Behavioral economists have identified many ways that our own thought processes can lead us down bad financial paths. And now comes word that one such thought process—”framing”—may have led generations of retired workers to make a bad choice in one of the most important financial decisions: when to begin taking Social Security benefits.
If you’re eligible for benefits (you’ve paid in to the system for at least 10 years), you could opt to begin receiving benefits as early as age 62, and that’s what a majority of today’s recipients chose.
However, if you wait until your “Full Retirement Age” (65-67, depending on when you were born), you will receive a much higher monthly amount. And if you wait until age 70, you’ll receive still more.
It’s a vitally important decision, and one that requires taking many factors into consideration—your financial need, life expectancy (the longer you live, the more total benefits you will receive by claiming later), desire to continue working (if you claim earlier than your full retirement age, every two dollars you earn over $15,120 reduces your Social Security benefits by $1), and more.
Now you can add another factor into the mix: the words used in describing the decision at hand.
As reported by US News,
[The researchers] found that framing the decision in terms of gains or losses led to different consumer choices. For example, the decision to take benefits early could be described as “gaining benefit dollars” or “losing future dollars.” Likewise, the decision to defer benefits to a later age could be couched as either a gain via higher benefit payments or a loss of benefits that were not received in earlier years.
The researchers found that another “cognitive bias” also came into play: anchoring. This is what you experience when you visit a restaurant offering prime rib for what seems like an exorbitant price of $45. By comparison, $25 for the top sirloin seems reasonable.
In the Social Security study, participants who were asked to consider the implications of taking benefits at age 62 were compared with those who considered the implications of taking benefits at age 66.
Framing the decision in terms of gaining higher benefit payments by waiting and anchoring it in an age-66 scenario led to later claiming.
The study also found that framing the decision with a break-even analysis leads to earlier claiming. This analysis compares the accumulated benefits over time of claiming at age 62 vs. claiming later. For many people, seeing that they would have to live until their late 70s in order for a Full Retirement Age claim date to pay off makes waiting seem like “a risky gamble.” That, despite the fact that they may have a high likelihood of living even longer, which would make waiting until their Full Retirement Age the more lucrative decision.
The Social Security Administration used to have a break-even analysis calculator on its web site, but removed it after discovering that it was heavily influencing people to claim early.
According to the researchers,
The financially less literate, individuals with credit card debt and those with lower earnings are more influenced by framing than others.
Where else have you seen framing and anchoring influence some of your financial decisions?
By Matt Bell
Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.