L EAVING B IG M ONEY ON THE T ABLE : A RBITRAGE O PPORTUNITIES IN D - PowerPoint PPT Presentation

L EAVING B IG M ONEY ON THE T ABLE : A RBITRAGE O PPORTUNITIES IN D ELAYING S OCIAL S ECURITY Gila Bronshtein, Jason Scott, John B. Shoven, and Sita N. Slavov discussion by John Beshears

S UMMARY  About one-quarter of people claim Social Security early and simultaneously receive pension or annuity income  Alternative: Defer Social Security and take a lump-sum pension payout (or do not purchase annuity)  After-tax income the same during deferral period but higher by ~5% of primary benefit afterwards (for couples)  Plus inflation protection  Higher when the proceeds come from not buying an annuity  This discussion  Relationship to previous literature  Why?  What should be done?

T ABLE 3 – M ARRIED M EN B ORN A FTER 1940

R ELATIONSHIP TO P REVIOUS L ITERATURE  Leaving 401(k) employer match on the table (Choi, Laibson, and Madrian 2011) – loss is $500 per year for ~5 years  Prepaying mortgage instead of contributing to 401(k) (Amromin, Huang, and Sialm 2007) – loss is $400 per year for ~10 years  Carrying credit card debt instead of taking out a 401(k) loan (Li and Smith 2010) – loss is $300 per year for ~20 years  This paper – loss is easily $10,000 or more

W HY A RE P EOPLE M AKING A M ISTAKE ?  People treat the Social Security claiming decision separately from the pension lump sum or annuity purchase decision  Within each of the separate decision-making problems, people try to reach a reasonable outcome  Social Security claiming Psychological link to retirement decision  Framing of “normal retirement age”  Tendency to choose the “middle option”  Avoiding loss of never receiving benefits   Pension lump sum decision For defined benefit plans, the default is an annuity stream  Employer communication around retirement income  Lump sum option may not be available 

W HAT S HOULD B E D ONE ?  Employers  Offer partial lump-sum cash-outs in defined benefit plans  AND, in both defined benefit and defined contribution plans, offer advice or a product that integrates the Social Security claiming decision into the annuitization decision  “Social Security Leveling” – program provides high payments before age 70, lower payments starting at age 70, and constant income for the rest of life when combined with Social Security  Government  Maybe nothing should be done  If we eliminate this mistake, we have effected a transfer  This is not free and in fact shifts resources to those who are already doing well