Early Social Security Claiming and Old-Age Poverty- Evidence from the Introduction of the Social Security Early Eligibility Agepdf
Early Social Security Claiming and Old-Age Poverty- Evidence from the Introduction of the Social Security Early Eligibility Agepdf
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  1. NBER WORKING PAPER SERIESEARLY SOCIAL SECURITY CLAIMING AND OLD-AGE POVERTY:EVIDENCE FROM THE INTRODUCTION OF THE SOCIAL SECURITY EARLY ELIGIBILITY AGEGary V. EngelhardtJonathan GruberAnil KumarWorking Paper 24609http://www.nber.org/papers/w24609NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts AvenueCambridge, MA 02138May 2018Corresponding author: Gary V. Engelhardt, Aging Studies Institute, 320F Lyman Hall, Syracuse University,Syracuse, NY 13210, gvengelh@syr.edu. The research reported herein was supported by the Centerfor Retirement Research at Boston College pursuant to a grant from the U.S. Social Security Administrationfunded as part of the Retirement Research Consortium. The opinions and conclusions are solely thoseof the authors and should not be construed as representing the opinions or policy of the Social SecurityAdministration, any agency of the Federal Government, National Bureau of Economic Research, BostonCollege Center for Retirement Research, Syracuse University, Federal Reserve Bank of Dallas, orM.I.T.NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies officialNBER publications.© 2018 by Gary V. Engelhardt, Jonathan Gruber, and Anil Kumar. All rights reserved. Short sectionsof text, not to exceed two paragraphs, may be quoted without explicit permission provided that fullcredit, including © notice, is given to the source.
  2. Early Social Security Claiming and Old-Age Poverty: Evidence from the Introduction of theSocial Security Early Eligibility AgeGary V. Engelhardt, Jonathan Gruber, and Anil KumarNBER Working Paper No. 24609May 2018JEL No. H31,J26ABSTRACTSocial Security faces a major financing shortfall. One policy option for addressing this shortfall wouldbe to raise the earliest age at which individuals can claim their retirement benefits. A welfare analysisof such a policy change depends critically on how it affects living standards. This paper estimatesthe impact of the Social Security early entitlement age on later-life elderly living standards by tracingbirth cohorts of men who had access to different potential claiming ages. The focus is on the SocialSecurity Amendments of 1961, which introduced age 62 as the early entitlement age (EEA) for retired-workerbenefits for men. Based on data from the Social Security Administration and March 1968-2001 CurrentPopulation Surveys, reductions in the EEA in the long-run lowered the average claiming age by 1.4years, which lowered Social Security income for male-headed families in retirement by 1.5% at themean, 3% at the median, and 4% at the 25th percentile of the Social Security income distribution.The increase in early claiming was associated with a decrease in total income, but only at the bottomof the income distribution. There was a large associated rise in elderly poverty and income inequality;the introduction of early claiming raised the elderly poverty rate by about one percentage point. Finally,for the 1885-1916 cohorts, the implied elasticity of poverty with respect to Social Security incomefor male-headed families is 1.6 . Overall, we find that the introduction of early claiming was associatedwith a reduction in income and an increase in the poverty rate in old age for male-headed households.Gary V. EngelhardtCenter for Policy Research423 Eggers HallSyracuse UniversitySyracuse, NY 13244-1020gvengelh@maxwell.syr.eduJonathan GruberDepartment of Economics, E52-434MIT77 Massachusetts AvenueCambridge, MA 02139and NBERgruberj@mit.eduAnil KumarFederal Reserve Bank of DallasAnil.Kumar@dal.frb.org
  3. 1 I.IntroductionThe Social Security program is the largest single expenditure of the U.S. federal government, totaling $922 billionin 2016. It is also an important source of long-term fiscal imbalance. Due to the aging of the population, falling fertility, and a declining rate of productivity growth, Social Security currently faces a 75-year actuarial deficit equivalent to 2.83% of payroll(Board of Trustees, Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, 2017). For this reason, there are constant conversations among policy makers about reforms to the program. There is no shortage of ideas for making incremental changes, from raising the cap on payroll taxes, to investing some of the trust fund in stocks. More significant changesinclude raising the payroll tax rate or raising the Full Benefit Age (FBA) from its current level of 67. For each of these proposals, the welfare implications are fairly clear; the main debates are political.A more radical change in the Social Security program would be to raise the Early EligibilityAge (EEA), currently 62. While age 67 is also known more colloquially as the “normal” retirement age in the U.S., there is nothing normal about it; by far the most common age for claiming Social Security benefits is 62, when retired-worker benefits first become available. So, an increase in the EEA would affect the timing and amount of benefits for a large number of older Americans. Anumber of OECD countries recently have increased the early entitlement age in their old-age pension systems, including Australia, Austria, Germany, and the United Kingdom, among others. While we know that raising the EEA would reduce early retirement, we do not know the direction of the welfare effect, because the excess in claimingat age 62in theU.S.is difficult to
  4. 2 reconcile. As Diamond and Gruber (1999) emphasized, this spike cannot be explained easily by simple financial incentives, which are roughly actuarially fair for the population of individuals as a whole at that age.Rather, there are a number ofcompeting explanations. The first is liquidity constraints: individuals wouldlike to claimearlier than62, but are unable to, because it is illegal to borrow against Social Security benefits. The second is that there is significant heterogeneity in mortality rates that make the financial incentives actuarially fair for the population as a whole, but actuarially unfair for some population sub-groups, who then rationally choose to claim early(Hurd et al., 2004). The thirdarebehavioral failures: either due to misunderstanding (Brown et al., 2013), misoptimization(from, for example, cognitive limitations or financial illiteracy), or quasi-hyperbolic preferences(Diamond and Koszegi, 2003), individuals do not appreciate the fact that by taking benefits at age 62, they are lowering their monthly check until they die. The problem for welfare analysis is that these alternative explanations have directly opposite predictions for the welfare impactsof raising the EEA: the first suggests that it would lowerwelfare by tightening liquidity constraints; the second suggests that it could lower welfare for sub-groups of the population that had above-average mortality; while the thirdsuggests that it would raise welfare by decreasing “mistakes.”There is no study that comprehensively evaluates thesetradeoffs, and we will not either. But what we offer in this paper is a piece of the puzzle: a demonstration of the impact on long-run living standards of early benefit claiming. If individuals who claimed benefits early did not see a diminishment of their later-life living standards (e.g. through other sources of income or smoothing through savings(Milligan, 2014; Bronshtein et al., 2018)), then it would suggest little welfare cost to allowing them to claim benefits earlier. Conversely, if early claiming is associated with reduced
  5. 3 living standards, it raises a potential tradeoff from early claiming. This is especially true if the reduced living standards are among those with the lowest incomes.This problem cannot be addressed by simply comparing those who do and do not claim Social Security benefits early, as these groups may differ in many ways that impact their later living circumstances. What is needed is an exogenous shift in the availability of early retirement options. The introduction of the EEAinto the Social Security program in 1961 provides that exogenous variation. Men born in 1896and earlier moved through their early 60s prior to the 1961 Amendments to the Social Security Act. They could first claim benefits at age 65, the full benefits age (FBA). Men born in 1897and later were affected bythe law change. Those born in 1897 could claim as early as age 64; those born in 1898 could claim as early as 63; those born in 1899 and later could claim as early as age 62. With early claiming, age-65 benefits were actuarially reduced by 5/9ths of a percent for each month of payable benefits before attainment of age 65. For a man claiming at age 62, this represented a 20% reduction in benefits, compared to claiming at age 65. The cohort variation in the availability of early eligibility allows us to analyze its impact on financial well-being while controlling for both age and time trends. The paper begins with a description of the 1961 Amendments and other relevant changes to the Social Security system around that time, then moves on to the empirical analysis, which focuses on men born in 1885 through 1916, a roughly fifteen year-of-birth window around the pivotal birth cohorts affected by the 1961 Amendments. These men attained their FBA and made their retirement decisions in the 1950s, 1960s, and 1970s. We then use data from the 1968-2001 March Current Population Surveys (CPS)to measure each cohort’s income and poverty
  6. 4 trajectories into old age. We use a regression framework to estimate the impact of the reduction in the early entitlement age on income and poverty, controlling for both age and calendar-year effects, as well as a broad set of potentially confounding factors. There are threeprimary findings. First, reductions in the early entitlement age in the long-run lowered the average claiming age by 1.4 years, which lowered Social Security income for male-headed families in retirement by 1.5% at the mean, 3% at the median, and 4% at the 25thpercentile of the Social Security income distribution. Second, the increase in early claiming was associated with a decrease in total income – but only for the lower half of the income distribution. As a result, therewas a sizeable increase in elderly poverty and income inequality. In particular, the introduction of early claiming raised the elderlypoverty rate by about one percentage point. Finally, for the 1885-1916 cohorts, the implied elasticity of poverty with respect to Social Security income for male-headed families is −1.6. Overall, we find that the introduction of early claiming was associated with a reduction in income and an increase in the poverty rate in old age for male-headed households. These findings do not prove that there were negative welfare consequences from introducing the EEA. In particular, individuals may have been making a rational decision to trade off leisure for income. But they do rule out the notion early claiming was aclear welfare improvement and motivate further analysis of the welfare consequences of this key policy parameter.The paperis organized as follows. The next section briefly relates our analysis to the previous literature. Then section IIIgives background on the 1961 Amendments. Section IV describes the CPS data and discusses cohort trends in income and poverty, whereas Section V lays
  7. 5 out the regression framework. Both of these sections draw on the organization, exposition, and methodology developed in a companion set of papers, Engelhardt and Gruber (2006), Engelhardt, Gruber, and Perry (2005), and Engelhardt (2008). Section VI presents the empirical results. There is a brief conclusion. II.Previous LiteratureOur analysisis most closely related to fivestrands of the empirical literatureon Social Security. The first isa large, longstanding literature that has examinedthe role of Social Security in retirement in the 1960s and 1970s. Reviewed in detail in Feldstein and Liebman (2001), it includes notable contributions by Crawford and Lilien (1981), Moffitt (1987), Rust and Phelan (1997), among many others. This body of work generally concludedthat decreasing the age of eligibility to 62 for men not only increased Social Security claims, but also led to earlier departures from the labor force, with a spike emerging in theretirement hazard at age 62. Related work in other contexts includes the option-value approach of Stock and Wise (1990) to analyze the timing of claims to private pensions, and Gruber and Wise (1999), who documented similar evidence on the impact of early claiming in Social Security programs in a wide variety of OECD countries. The second strand is comparatively more recent and has used both structural models and reduced-form approaches to examine the impact of early and delayed claiming on labor supply, saving, and retirement income adequacy. This includes work by Blau (2008), Gustman and Steinmeier (1986, 2008, 2015), Coile et al. (2002), Sass et al. (2014), Shoven and Slavov (2014), and Shoven et al. (2017, 2018), among many others.
  8. 6 The thirdstrand has examined the short- and long-run impact of benefitincreases andcuts, respectively,from the 1971 and 1977 Social Security Amendments that generated the so-called Social Security “notch.”These amendments changed real benefits, while leaving the FBA and EEA unchanged at (then) 65 and 62, respectively. This includes work by Krueger and Pischke (1992), who found little evidence of an impact on labor supply, and Engelhardt and Gruber (2006), Engelhardt, Gruber, and Perry (2005), and Engelhardt (2008),who found substantive long-run impacts on old-age poverty, shared living arrangements, and home ownership. A fourth, more recent strand has estimated the short-run impact of the 1983 Social Security Amendments that increased the FBA from 65 to 67, whileleaving the EEA intact at 62, which effectively generated benefit cuts. This includes work by Mastrobuoni (2009) and Behagel and Blau (2012), who examined the impact on labor supply and claiming behavior, and Duggan et al. (2009), who examined the spillover effects into the federal disability insurance (DI) program.The final strand consists of a set of a current empirical studies that examine the short-run impacts of recent increases in the EEA that varied by birth cohort on labor force participation, poverty, and program participation of older individuals in other countries. This includes Atalay and Barrett (2015), who studied women in Australia, Staubli and Zweimüller (2013) and Manoli and Weber (2016), who studied men and women in Austria, and Cribb and Emmerson (2017), who studied women in the United Kingdom. Taken together, these studies show that for individuals close to the EEA (i.e., in their late 50s and early 60s) raising the EEA generates significant increases in participation in the labor force andother gateway social insurance programs (e.g., disability and unemployment insurance, with results differing somewhat across countries). Cribb and Emmerson (2017) showed that raising the EEA actually raised the poverty rate in the short-
  9. 7 run, because the increases in earnings and other program income were not enough to offsetthe loss of old-age pension benefits. Instead of focusing on the labor-market impact of early eligibilitylike these studies, our main contribution is to examine the long-termimpact of early claiming on well-being, as measured by family income and poverty. We do so by examining the introduction of the EEA for men in the early 1960s, which differed by birth cohort, and then trace the trajectories of income and poverty as the affected cohorts progressed into old age. III.Legislative HistoryThe 1950s, 1960s, and 1970s were central to the formation of today’sSocial Security program.1This section describes the focalprogram changes in this period and illustrates their time-series impact on benefit awards inFigures 1-5, which are based on data drawn from various issues of the Social Security Administration’s Annual Statistical Supplement. In the early 1950s, age 65 was the earliest an individualcould receive any type of benefit based off career earnings. At that point, someonecould claim retired-worker benefits equal to 100% of the primary insurance amount (PIA) based on his/hercovered earnings history.The 1956 Social Security Amendments granted women the opportunity to claim actuarially-reduced benefits as early as age 62(Schottland, 1956). Early claiming lowered the age-65 benefit for women by 5/9ths of one percent for each month of payable benefits prior to age 65 and applied both to retired-worker and wife’s benefits. For a woman claiming early on her 62ndbirthday, this amounted to a 1Parsons (1991) and Ransom and Sutch (1986) have examined retirement behavior in the early years of the Social Security program. The legislative history for Social Security in this period is detailed in Cohen and Ball (1965, 1967), Cohen et al. (1966), Myers (1964), and Cohen and Mitchell (1961).
  10. 8 20% reduction in benefits. The 1956 Amendments took effect for calendar year 1957.The 1956 Amendments also introduced the disability insurance (DI) program, in which insured workers with a demonstrated need could draw benefits prior to age 65. The Social Security Amendments of 1961 extended early claiming on the same basis to men (Cohen and Mitchell, 1961). Men born in 1897and later were affected bythe law change: those born in 1897 could claim as early as age 64; those born in 1898 could claim as early as 63; those born in 1899 and later could claim as early as age 62. Overall, the 1961 Amendments induced age-by-cohort variation in the eligibility for early claiming: men born in 1897-1899 became (partially or fully) eligible for early claiming in a manner that depended on age. Those born 1900 or later were eligible to claim early at all ages from 62-64. Those born prior to 1897 were noteligible for early claiming. This is the central variation that is used in the empirical analysis below. Figure 1 illustrates the impact of these amendments on total retired-worker claims. The figure plots the aggregate number of claims for retired-worker benefits for both sexes pooledfrom 1955-19752There are three spikes in the time series. The first occurred in 1957, when early claiming forwomen was introduced. The second occurred in 1961-1962, when early claiming for men was introduced and fully phased in. The third occurred in 1966, the year of the introduction of Medicare.32The number of insured workers grew smoothly in this period. Early issues of the Annual Statistical Supplementpooled these data for the sexes, which, unfortunately, means the series cannot be broken out for men only. 3The explanation for this third spike is somewhat complicated. Medicare was enacted in 1965, but was not implemented until July, 1966. The spike in 1966 occurred because many insured workers who had not yet claimed were required to claim OAS benefits in order to become eligible for Medicare benefits at that time (in the early years, Medicare was administered by SSA). This peculiar feature of the initial administration of the Medicare program is described in Ball (1966). Specifically, prior to 1965, there were a large number of individuals who were 65 and older, who were fully insured for OAS benefits, but did not claim, because of the retirement earnings test (RET). During this period, the earnings test applied to beneficiaries under age 72, and it was all-or-nothing: if a beneficiary earned
  11. 9 Figures 2 and 3 break this time series out by sex and age group. There are three notable featuresin Figure 2, which shows the number of new retired-worker awards by age group for women. First,there was an upward trend toward retirement at ages 65-66 in the early 1950sthat reversed itself with the introduction of early eligibility in 1957. The same occurred for men in Figure 3: there was an upward trend toward retirement at ages 65-66 throughout all of the 1950s that reversed itself with the introduction of early eligibility in 1961. Together, the figures show a significant shift in the composition of claiming, away from claiming at the Full Benefit Age (FBA) of 65, toward early claiming at ages 62-64. Second, the increase in the number of claims at ages 62-64 (in 1957 for women and 1961 for men) exceeds the decline in claims at ages 65-66. Third, there is a secular decline in claiming at ages 67 and older after 1957 for both sexes, and, although interrupted in 1966 when Medicare came online, this decline continuedthereafter.After the introduction of Medicare, claiming retired-worker benefits at 67 or older was relatively uncommon. The dashed line in Figure 4 shows the time series of the percent of new awards for men that were due to early claiming, as measured on the left-hand vertical axis. After the introduction of early claimingin 1961, this share rises across years. In 1975, about 55% of all new retired-worker claims were early claims. The solid line in the figure plots the time series of the real value of new awards for men, as measured on the right-hand vertical axis. While generally increasing $1 above the earnings test threshold, no benefits were paid. The benefit award was deemed “conditional and deferred,” with the benefit reduction under the test returned through higher benefits in futureyears. However, as described in Ball (1966), this structure of the earnings test, in practice, had the effect of deterring claiming for individuals between the ages of 65 and 71. Specifically, among those fully insured for benefits, but who expected to earn above the earnings test threshold, many did not claim benefits, because those benefits would have been clawed back fully. In anticipation of this, many insured workers simply did not claim. Ball (1966) estimated that in 1965, over one million insured workers were not claiming because of the earnings test. When Medicare was enacted, these individuals claimed OAS benefits in order to get health insurance, generating the large spikein the figure.
  12. 10 over time, the trajectory flattens after the introduction of early claiming. Not surprisingly, the actuarial reduction in benefits generates a strong inverse relationship between the share of claims from early claiming and the amount of new awards. Figure 5 illustrates the initial take-up of early claiming by plotting the change in the age distribution of claims for new retired-worker benefits for men across the focal cohorts affected by the 1961 Amendments. Men in the 1895-6 cohorts were not eligible for early claiming, and the majority claimed at the FBA of 65. The age distribution shifted systematically leftward toward early claiming with the 1897, 1898, and 1899 cohorts, eligible at ages 64, 63, and 62, respectively. For the 1900 cohort, about one-third of men claimed at the FBA of 65 and one-fifth at the EEA of 62. IV.Data Construction and Year-of-Birth TrendsThe analysis focuses on men born in 1885 through 1916, a roughly fifteen year-of-birth window around the pivotal cohorts affected by the 1961 Amendments. We do not include women in the analysis for three reasons. First, most married women from similar cohorts claimed benefits on their husband’s earnings history. Second, for widows and divorcees, the CPS did not ask about the year of birth for ex- or deceased husbands, so we cannot assign these women to the correct EEA for their husband’s birth cohort. Finally, for never-married women, who would have claimed on their own earnings histories, the CPS sample sizes were too small for reliable analysis. One concern, which will become apparent in the description of the regression framework below, isthat cohorts in the latter halfof this sample window experienced rapidly rising generosity of benefits forworkers claiming at all ages. In particular, prior to 1971, Congress adjusted benefits
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