David lerner Associates: How Framing Affects Social Security

There is essentially an eight-year window between the ages of 62 and 70 during which you can start to receive Social Security retirement benefits. The longer you wait to begin receiving Social Security benefits, the larger your monthly benefit check will be.

There are different opinions about whether it’s smarter to start receiving benefits as soon as you’re eligible, and receive a smaller monthly benefit amount but for a longer period of time, or wait until later and receive a larger monthly benefit amount, but for a shorter period of time. The right decision will be different for everyone based on their particular financial, employment, health and family factors, among others.

But a new behavioral economics study indicates that there may be another factor at play in this decision: the way in which information about the decision is presented to seniors — or in other words, how the information is framed. According to the study, which was titled “Framing and Claiming: How Information-Framing Affects Expected Social Security Claiming Behavior,” generations of retirees may have claimed Social Security benefits too soon based on how many experts described (or framed) the claiming decision.

“Our evidence strongly suggests that how the claiming information is framed powerfully influences peoples’ anticipated claiming dates,” wrote the authors of the study.

For example, receiving benefits early during the eight-year window could be framed as “gaining current benefit dollars,” or as “losing future benefit dollars.” Similarly, deferring benefits until later during the eight-year window could be framed as “gaining future benefit dollars” or “losing current benefit dollars.” The study found that when the decision was framed as a “gain,” retirees tended to claim Social Security benefits later.

The Social Security Administration now says that it favors a value-neutral baseline approach to communicating information about the Social Security benefit claiming decision. This approach includes a breakeven analysis that helps retirees determine how many years it would take them to make up for dollar amounts forfeited during early years if they wait until later to start receiving benefits. Interestingly, when presented with a breakeven analysis, retirees tend to claim benefits earlier than when presented with other framing approaches.

The authors of the study point out that Social Security benefits represent at least half of all retirement income for 65 percent of beneficiaries. “Clearly, then, the claiming decision has substantial consequences for the financial well-being of a large part of the U.S. elderly population,” they wrote. The ease of influencing a claiming decision simply by changing the framing “implies that many individuals may be insufficiently equipped to make a decision that affects their financial well-being in their later lives.”

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC