Are Early Claimers Making a Mistake?

Abstract

Using Health and Retirement Study (HRS) data and Latent Class Analysis for three cohorts (those born in 1931-1936, 1937-1941, and 1942-1947), this paper explores: 1) who claims Social Security benefits at age 62; 2) what percentage of households claiming at 62 are unprepared for retirement; and 3) whether the unprepared early claimers were pushed into claiming through job shocks and/or poor health or simply decided to take benefits early. Looking across three cohorts makes it possible to see whether these patterns have changed as the average claim age has increased and pension coverage has shifted away from defined benefit (DB) plans. That is, have those who have moved out of age-62 claiming been educated, financially prepared households or unprepared households that have recognized the need to delay claiming?

The paper found that:

- Consistent with previous research, the HRS shows a decline in those claiming at 62. - Age-62 claimers are less well off than “postponers” in some ways and better off in others. - Latent class analysis shows that this mixed picture reflects the average of: 1) those with little education and poor job prospects (disadvantaged); and 2) those with at least some college and sufficient resources to claim early (advantaged). - The percentage of the age-62 claimers in each of these groups has remained virtually constant over the three cohorts. - Comparing the calculated household replacement rates with target rates from previous research shows that, overall, roughly 65 percent of households claiming at 62 are not prepared; the rate for the disadvantaged group is twice the rate of the advantaged group. - The percentage unprepared at 62 has increased over time, reflecting an overall trend toward less preparedness. - A simple probit regression suggests that health and employment shocks and the absence of a DB pension are related to the lack of preparedness for both the disadvantaged and advantaged. The policy implications of the findings are:

- Given the increasing trend in unpreparedness, further cuts to Social Security benefits would exacerbate this problem. - Workers claiming at 62 with DB plans were especially likely to be prepared; these plans are not coming back, so the challenge is whether the 401(k) system can be enhanced.