Probabilistic Thinking and Early Social Security Claiming

8th Annual Joint Conference of the Retirement Research Consortium“Pathways to a Secure Retirement”

August 10-11, 2006Washington, D.C.

Adeline Delavande Mike Perry Robert J. Willis

RAND Corp.

Univ. Nova de Lisboa

CEPR

University of Michigan University of Michigan

Motivation

• Do people claim SS based on their survival expectations?

• Hurd, Smith and Zissimopoulos - HSZ (2004)– Use direct measures of survival expectations– Findings: subjective survival of 0 associated with

early claiming; otherwise, no effect

• Is the effect found by HSZ too small?– Survey measures of survival expectations

capture much individual heterogeneity in risk– But also have a lot of measurement error

This Paper • We reexamine whether people claim SS based on

their survival expectations• Correct measurement error in elicited subjective

survival probabilities using rich set of risk factors as instruments

• Findings: People act on their subjective survival beliefs– Statistically and economically significant effect of

subjective survival on SS claiming for people working at 62

-elasticity of claiming probability with respect to survival probability = -1.24

This Paper (cont.)

• Compare with predictions of objective survival probability based on same risk factors– Similar effect on SS claiming– Do not contain more information than

subjective survival to explain SS claiming• Our findings suggest that people

– have highly hetereogenous mortality expectations– their expectations are largely rational – they act on these beliefs in deciding when to

claim Social Security benefits

The Analytical Samples

• Use data from the Health and Retirement Study (HRS)

• Follow HSZ and study 2 groups1. People who are retired by age 62– Analyze SS claiming by age 64 2. People who are NOT retired by age 62– Analyze joint decision to retire and claim by

age 64

Early Retiree Sample:Claiming by those retired by age 62

• 79.2% claim in first year of eligibility

• 89.6% claim by third year

• No effect of survival expectations

(all specifications)

01

02

03

04

0P

erc

en

t

0 12 24 36 48 60 72 84Months since 62nd birthday

Months since 62nd birthday

Late Retiree Sample:Claiming by those not retired by age 62

• 21.2% claim in first year of eligibility

• 62.2% claim by third year

• Significant effects of survival expectations when corrected for measurement error

Months since 62nd birthday

N=1801

05

10

15

Pe

rce

nt

0 12 24 36 48 60 72 84 96Months since 62nd birthday

Age 65 spike

Correcting for Measurement Errors • Probabilistic beliefs about survival in HRS

(On a scale from 0 to 100)What are the chances that you will live to be age 75 or

more?

• Measurement error: rounding and heaping at ‘50’ and ‘100’

• Use Instrumental Variable methods to correct for measurement error

Four sets of instruments:(I) Basic demographic characteristics (II) Health variables (self-reported health and conditions)(III) Dummy variables on parental mortality (own and

spouse) (IV) Optimism index

Heterogeneity of Survival Beliefs and Measurement Error

• Survey measure of survival beliefs are quite noisy– many focal

answers at “0”, “50” and “100”

05

10

15

20

25

Pe

rce

nt

0 25 50 75 100subjective survival to age 75

Subjective Probability of Survival to Age 75

Heterogeneity of Survival Beliefs and Measurement Error (cont.)

• But there is a lot of individual variability in subjective mortality risk based on risk factors

(see Table 5)

Predicted Subjective Survival Probability

0.0

1.0

2.0

3.0

4.0

5D

ens

ity

40 50 60 70 80 90Linear prediction

The effects of subjective survival expectations

on claiming behavior • Bivariate probit model with demographics, health and wealth variables

Claim by 64 specification

Without correction With Correction

Coef. P value Coef. P value

Subjective Prob. -0.002 0.132

IV Subjective Prob.

-0.016 0.004

Effect of subjective survivals on claiming

IV subjective prob. of surviving until age 75

Predicted probability of claiming by age 64

59 26

69 30

79 34

•correction for measurement error increases magnitude of effect by eight-fold

•instrumented coefficient is highly significant based on boot-strappedstandard errors

The effects of subjective survival expectations

on claiming behavior • Bivariate probit model with demographics, health and wealth variables

Claim by 64 specification

Without correction With Correction

Coef. P value Coef. P value

Subjective Prob. -0.002 0.132

IV Subjective Prob.

-0.016 0.004

Effect of subjective survival probability on claiming

IV subjective prob. of surviving until age 75

Predicted probability of claiming by age 64

59 26

69 30

79 34

The effects of objective survival expectations on claiming behavior

• Use data on 8 to 12 years actual mortality to estimate and “objective” probability of survival to age 75 using same variables as for IV

• Bivariate probit modelClaim by 64 Specification

Coef. P value

Coef. P value Coef. P value

IV Subjective Prob -0.016 0.004 -0.019 0.003

Objective probability -0.013 0.007

Subj – Obj probability 0.006 0.234

• Similar effects of subjective and objective expectations on SS claiming • Objective expectations do not contain more information than subjective survivals to explain SS claiming

Conclusion

• Measurement errors in subjective probability are important

• Mortality expectations have significant effect on SS claiming

• People who expect to be long-lived delay claiming and enjoy larger benefits

– Positive effect for the well-being of the elderly

– Higher cost for tax payers

– Ambiguous welfare effects on the whole population