses the money contributed by current workers to pay current beneficiaries. And yet people are looking at the money that they've contributed into Social Security as being held almost like a 401(k) account that they're going to cash out once they retire."
Interestingly, the researchers did not find that people were as stressed about the solvency of Social Security for their reasoning about when to start their checks rolling.
Social Security's reserves are projected to run out in 2033, at which point the program will be able to pay out just 77% of benefits to seniors. That has repercussions for many workers who plan to rely on Social Security for a major portion of their retirement income.
"One reason people don’t delay Social Security claiming is that they're worried that the Social Security Administration is going to run out of money, that the trust fund is going to go to zero, and they want their money before that happens," Shu said. While that does have some effect, "it turns out in our research that the psychological explanations are actually more powerful in explaining the people who want to claim earlier versus claim later."
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You can’t ignore the financial payback of patience
If you have the flexibility to delay benefits, the increase that you get by waiting is formidable. Pushing back tapping your benefits from your full retirement age, or FRA — which ranges in age from 66 to 67 — until age 70, you earn delayed retirement credits. Those come to roughly an 8% per year annual increase in your benefit for each year until you hit 70 when the credits stop accruing.
For many Americans, the average monthly benefit is around $2,000. If you live to age 90 or longer, you will be better off by about $128,000 in cumulative payouts by delaying claiming from the earliest date possible (age 62) to the latest age possible (age 70), according to the research report.
If you were born in 1960 or later, you’ll receive about 70% of your FRA payout when you claim early at age 62, and about 132% if you claim later at age 70.
Other findings: Older respondents say they plan to claim earlier than younger respondents. No doubt as they close in on retirement age somehow the desire to kick off monthly benefits becomes more appealing than when it’s two decades down the road.
"If you ask someone who is 45, they’ll probably say 'I'll delay it because that's a smart thing to do,'" Payne said. "But at 60, if you ask what do you want to do, they're more likely to say, 'I’ll want to take it early.'"
And not surprisingly, people with more retirement savings socked away said they plan to wait to claim beyond age 62.
How to reframe the claim early psyche
To solve the psychological ownership piece, "provide an opportunity to grab a little bit of what people think is theirs early on," Shu said. "And so at 62, provide the option to pull a little bit of money out of the system, but not to actually trigger the full monthly check that Social Security would normally provide if you began claiming."
Another way that doesn’t involve major policy gyrations: Reframe the Social Security claiming mindset by asking first what someone would advise someone else, and most people will say they would tell them to delay, Payne said. Then ask them about their own strategy.
Sen. Bill Cassidy (R-La.) has also proposed legislation with Sens. Chris Coons (D-Del.), Susan Collins (R-Maine), and Tim Kaine (D-Va.) to address what many see as a stumbling block for waiting to claim — a lack of understanding of how it all works.
The bill would push the Social Security Administration to change the language it uses to describe how benefits change with age. It would also require the agency to send paper statements to more Americans showing them how when they claim affects their benefit amount.
Many people claim early without thinking about how it "might reduce both their lifetime retirement benefits and their spouse’s survivor benefits," Smith said. A better understanding could help.
"Claiming Social Security right when you retire is a simple approach that fills the cash flow gap," Smith said, "but often leaves money on the table."
Kerry Hannon is a Senior Reporter and Columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of 14 books, including "In Control at 50+: How to Succeed in The New World of Work" and "Never Too Old To Get Rich." Follow her on Twitter @kerryhannon.
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