Is the Adjustment of Social Security Benefits Actuarially Fair, and If So, for Whom?
Disparities in Social Security claim ages have risen since the early 1990s. With high earners increasingly likely to delay claiming, and also living longer on average than lower earners, late claimants may differ in critical ways from early claimants. Using Social Security Administration data and focusing on men, we find that late claimants have lower mortality than those who claim at age 62, so late claimants are adversely selected. As a result of selective claiming combined with improvements in actuarial adjustments, the return to delaying claiming has become systematically positive for those who actually delay, but not for those who claim early. We further find that selective claiming increases benefits by more for those with higher lifetime earnings because their return to delay exceeds actuarially fair amounts by larger margins. Lastly, we find that selective claiming has a modest effect on total payouts, but a more consequential effect on inequality in lifetime benefit payouts. In the aggregate, the increase in Trust Fund payouts as a result of adverse selection in claiming was 0.5% for the most recent retiring cohorts. Yet, lifetime benefit payouts are 1.9% higher for those in the highest quartile of lifetime earnings as a result of claim-age differences, compared to what payouts would be if they had the same claim ages as those in the lowest quartile, and this contributes 2.8% to the difference in expected lifetime benefits between the highest and lowest quartiles.
- Average Social Security claim ages among male retired-worker beneficiaries have diverged considerably. The 25th percentile claim age remains just above 62, while the 75th percentile claim has reached 66 for recent retiring cohorts.
Life expectancy is lower for those who claim at early ages. For the 1931-32 and later birth cohorts, life expectancy at age 62 for age-62 claimants is around 1-2 years lower than for age-66 claimants. Consequently, late claimants are adversely selected.
- The impact of selective claiming on actuarial fairness of benefit adjustments has been limited by the low rates of these adjustments for most of the cohorts we study. For the 1931-32 birth cohort, the return to delaying claiming was -0.32% for claimants who actually delayed until age 66, versus -2.63% for claimants who claimed at 62.
- For later cohorts, the return to delay has become systematically positive for those who actually delay. Yet, the fiscal impact on the Trust Fund of selective claiming remains modest, increasing Trust Fund payouts by 0.3-0.5% for recent retiring cohorts that we study.
- Many of these patterns are magnified when comparing high and low lifetime earners. Selective claiming occurs within all lifetime earning quartiles, but it increases the return to delay by larger margins for high earners. The return to delay has reached around 5% for those in the highest earning quartile who actually delay claiming among cohorts of recently retiring beneficiaries.
- Consequently, the impact of selective claiming on inequality in lifetime benefits is greater than on overall benefit payouts, raising lifetime benefit payouts by 1.9% for the highest-earning relative to the lowest-earning quartile among recent retiring cohorts that we study.
Dushi, Irena, Leora Friedberg, and Anthony Webb. 2021. “Is the Adjustment of Social Security Benefits Actuarially Fair, and If So, for Whom?” Ann Arbor, MI. University of Michigan Retirement and Disability Research Center (MRDRC) Working Paper; MRDRC WP 2021-421. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp421.pdf
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Paper IDWP 2021-421