Exchanging Delayed Social Security Benefits for Lump Sums: Could This Incentivize Longer Work Careers?

Published: 2012


Social Security benefits are currently provided as a lifelong benefit stream, though some workers would be willing to trade a portion of their annuity streams in exchange for a lump sum amount. This paper explores whether allowing people to receive a lump sum as a payment for delayed retirement rather than as an addition to their lifetime Social Security benefits might induce them to work longer. We model the factors that influence how people trade off a Social Security stream for a lump sum, and we also examine the consequences of such tradeoffs for work, retirement, and life cycle well-being. Our base case indicates that workers given the chance to receive their delayed retirement credit as a lump sum payment would boost their average retirement age by 1.5-2 years. This will interest policymakers seeking to reform the Social Security system without raising costs or cutting benefits, while enhancing the incentives to delay retirement.

Key Findings

    • We model the factors that could influence individuals to work longer if they could trade off Social Security benefit increases in exchange for an actuarially fair lump sum once they retire.
      • This can afford people flexibility over the timing of their consumption decisions.
      • Lump sums also permit people to leave assets to their heirs.
      • Some people may wish to invest a portion of their lump sum amounts in the capital market.
    • Offering a lump sum equivalent in expected present value to the delayed retirement credit could be cost-neutral to the system, on average.
    • Giving the delayed retirement credit as a lump sum in exchange for delayed retirement could boost average retirement ages by 1.5-2 years.
    • If older individuals worked longer voluntarily, this might enhance system solvency via additional payroll tax collections.