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Probabilistic Thinking and Early Social Security Claiming

Probabilistic Thinking and Early Social Security Claiming. 8th Annual Joint Conference of the Retirement Research Consortium “Pathways to a Secure Retirement” August 10-11, 2006 Washington, D.C. Motivation. Do people claim SS based on their survival expectations?

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Probabilistic Thinking and Early Social Security Claiming

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  1. Probabilistic Thinking and Early Social Security Claiming 8th Annual Joint Conference of the Retirement Research Consortium “Pathways to a Secure Retirement” August 10-11, 2006 Washington, D.C.

  2. Motivation • Do people claim SS based on their survival expectations? • Hurd, Smith and Zissimopoulos - HSZ (2004) • Use direct measures of survival expectations • Findings: subjective survival of 0 associated with early claiming; otherwise, no effect • Is the effect found by HSZ too small? • Survey measures of survival expectations capture much individual heterogeneity in risk • But also have a lot of measurement error

  3. This Paper • We reexamine whether people claim SS based on their survival expectations • Correct measurement error in elicited subjective survival probabilities using rich set of risk factors as instruments • Findings: People act on their subjective survival beliefs • Statistically and economically significant effect of subjective survival on SS claiming for people working at 62 -elasticity of claiming probability with respect to survival probability = -1.24

  4. This Paper (cont.) • Compare with predictions of objective survival probability based on same risk factors • Similar effect on SS claiming • Do not contain more information than subjective survival to explain SS claiming • Our findings suggest that people • have highly hetereogenous mortality expectations • their expectations are largely rational • they act on these beliefs in deciding when to claim Social Security benefits

  5. The Analytical Samples • Use data from the Health and Retirement Study (HRS) • Follow HSZ and study 2 groups 1. People who are retired by age 62 • Analyze SS claiming by age 64 2. People who are NOT retired by age 62 • Analyze joint decision to retire and claim by age 64

  6. 79.2% claim in first year of eligibility 89.6% claim by third year No effect of survival expectations (all specifications) Early Retiree Sample:Claiming by those retired by age 62 Months since 62nd birthday

  7. 21.2% claim in first year of eligibility 62.2% claim by third year Significant effects of survival expectations when corrected for measurement error Late Retiree Sample:Claiming by those not retired by age 62 Age 65 spike N=1801 Months since 62nd birthday

  8. Correcting for Measurement Errors • Probabilistic beliefs about survival in HRS (On a scale from 0 to 100) What are the chances that you will live to be age 75 or more? • Measurement error: rounding and heaping at ‘50’ and ‘100’ • Use Instrumental Variable methods to correct for measurement error Four sets of instruments: • Basic demographic characteristics • Health variables (self-reported health and conditions) • Dummy variables on parental mortality (own and spouse) • Optimism index

  9. Survey measure of survival beliefs are quite noisy many focal answers at “0”, “50” and “100” Heterogeneity of Survival Beliefs and Measurement Error Subjective Probability of Survival to Age 75

  10. But there is a lot of individual variability in subjective mortality risk based on risk factors (see Table 5) Heterogeneity of Survival Beliefs and Measurement Error (cont.) Predicted Subjective Survival Probability

  11. The effects of subjective survival expectations on claiming behavior • Bivariate probit model with demographics, health and wealth variables Claim by 64 specification Effect of subjective survivals on claiming • correction for measurement error increases magnitude of • effect by eight-fold • instrumented coefficient is highly significant based on boot-strapped • standard errors

  12. The effects of subjective survival expectations on claiming behavior • Bivariate probit model with demographics, health and wealth variables Claim by 64 specification Effect of subjective survival probability on claiming

  13. The effects of objective survival expectations on claiming behavior • Use data on 8 to 12 years actual mortality to estimate and “objective” probability of survival to age 75 using same variables as for IV • Bivariate probit model Claim by 64 Specification • Similar effects of subjective and objective expectations on SS claiming • Objective expectations do not contain more information than subjective survivals to explain SS claiming

  14. Conclusion • Measurement errors in subjective probability are important • Mortality expectations have significant effect on SS claiming • People who expect to be long-lived delay claiming and enjoy larger benefits • Positive effect for the well-being of the elderly • Higher cost for tax payers • Ambiguous welfare effects on the whole population

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