How Information Framing Impacts Your Social Security Timing
Learning about the 'framing effect' is a simple way to improve financial decision making
How information is presented often impacts people’s decision-making more than the actual information itself.
In a previous post, I reviewed the research on the framing effect, which states that the framing of each choice heavily influences our choice between multiple options.
Today, I’ll review a 2013 study that shows how the framing of when to claim government retirement benefit programs—like Social Security in the U.S. or Canadian Pension Plan in Canada can impact your retirement.
Take less now or more later?
The study investigates whether framing information about Social Security benefits influences people’s decisions on abouten to claim these benefits.
Specifically, it examines if different presentations of the same information can lead to variations in expected claiming ages, challenging the traditional economic assumption that people make decisions solely based on maximizing lifetime wealth.
To explore this, the researchers conducted a randomized experiment using the American Life Panel (ALP), a nationally representative survey. Participants were randomly assigned to different groups, each receiving information about Social Security claiming in various frames:
Neutral Frame: Presented factual information without any persuasive language.
Breakeven Frame: Emphasized the age at which the total value of benefits from delayed claiming equals the total value from early claiming.
Gain Frame: Highlighted the increase in monthly benefits resulting from delayed claiming.
Loss Frame: Focused on the reduction in monthly benefits due to early claiming.
Participants were then asked to indicate the age at which they expected to claim their Social Security benefits. This design allowed the researchers to isolate the effect of framing on claiming intentions.
4 Interesting findings
#1—Breakeven Analysis Encourages Early Claiming
Participants exposed to the breakeven frame, which emphasizes the age at which the total value of benefits from delayed claiming equals that of early claiming, tended to choose earlier claiming ages. This suggests that presenting information in terms of "breaking even" may inadvertently prompt individuals to claim benefits sooner than they might otherwise.
Imagine you are about to turn 60 and are presented with two options: take a smaller monthly payment today or a larger one starting in five years; which will you choose?
Essentially, this result says that if I tell you that 75 is your ‘breakeven age’ and you’ll only be better off delaying your payments if you expect to live past 75, you will be much more likely to take a reduced payment today.
#2—Framing something as a ‘gain’ heavily influences decision making
When information was framed to highlight the gains from delaying benefits—"claiming later increases your monthly benefits"— participants were more likely to postpone claiming than when that information was framed as a loss of claiming today.
I should mention that this is often how financial planners frame these types of decisions for their clients—If you take these benefits later in life, you’ll likely collect more money in the long run.
#3—Anchoring Effect of Suggested Claiming Ages:
Introducing an age anchor, such as age 66 or 70, influenced participants' expected claiming ages.
Specifically, anchoring at age 70 led to later expected claiming ages compared to anchoring at younger ages. This indicates that suggesting a specific age can serve as a reference point, affecting individuals' decisions on when to claim benefits.
The anchoring effect is a very powerful bias that impacts how we make financial decisions. Basically, whatever number gets presented to you first is your ‘anchor,’ and by throwing out a relatively high number to start, you are more likely to view delaying your benefits than if 65 were thrown out as the anchorage.
If you want a deep-dive into how the anchoring effect impacts everything from shopping to salary negotiating, check out this post:
#4—certain groups were more susceptible to framing effects:
People with lower financial literacy were more influenced by framing, suggesting that a lack of understanding of financial concepts makes one more prone to external influences.
People in debt were more influenced by anchoring.
Lower-income people were also more affected by framing.
This tells us a lot about the target audience for financial scammers: People in debt, with a low income and very little financial literacy, are easier to sway by presenting information in a certain way.
So, if you want to avoid poor financial decisions, dedicating to improving your understanding of money and working—even slowly—on paying down debt. Financial stress leads to poor decisions.
A few final thoughts about what we can learn from this study
Understanding how biases like the framing effect work can help you make more informed decisions about all sorts of financial decisions that go far beyond when to claim retirement benefits.
Be Aware of Information Framing: Recognize that how information is presented can influence your decisions. Simply knowing that the framing effect is a real thing is the first step to combating it.
Up your Financial Literacy: Invest time improving your understanding of financial concepts. Higher financial literacy can reduce susceptibility to framing effects and lead to more informed decision-making. A perfect place to start is by increasing your ‘financial numeracy’ which is the math behind basic personal finance concepts:
Work on the basics: The better your financial situation, the harder it will be for you to be influenced by the framing or anchoring effect. Start building that emergency fund and paying down your debts.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.