There is a social security puzzle in the U.S.

The earliest age a U.S. citizen can claim their social security benefits is 62. The latest is 70. Claiming early means getting a smaller payout (about 70% of the check they would get at “full retirement age” of 66/67). Claiming at 70 translates into about 124% of the full retirement payout.

Despite the recommendation of most economists to delay the claim as late as possible, many Americans tend to claim as soon as they can, "often at age 62," said John Payne, the Joseph R. Ruvane, Jr. Professor Emeritus at Duke University’s Fuqua School of Business.

"In theory, this is not the economically reasonable choice for most people," he said. “For example, claiming at age 62 might yield a monthly payment of $1339 per month, while claiming at age 70 might yield a monthly payment of $2395 per month. It’s a big difference.”

In a paper posted by the National Bureau of Economic Research, Payne and his colleague Suzanne Shu of Cornell University examined the psychological factors behind this apparent “claiming puzzle” and found two main drivers of early claiming behavior: “sense of ownership” and “loss aversion.”

Why people claim social security as early as they can

Picking the right age to start claiming social security benefits is one of the most important retirement decisions people face, Payne said, especially considering that many retired Americans receive 50% or more of their income from Social Security (and 25% of the over-65 rely on it for 90% of their family income).

If one expects to live well past the age of maximum benefits (70), they may claim later and enjoy a monthly income significantly higher that what early claimants get, he said. “It’s like buying insurance,” Payne said. “If you die later than the average person, you will be way better off in terms of total payout.” For example, if one lives to age 90, the difference in total payout can be more than $100,000, he said.

It is a sort of a gamble with your life, the authors write, a decision under uncertainty about how long you will live.

“Every individual is different,” Payne said. “There can be accidents, or unexpected medical conditions that may occur in your 60s or early 70s. If that happens, you can be better off if you claim early. On the other hand, people may live beyond what they might expect — into their late 80s, 90s or beyond.”

The researchers wanted to identify the psychological factors that may influence claiming behavior. They surveyed a sample of about 4000 participants across 4 studies conducted during a 5-year span.

As expected, they found that people with longer life expectancy tend to claim later.

The researchers hypothesized that a higher sense of ownership — the sense the social security benefits “are mine,” they write — would be associated with earlier claims. In their survey, they asked participants to rate their agreement with statements such as: “The social security benefits that I will receive come from the money that I contributed.” (Many respondents agreed with this statement, even though it is incorrect, the researchers note, because the benefits a retired person receives are funded by the current workers, not from the claimant’s lifetime contributions.)

They found that people expressing a higher sense of ownership are significantly more reluctant to delay claiming.

They also tested how individual differences in “loss aversion” may affect claiming decisions. “Imagine a coin toss: if it lands on heads you earn $100. If tails, you lose $100,” Payne said. “It turns out, most people wouldn’t take the bet. But if you raise the win to $200, roughly half of the people would take it.”

But there are people who are more loss-averse than others, he said.

The more loss-averse people are, the researchers found, the earlier they claim.

“They don’t want to wait to start claiming because they may get nothing or just a relatively small amount, if they don’t live long enough,” Payne said.

A nudge that backfired

These psychological factors of ownership and loss aversion may explain why past policy interventions seem to not have worked, Payne said (the average age people claim is currently 64, and it has only slightly moved up in the last 20 years.)

The researchers tested whether showing participants the lifetime payouts corresponding to early versus late claiming would affect the participants’ choices. “The results were surprising,” Payne said. Despite previous research indicating that such an intervention would nudge individuals to buy a life annuity that provides payments as long as one lives (often a financially sound decision), in this case — the researchers found — showing the numbers led to earlier, rather than later claim intentions.

“We showed them a chart: this is how much you're going to make per month, at age 62 through 70. And this is your potential cumulative payout in future years. You would think that by showing the economic value, people would want to delay. But it did the opposite.”

A trade-off between gains and losses

People see claiming decisions as a trade-off between potential gains and potential losses, the researchers write. Showing them the whole chart of gains and losses triggered their loss aversion. It made them see clearly the trade off, Payne said. “I can see that if I die younger and I have delayed the claim, I lose. I don’t want to gamble with my life,” Payne said

However, getting people to make the reasonable choice for retirement is important, he said. “You’d be shocked at how many people don’t have much money when they get into their 60s,” he said.

Factoring in the psychological drivers behind people’s claiming behaviors should inform the design of policy interventions aimed at nudging them to claim later, Payne said.

In one test that showed some promise, the researchers gave the participants information about social security payouts, and then asked them to make a recommendation to someone else, before asking them about their claiming intentions for themselves. As it turned out, this preliminary thinking about the trade-off someone else would face led them to express willingness to delay claiming for themselves, Payne said.

“This seemed to mitigate the effects of loss aversion,” he said.