Studies have indicated that a large majority of individuals would elect to conti
ID: 3491202 • Letter: S
Question
Studies have indicated that a large majority of individuals would elect to continue working even if they possess the financial means to stop working. Why do you feel work plays such a vital role in the life of an individual, regardless of monetary compensation? Do you believe that different cultures place different levels of value on work? What individual differences, if any, play a role in an employee’s decision whether to quit or continue working? Explain why, giving specific examples to support your viewpoint.
Explanation / Answer
Before discussing the significance of the possible behavioral underpinnings of retirement, it is important to disentangle the different meanings of the term "retirement." That is, "retiring" may mean different things to different people. First, retiring can mean exiting the workforce; when individuals no longer want to or are no longer able to work, they may decide that it is time to leave the workforce. Second, retiring may refer to claiming Social Security benefits. For many retirees, those two events likely are one and the same, but those events do not always temporally coincide—individuals may claim benefits while continuing to work or they may stop working without claiming benefits. When individuals decide to stop working, they must have a way to support themselves financially, as their income from work will no longer be available. Thus, the question of how to support oneself in retirement should be an important consideration in the retirement decision. Traditionally, income during retirement is thought to come from three main sources, or what is generally referred to as a "three-legged financial stool": Social Security benefits, pensions, and personal savings. Unfortunately, many individuals fail to consider the issue of financial well-being in retirement until retiring becomes imminent (EBRI 2008), which can mean that the "personal savings" leg of the stool is weaker than it should be. In addition, the number of workers who participate in an employer-sponsored defined benefit pension plan has decreased over the past two-to-three decades (Buessing and Soto 2006).5 Individuals consequently may be left financially unprepared for retirement, leading them to rely heavily on Social Security benefits. Social Security comprises the majority of retirement income for many individuals (NIA 2007; SSA 2010), and this reliance on Social Security can have a major impact on the timing of one's exit from the workforce. For individuals for whom Social Security is the main or only source of income in retirement, exiting the workforce and claiming Social Security benefits likely occur concomitantly. On the other hand, retirees who will receive a pension and/or who have personally saved for retirement may not need to claim Social Security benefits immediately upon exiting the workforce because other sources of income can fund their retirement, at least for some time.6 Coile and others (2002) highlighted a number of additional factors that may affect the relationship between retiring and benefit claiming, including life expectancy, age at retirement, and marital status. Importantly, however, the authors noted that many people may simply claim benefits immediately at age 62, without taking into account the far-reaching financial effects of this uptake decision. As such, the authors suggested that "claiming behavior should be better understood by those interested in Social Security" Related to the interaction between leaving the workforce and claiming Social Security benefits is the relationship between a retiree's claiming age and the resulting benefit amount. This relationship should also be an important consideration in the retirement decision. Individuals can choose to begin receiving retirement benefits at any age between 62 (that is, the EEA) and 70, and this choice affects the size of the benefit. At FRA, retirees receive 100 percent of their scheduled benefits. If an individual claims benefits before his or her FRA, reduction factors are applied, permanently reducing the monthly benefit amount. If an individual claims between his or her FRA and age 70, delayed retirement credits are applied, permanently increasing the monthly benefit amount. But, research has indicated that many future retirees do not fully understand the interplay between claiming age and Social Security benefits (Benítez-Silva, Demiralp, and Liu 2009; Liebman and Luttmer 2009), and many simply do not know that such an interaction exists between claiming age and benefit amount (EBRI 2007). Such a lack of knowledge or understanding about claiming can lead individuals to claim Social Security benefits early, which may not be in their own best interest or in the best interest of their family members. Although informational constraints can certainly lead to suboptimal claiming decisions, JDM and behavioral economics research suggests that, even with complete knowledge of the claiming rules and their effects on benefit amounts, individuals may nevertheless decide to claim benefits when it is not economically advisable to do so. While delaying claiming allows for permanently increased monthly Social Security benefits, more than half of retirees nevertheless claim benefits at the EEA (for example, Song and Manchester (2007)). That behavior may have multiple determinants. For example, there is, of course, a subgroup of retirement-age individuals who must leave the workforce at the EEA for health reasons. However, the Employee Benefit Research Institute (EBRI 2006) estimated that only about 15 percent of survey respondents reported retiring early because of health problems. Therefore, the number of retirees citing a health-induced exit from the workforce is not so large that it can explain all, or even the majority, of early retirement behavior. Some individuals may start to receive benefits as soon as possible because they have been "forced" into retirement, either as a result of a layoff or a buyout offer from their employer. While the number of individuals who retire as a result of a job cut has likely risen in recent years, these retirees represent only a small subset of the retirement population; EBRI (2006) found that approximately 11 percent of those retiring early reported doing so as a result of downsizing or closure. The claiming decision for individuals who must leave the workforce early citing poor health or a layoff very likely depends entirely on their financial condition. For those retirees, choosing the option to delay claiming may not be possible if they do not have sufficient savings or an employee pension. In addition to those needing or forced to leave the workforce, a substantial number of retirees chooseto stop working before reaching their FRA. According to EBRI's (2006) report, 38 percent of individuals reported retiring early; although 39 percent of early retirees surveyed said they did so because they could afford to, 24 percent reported that they wanted to do something else and 22 percent indicated that they retired early for family reasons. If individuals in those latter two groups have little personal retirement savings and no pension, they will quite likely claim Social Security benefits upon retiring. Regardless of the specific financial needs of a potential retiree, if individuals work longer, they are less likely to claim benefits whether they have sources of retirement funding outside of Social Security or not (Gustman and Steinmeier 2002). That is, individuals who continue to earn wages through working are less likely to claim benefits, regardless of their personal savings or pensions.7 When encouraging individuals to delay claiming Social Security so that they receive a higher monthly benefit for the rest of their lives, it may behoove policymakers to shift their focus from delaying claiming to encouraging prolonged labor force participation.8 With this in mind, many of the issues raised later focus on behavioral and psychological impediments to working longer, and many of the suggested interventions focus on working longer and claiming later.