CHICAGO (Reuters) – Fewer Americans are asking Social Security to “show me the money” as soon as possible.
The share of workers claiming Social Security retirement benefits at the earliest possible date has plunged in recent years. That probably reflects growing public awareness of the higher annual benefits available through delayed claiming. But it may also be driven by the dramatic shift by employers away from traditional pension retirement coverage, and toward 401(k) savings plans.
Retiring workers can claim Social Security anytime from age 62 to 70. The benefit formula is designed to be “actuarially fair,” meaning all claimants should come out roughly equal no matter when they claim.
But delayed filing often works out in favor of those who are patient – especially for better-educated, healthier people, who tend to live longer. And for married couples, it can be beneficial for the higher-earning spouse to delay as long as possible, since the surviving spouse can step up to 100 percent of the deceased spouse’s benefit.
The Social Security Administration (SSA) determines your benefit amount by taking into account your 35 years of highest wages, and translating them into something called the Primary Insurance Amount (PIA). If you wait until the full retirement age (FRA) of 66, you would receive 100 percent of PIA. If you start at 62 (the earliest opportunity), you will receive a reduced benefit for the rest of life – 25 percent lower.
By waiting until after full retirement age (66), you would get the delayed retirement credit, which is 8 percent for each 12-month period that you delay. The credits are available until age 70.
As recently as 2004, half of all men and 55 percent of women filed at age 62. But in 2016, just 32 percent of men and 37 percent of women were filing at 62. The share of men filing at their FRA jumped from 11.5 percent in 2004 to 17.9 percent in 2016. For women it rose from 7.5 percent to 12.6 percent. The number of claimants delaying beyond FRA also has risen, but remains a small portion of overall claims. Just 4.2 percent of men – and 3.6 percent of women – filed between age 67 and 69 in 2016.
PENSION SHIFT DRIVES CHANGE
Surveys reflect growing public understanding of the advantages of delayed filing. Personal-finance journalists cover the topic frequently and a growing cottage industry of online Social Security claiming tools are marketed these days, urging people to run “what if?” illustrations.
What’s more, the SSA and many financial advisers have been moving their guidance to claimants away from a focus on “break-even” ages – that is, the age when total lifetime benefits received would be equal using different claiming ages. (For example, if you file at age 62, you are ahead in accumulated benefits until age 78, when a person who waited until the full FRA catches up to you and then begins to pull ahead, and remains ahead for the rest of her life.) The fallacy with that approach is that it requires certainty about how long you will live.
But research published last year by the Center for Retirement Research at Boston College (CRR) points to the changing landscape of workplace retirement plans as a key driver of later Social Security claiming.
CRR worked with a model comparing two groups of retirees – those born between 1931 and 1941 and the early baby boomers (born between 1948 and 1953). Researchers looked at data reflecting retirees’ financial constraints and preferences toward work at later ages. The early boomers were in better health in their early sixties and much less likely to be fully retired than those born between 1931 and 1941 – and hence were filing later for Social Security.
The research model suggested that two drivers of that trend were better health, and the falling number of workers covered by defined benefit (DB) pensions, which have been increasingly replaced by 401(k) plans.
DB pensions contain a promise by employers to pay a specified monthly benefit for life, while 401(k)s come with a promised employer contribution to your investment account.
Sixty-two percent of workers offered a retirement plan on the job had a DB pension in 1983 – but that fell to just 17 percent in 2016, according to a separate CRR analysis of Federal Reserve data. During the same period, the percentage of workers offered only a defined contribution plan soared, from 12 percent to 73 percent.
Like Social Security, DB pensions are designed around an age when workers can receive full benefits – and that is a powerful incentive to retire, notes Geoff Sanzenbacher, associate director of research at CRR and a co-author of the study. “For most people, that’s it – you hit that age and decide to retire,” he said.
The incentives in defined contribution plans are the mirror opposite, he added. “DC plans don’t have any mechanism for suggesting a retirement age – and if anything, there is always an incentive to keep working and saving. And people worry about exhausting their savings, which doesn’t happen with a lifetime DB pension benefit.”
Social Security’s FRA is rising under reforms approved in 1983, gradually increasing from 65 to 67 for workers born in 1960 or later. The reform functions as a benefit cut, since it raises the bar for receiving full benefits. The CRR research did not find that the higher retirement age is serving as much of an incentive to delay filing.
But Sanzenbacher does think any move to increase the FRA further would change behavior. “If we saw an increase to 70, you’d see more people delaying wherever possible.”
(The writer is a Reuters columnist. The opinions expressed are his own.)
Editing by Matthew Lewis