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Why do retired workers claim their social security benefits so early? A potential explanation based on the cumulative prospect theory

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  • Rui Guo
  • Wei Sun
  • Jianqiu Wang
  • Gang Xiao

Abstract

Social Security provides longevity insurance for older Americans. According to expected utility theory models, rational households who are not liquidity constrained should delay claiming their Social Security benefits to insure consumption in late life. However, data shows that most retired workers claim soon after becoming eligible. This paper explains the early claiming behaviors using the cumulative prospect theory. We show that when making claiming decisions, individuals consider benefit gains and losses from delaying claiming relative to claiming immediately. Fear of receiving less lifetime benefits in the event of early death induces them to claim immediately.

Suggested Citation

  • Rui Guo & Wei Sun & Jianqiu Wang & Gang Xiao, 2020. "Why do retired workers claim their social security benefits so early? A potential explanation based on the cumulative prospect theory," Applied Economics, Taylor & Francis Journals, vol. 52(5), pages 490-505, January.
    • Handle: RePEc:taf:applec:v:52:y:2020:i:5:p:490-505
    DOI: 10.1080/00036846.2019.1646874
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