Social Security and Defined Benefit Pension Payout Choices: Evidence from a Survey of Retirees
By Steve Nyce (Willis Towers Watson), Sylvester J. Schieber (Independent), John B. Shoven (Stanford University – Department of Economics; National Bureau of Economic Research (NBER)), Sita Slavov (George Mason University – School of Policy, Government, and International Affairs), David A. Wise (National Bureau of Economic Research (NBER); Harvard University – Harvard Kennedy School (HKS))
Delaying Social Security claiming is equivalent to buying an annuity, as individuals who delay forgo current benefits in exchange for higher monthly benefits in the future. Despite growing evidence that this annuity is offered on extremely generous terms, the majority of people claim well before age 70. In addition, many people offered a choice between a lump sum and annuity payout from their defined benefit pension choose the lump sum even though it is typically actuarially disadvantageous. We present new evidence, based on an original survey, on why people claim Social Security early, how satisfied they are ex post with their claiming decision, and how well they understood Social Security’s rules at the time of claiming. Our survey also provides insight into defined benefit payout choices by asking people about these choices as well as their motivations for choosing a lump sum over an annuity. We find that the most common reasons for claiming Social Security early are a need for cash, an assumption that claiming should occur upon stopping work, and a desire to invest the money and come out ahead. For defined benefit pensions, we find that less than half of individuals who were offered a choice chose the lump sum, and among individuals who chose the lump sum, a large number rolled the money into an IRA.