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Leaving Big Money on the Table: Arbitrage Opportunities in Delaying Social Security

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Listed:
  • Gila Bronshtein
  • Jason Scott
  • John B. Shoven
  • Sita N. Slavov

Abstract

Recent research has documented that delaying the commencement of Social Security benefits increases the expected present value of retirement income for most people. Despite this research, the vast majority of individuals claim Social Security at or before full retirement age. Claiming Social Security early is not necessarily a mistake, as delaying Social Security commencement requires forgoing current income in exchange for future income. The decision to claim early could therefore rationally be driven by liquidity constraints, mortality concerns, bequest motives, a high time discount rate, or a variety of other preference related factors. However, for some individuals, delaying Social Security offers a significant arbitrage opportunity because they can defer Social Security and have higher income in all future years. Arbitrage exists for most primary earners who either purchase a retail-priced annuity or opt for a defined benefit annuity when a lump sum payout is offered, while forgoing the opportunity to defer Social Security. These individuals are essentially buying an expensive annuity when a cheaper one is available, and their decision to claim Social Security early is almost certainly a mistake. The magnitude of the mistake can reach up to approximately $250,000.

Suggested Citation

  • Gila Bronshtein & Jason Scott & John B. Shoven & Sita N. Slavov, 2016. "Leaving Big Money on the Table: Arbitrage Opportunities in Delaying Social Security," NBER Working Papers 22853, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22853
    Note: AG PE
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    References listed on IDEAS

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    Cited by:

    1. David Altig & Laurence J. Kotlikoff & Victor Yifan Ye, 2022. "How Much Lifetime Social Security Benefits Are Americans Leaving on the Table?," NBER Chapters, in: Tax Policy and the Economy, Volume 37, pages 135-173, National Bureau of Economic Research, Inc.
    2. Jeffrey R. Brown & Arie Kapteyn & Erzo F. P. Luttmer & Olivia S. Mitchell & Anya Samek, 2021. "Behavioral Impediments to Valuing Annuities: Complexity and Choice Bracketing," The Review of Economics and Statistics, MIT Press, vol. 103(3), pages 533-546, July.
    3. Svetlana Pashchenko & Ponpoje Porapakkarm, 2019. "Accounting for Social Security Claiming Behavior," Working Papers 2019-068, Human Capital and Economic Opportunity Working Group.
    4. Robert L. Clark & Robert G. Hammond & Melinda S. Morrill & David Vanderweide, 2017. "Annuity Options in Public Pension Plans: The Curious Case of Social Security Leveling," NBER Working Papers 23262, National Bureau of Economic Research, Inc.
    5. Jeffrey R. Brown & Arie Kapteyn & Erzo F.P. Luttmer & Olivia S. Mitchell & Anya Samek, 2017. "Behavioral Impediments to Valuing Annuities: Evidence on the Effects of Complexity and Choice Bracketing," NBER Working Papers 24101, National Bureau of Economic Research, Inc.
    6. P. Beaumont & A. Luciani, 2018. "The French 2016 SMEs hiring subsidy, an evaluation based on pre-hiring declarations," Documents de Travail de l'Insee - INSEE Working Papers g2018-09, Institut National de la Statistique et des Etudes Economiques.
    7. Jason Scott & John B. Shoven & Sita Slavov & John G. Watson, 2019. "Retirement Implications of a Low Wage Growth, Low Real Interest Rate Economy," NBER Working Papers 25556, National Bureau of Economic Research, Inc.
    8. Francisco Perez-Arce & Lila Rabinovich, 2022. "The Impacts of the Social Security Statement Redesign on People’s Knowledge and Behavioral Intentions: A Survey Experiment," Working Papers wp450, University of Michigan, Michigan Retirement Research Center.

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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