Working Paper: NBER ID: w23262
Authors: Robert L. Clark; Robert G. Hammond; Melinda S. Morrill; David Vanderweide
Abstract: Social Security Leveling is an annuity option that allows participants to receive a level income before and after age 62. The retiree receives a larger pension benefit prior to age 62, but then the pension benefit is lowered at age 62 when the individual is expected to claim Social Security benefits. This option is not uncommon in public pension plans, yet little is known about how this option is used in practice and its impact on well-being in retirement. Our study uses a combination of administrative records and survey data from recent North Carolina public sector retirees. We find that one-third of all retirees selecting a single life annuity between 2009 and 2014 opted for Social Security Leveling. The evidence suggests that individuals are choosing this option in a way that is consistent with their stated preferences and a consumption smoothing motive. However, we also see higher rates of ex post “regret” in the annuity choice among those choosing the level income option.
Keywords: Social Security; Public Pension Plans; Annuity Options; Retirement; Consumption Smoothing
JEL Codes: H55; J26; J38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher personal discount rates (D15) | Choosing social security leveling option (H55) |
| Lower life expectancies (I14) | Choosing social security leveling option (H55) |
| Men's shorter life expectancies (I14) | Higher likelihood of choosing leveling (C52) |
| Non-Hispanic Black retirees (J26) | Higher likelihood of choosing leveling (C52) |
| Lower education levels (I24) | Less likely to choose leveling (C52) |
| Age at claiming (J26) | Probability of choosing leveling (C25) |
| Higher maximum initial benefit amounts (H55) | Less likely to choose leveling (C52) |
| Ex post health status (I12) | Choice of leveling (C52) |