The Effect of Labor Market Trends on the Incentives and Incidence for Claiming Social Security Benefits

This study examines the effect of incentives to claim Social Security benefits early originating in the labor market. Using synthetic matched survey and administrative data it first documents large increases in the fraction of earnings of less educated workers replaced by Social Security benefits in the 1990s. Exploiting variation in replacement rates at the level of year and education groups, we then show that these increases have significantly contributed to the contemporaneous decline in claiming ages of less educated workers. We argue that the rise in replacement rates can be explained by an increase in earnings inequality, and that trends in earnings inequality are likely to lead to increases in replacement rates in the future. We also examine a second channel through which labor market trends affect early claiming, the rise and decline in educational attainment across cohorts. We conclude that changes in replacement rates are likely to play a bigger role than changes in the education distribution.