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

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Feb 10, 2024 109 likes •188 views

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

SLIDE 1

LEAVING BIG MONEY ON THE TABLE: ARBITRAGE OPPORTUNITIES

IN DELAYING SOCIAL SECURITY

Gila Bronshtein, Jason Scott, John B. Shoven, and Sita N. Slavov discussion by John Beshears

SLIDE 2

SUMMARY

 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?

SLIDE 3

TABLE 3 – MARRIED MEN BORN AFTER 1940

SLIDE 4

RELATIONSHIP TO PREVIOUS LITERATURE

 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

SLIDE 5

WHY ARE PEOPLE MAKING A MISTAKE?

 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

SLIDE 6

WHAT SHOULD BE DONE?

 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