Social Security and Defined Benefit Pension Payout Choices: Evidence from a

Survey of Retirees

Steven Nyce, Towers WatsonSylvester Schieber, Towers Watson

John Shoven, Stanford University and NBERSita Slavov, George Mason University and NBER

David Wise, Harvard University and NBER

SIEPR Conference on Working Longer and RetirementOctober 9, 2015

Motivation

• What is the best way to draw down on retirement assets?

• Social Security:– Delaying Social Security is equivalent to purchasing

annuity.– Delay can increase retirement wealth for many

people (Shoven and Slavov 2014).– Majority have wealth to finance a 2-year delay.– Most claim at 62 or upon retirement; few delay to 70.

Motivation

• DB pensions:– Annuity versus lump sum choices.– Lump sums often actuarially disadvantageous.– May be optimal to use lump sum to delay Social

Security.• Broader question: Why do people not annuitize?• We present new evidence on why people claim

Social Security early and choose lump sums over annuities.

Our Survey

• Panel of retirees who receive services through Towers Watson’s OneExchange health insurance marketplace

• Part of ongoing survey series conducted by Towers Watson.

• 2,620 respondents.

Distribution of Birth Years0

24

68

Per

cent

1920 1930 1940 1950 1960 1970In what year were you born?

Part 1: Social Security Claiming Choices

• Focus on people born after 1954 (n = 2,608).• 27.2 percent have NRA = 65, 44.8 percent have

NRA = 66, remainder between 65 and 66.• Ask those who have claimed:

– Why they claimed when they did.– How they financed a delay.– How familiar they were with various rules.

• Ask those who have not yet claimed when they plan to claim and why.

Table 1: Are you currently collecting Social Security benefits? No. %Yes 2,532 96.6No, I have not yet started collecting Social Security benefits 46 1.8No, I am not eligible for Social Security benefits 24 0.9Missing 6 0.2Not applicable (born 1954 or later) 12 0.5Total 2,620 100

Distribution of Claiming Ages0

1020

3040

50P

erce

nt

20 40 60 80Claiming Age (Rounded Down)

Full Sample

Table 2: What type of Social Security benefit do you receive? No. %Retired Worker 2,325 92.9Disability 28 1.1Spousal 96 3.8Survivor 41 1.6Don’t know 9 0.4Missing 3 0.1Total 2,502 100

Table 3: What is your current relationship status? No. %Single 112 4.3In a domestic partnership 21 0.8Married 1,957 75Divorced 120 4.6Widowed 311 11.9Separated 6 0.2Missing 81 3.1Total 2,608 100

Table 4: How did the total earnings in your career compare to your spouses? No. %Mine were higher 1,630 83.3My spouse(s) earned more 243 12.4About the same 68 3.5Don’t know 11 0.6Missing 5 0.3Total 1,957 100

Table 5: What is your current employment status? No. %Working full time 24 0.9Working part time 201 7.7Not currently working but looking for work 56 2.1Not currently working and not looking for work 2,242 86.0Missing 85 3.3Total 2,608 100

Table 6: Have you worked in the past? No. %Yes 2,104 91.6No 183 8Missing 11 0.5Total 2,298 100

Distribution of Retirement Ages0

24

68

10P

erce

nt

0 20 40 60 80Retirement Age (Rounded Down)

Full Sample

Distribution of Claiming Ages (Restricted Sample, n = 1,802)

010

2030

4050

Per

cent

60 65 70 75Claiming Age (Rounded Down)

Primary Earner/Single, Reti red Worker, Claim at 62+, Work to 50+

Indicator for claiming before/at/after NRA No. %Claim before NRA 1,212 67.3Claim at NRA 424 23.5Claim after NRA 166 9.2Total 1,802 100

Table 7: Claim Ages (Primary Earners/Singles, Claimed at 62+, Worker Benefit, Work to 50+)

Distribution of Retirement Ages (Restricted Sample, n = 1,802)

02

46

810

Per

cent

50 60 70 80 90Retirement Age (Rounded Down)

Primary Earner/Single, Retired Worker Benefi t, Claim at 62+, Work to 50+

Difference Between Retirement Age and Claiming Age (Restricted Sample)

05

1015

2025

Per

cent

-20 -10 0 10 20 30Age last worked - Claiming age

Primary Earner/Single, Reti red Worker Benefi t, Claim at 62+, Work to 50+

Claim before NRA Claim at NRA Claim after NRA TotalHow strongly do you agree or disagree with the following No. % No. % No. % No. %I am very satisfied with my decision on when to start my Social Security benefitStrongly Disagree 31 2.6 9 2.1 6 3.6 46 2.6Disagree 77 6.4 13 3.1 5 3 95 5.3Neither Agree Nor Disagree 148 12.2 29 6.8 9 5.4 186 10.3Agree 543 44.8 195 46 73 44 811 45Strongly Agree 391 32.3 174 41 73 44 638 35.4Missing 22 1.8 4 0.9 0 0 26 1.4Total 1,212 100 424 100 166 100 1,802 100

If I were to do it over again, I would have delayed starting Social Security until a later ageStrongly Disagree 248 20.5 95 22.4 35 21.1 378 21Disagree 339 28 165 38.9 60 36.1 564 31.3Neither Agree Nor Disagree 211 17.4 67 15.8 33 19.9 311 17.3Agree 273 22.5 58 13.7 24 14.5 355 19.7Strongly Agree 90 7.4 18 4.2 6 3.6 114 6.3Missing 51 4.2 21 5 8 4.8 80 4.4Total 1,212 100 424 100 166 100 1,802 100

Table 8: Satisfaction with Claiming Decision (Primary Earners/Singles, Claimed at 62+, Worker Benefit, Work to 50+)

Claim before NRA Claim at NRA Claim after NRA TotalHow strongly do you agree or disagree with the following statements? No. % No. % No. % No. %

Strongly Disagree 292 24.1 105 24.8 41 24.7 438 24.3Disagree 428 35.3 198 46.7 71 42.8 697 38.7Neither Agree Nor Disagree 209 17.2 48 11.3 27 16.3 284 15.8Agree 158 13 34 8 10 6 202 11.2Strongly Agree 57 4.7 17 4 7 4.2 81 4.5Missing 68 5.6 22 5.2 10 6 100 5.5Total 1,212 100 424 100 166 100 1,802 100

If I were to do it over again, I would have worked longerStrongly Disagree 306 25.2 117 27.6 29 17.5 452 25.1Disagree 346 28.5 150 35.4 56 33.7 552 30.6Neither Agree Nor Disagree 211 17.4 71 16.7 41 24.7 323 17.9Agree 229 18.9 51 12 22 13.3 302 16.8Strongly Agree 60 5 15 3.5 7 4.2 82 4.6Missing 60 5 20 4.7 11 6.6 91 5Total 1,212 100 424 100 166 100 1,802.00 100

If I were to do it over again, I would have lived off my other retirement saving after stopping work and before starting Social Security

Table 8: Satisfaction with Claiming Decision (Primary Earners/Singles, Claimed at 62+, Worker Benefit, Work to 50+)

Which best describes your reason for starting to collect Social Security benefits when you No. % No. % No. % No. %I/we needed the money 408 33.7 94 22.2 25 15.1 527 29.2I/we didn't trust that Social Security wouldn't cut benefits in the future 194 16 44 10.4 12 7.2 250 13.9I felt like my health wasn't good and that I might not enjoy a long life 123 10.1 13 3.1 5 3 141 7.8I/we thought that I/we could invest the money and end up ahead 249 20.5 65 15.3 15 9 329 18.3I/we had stopped working and assumed that one should commence Social Security benefits as soon as possible after stopping 398 32.8 90 21.2 34 20.5 522 29I had reached full retirement age and the earnings test no longer applied to me 61 5 209 49.3 86 51.8 356 19.8I/we were encouraged to claim by an employee at the Social Security offi ce 46 3.8 16 3.8 13 7.8 75 4.2Other 177 14.6 33 7.8 24 14.5 234 13

Table 9: Reasons for Claiming (Primary Earners/Singles, Claimed at 62+, Worker Benefit, Work to 50+)Claim Before NRA Claim at NRA Claim after NRA Total

How many months elapsed between the time you last worked and the time you started receiving Social Security? No. % No. % No. % No. %Two months or less 210 26 91 40.1 52 53.1 353 31.23-11 months 114 14.1 41 18.1 16 16.3 171 15.112-23 months 80 9.9 22 9.7 7 7.1 109 9.624 months or more 397 49.2 71 31.3 21 21.4 489 43.2Missing 6 0.7 2 0.9 2 2 10 0.9Total 807 100 227 100 98 100 1,132 100

Claim before NRA Claim at NRA Claim after NRA Total

Table 10: Time Elapsed Between Retirement and Claiming (Primary Earners/Singles, Claimed at 62+, Worker Benefit, Work to 50+)

How did you pay for living expenses between the time you stopped work and the time you started receiving Social Security? No. % No. % No. % No. %I/we used our savings 281 47.5 64 47.8 20 45.5 365 47.5I/we relied on my spouse's income 70 11.8 22 16.4 4 9.1 96 12.5I/we relied on help from family and friends 0 0 1 0.7 0 0 1 0.1I/we took out a loan 1 0.2 0 0 0 0 1 0.1Other 334 56.5 74 55.2 25 56.8 433 56.3

Claim before NRA Claim at NRA Claim after NRA Total

Table 11: Financing Gap Between Retirement and Claiming (Primary Earners/Singles, Claimed at 62+, Worker Benefit, Work to 50+)

No. % No. % No. % No. %

Not at all familiar 20 3.5 0 0 0 0 20 2.618 3.1 3 2.2 0 0 21 2.8

Somewhat familiar 128 22.1 22 15.8 2 4.9 152 20.1140 24.2 35 25.2 4 9.8 179 23.6

Very familiar 267 46.2 79 56.8 35 85.4 381 50.3Missing 5 0.9 0 0 0 0 5 0.7Total 578 100 139 100 41 100 758 100

Not at all familiar 39 6.7 4 2.9 2 4.9 45 5.920 3.5 8 5.8 2 4.9 30 4

Somewhat familiar 93 16.1 21 15.1 6 14.6 120 15.8137 23.7 33 23.7 7 17.1 177 23.4

Very familiar 277 47.9 69 49.6 24 58.5 370 48.8Missing 12 2.1 4 2.9 0 0 16 2.1Total 578 100 139 100 41 100 758 100

Claim before NRA Claim at NRA Claim after NRA Total

Table 12: Familiarity with Social Security Rules (Primary Earners/Singles, Claimed at 62+, Worker Benefit, Work to 50+, Born in 1943 or Later)

Social Security benefits for widows and widowers are based on the higher of the two spouses’ individual Social Security benefits

Monthly Social Security benefits increase by about 8 percent for each year you delay starting them between age 62 and 70

If you were contemplating retirement today, would you be more likely to wait to start Social Security? No. % No. % No. % No. %No, I would make the same decision 414 71.6 115 82.7 33 80.5 562 74.1Yes, I would delay starting Social Security as long as I could 160 27.7 24 17.3 8 19.5 192 25.3Missing 4 0.7 0 0 0 0 4 0.5Total 578 100 139 100 41 100 758 100

Claim before NRA Claim at NRA Claim after NRA Total

Table 13: Desire to Change Claiming Age (Primary Earners/Singles, Claimed at 62+, Worker Benefit, Work to 50+, Born in 1943 or Later)

Part 2: Defined Benefit Payout Choices

• Focus on individuals who are retired from an employer (n = 2,381).

• Ask about DB coverage and payout options that were offered.

• Ask those with choice about approximate lump sum and annuity amounts.

• Ask those who chose lump sum:– What they did with it.– Why they chose it.

Table 14: Pension TypeWhat best describes the type of pension offered by the main employer from which you retired? No. %Defined Benefit 1,817 76.3Defined Contribution 914 38.4Not sure which type 195 8.2No retirement plan 46 1.9Don't know/not sure 46 1.9

Table 16: Payout OptionsThinking about the money from your defined benefit (DB) plan, what options were offered to you at the time you left your company? No. %Single Life Annuity 908 50Joint and Survivor Annuity 1,300 71.5Fixed Period Annuity 94 5.2Lump sum amount 389 21.4Other option 52 2.9

Table 17: Lump Sum AmountsThinking about the lump sum benefit from your defined benefit (DB) plan, how large was the lump sum benefit when you came to retire? No. %Less than $10,000 4 1Between $10,000 and less than $25,000 7 1.8Between $25,000 and less than $50,000 13 3.3Between $50,000 and less than $100,000 16 4.1Between $100,000 and less than $200,000 51 13.1Between $200,000 and less than $300,000 57 14.7Between $300,000 and less than $400,000 41 10.5Between $400,000 and less than $500,000 26 6.7$500,000 or more 82 21.1Don’t know 82 21.1Missing 10 2.6Total 389 100

Table 18: Annuity AmountsThinking about one of the monthly benefits you were offered for the rest of life, how large was this monthly amount? No. %Less than $500 53 3.1Between $500 and less than $1000 150 8.7Between $1000 and less than $1500 238 13.7Between $1500 and less than $2000 261 15.1Between $2000 and less than $3000 371 21.4Between $3000 and less than $4000 235 13.6Between $4000 and less than $5000 119 6.9$5000 or more 181 10.4Don’t know 88 5.1Missing 38 2.2Total 1,734 100

Table 19: Lump Sum versus Annuity ChoiceDid you select a lump sum benefit or did you opt for a monthly benefit? No. %Took the lump sum 121 34.9Took the monthly benefit for the rest of life 194 55.9Took the monthly benefit for a fixed period 2 0.6Took some money as a lump sum and the rest as a monthly benefit 28 8.1Missing 2 0.6Total 347 100

Table 20: Use of Lump Sum BenefitWhat did you do with your lump sum benefit? No. %Rolled it into an IRA 128 85.9Used it to pay off debts or mortgage 6 4Spent it on a splurge item such as the vacation of a lifetime or a boat that you had always wanted 1 0.7Used for normal living expenses 11 7.4Invested the money in stocks, bonds and mutual 36 24.2Helped my children or grandchildren with their 1 0.7Other 5 3.4

Table 21: Reasons for Choosing Lump SumTo what extent do you agree with the following as reasons you selected the lump sum benefit option? No. %I thought the value of the lump sum was greater than the potential value of lifetime monthly benefitsStrongly Disagree 0 0Disagree 7 4.7Neither Agree Nor Disagree 14 9.4Agree 54 36.2Strongly Agree 40 26.8Missing 34 22.8Total 149 100

My financial advisor suggested the lump sum was of greater value than the lifetime monthly benefitsStrongly Disagree 15 10.1Disagree 7 4.7Neither Agree Nor Disagree 38 25.5Agree 34 22.8Strongly Agree 17 11.4Missing 38 25.5Total 149 100

Table 21: Reasons for Choosing Lump SumTo what extent do you agree with the following as reasons you selected the lump sum benefit option? No. %I needed the money to pay off existing bills and debtsStrongly Disagree 73 49Disagree 24 16.1Neither Agree Nor Disagree 4 2.7Agree 3 2Strongly Agree 0 0Missing 45 30.2Total 149 100

I did not trust the insurance company or provider of the lifetime monthly benefit was offering me a fair dealStrongly Disagree 26 17.4Disagree 21 14.1Neither Agree Nor Disagree 33 22.1Agree 16 10.7Strongly Agree 5 3.4Missing 48 32.2Total 149 100

Table 21: Reasons for Choosing Lump SumTo what extent do you agree with the following as reasons you selected the lump sum benefit option? No. %I was afraid that I might die before getting back monthly benefits equal to the value of my lump-sum balanceStrongly Disagree 16 10.7Disagree 17 11.4Neither Agree Nor Disagree 23 15.4Agree 35 23.5Strongly Agree 14 9.4Missing 44 29.5Total 149 100

Conclusions• Motivations for claiming Social Security early:

– Need for cash.– Assumption that claiming should occur upon stopping work.– Desire to invest the money and come out ahead.

• Majority indicate familiarity with provisions that make delay attractive.

• Motivations for claiming lump sum:– Perception of actuarial fairness. – Possible desire to invest (large fraction rolled into IRA).

• Further steps:– Examine relationships between health, work history, and wealth drawdown

behavior.– Examine generosity of lump sums versus annuties.