The Decision to Delay Social Security Benefits

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Even if the benefit adjustment for delaying benefits is fair on average from an actuarial point of view ... the adjustment won't be actuarially fair for everyone.

For a large subset of Americans, there may be substantial financial benefits to delaying filing for Social Security benefits. Benefits can be claimed as early as age 62 or as late as age 70. Delay means a larger monthly payment once payments begin, and for people of average life expectancy, that larger payment offsets the foregone benefits during the delay period, according to John Shoven and Sita Nataraj Slavov, authors of The Decision to Delay Social Security Benefits: Theory and Evidence (NBER Working Paper No. 17866). "Delaying Social Security is equivalent to purchasing a real annuity," the authors write. "Individuals who delay forgo benefits in the current year in exchange for a higher monthly benefit for the rest of their lives."

One of the authors' key observations is that even if the benefit adjustment for delaying benefits is fair on average from an actuarial point of view, in the sense that the average person gets the same net present value of Social Security benefits no matter when he chooses to start taking benefits, the adjustment won't be actuarially fair for everyone. For example: those who don't expect to live a long time would benefit by claiming benefits early; those who expect to live a long time would be better off delaying.

A "delay" strategy is particularly beneficial for married couples. The primary earner can delay claiming benefits, while the secondary earner takes benefits early. If the secondary earner outlives the primary earner, he or she gets to step up to the primary earner's benefits. That strategy helps married two-earner couples most, but married one-earner couples also benefit. "Delaying the primary earner's benefit is equivalent to purchasing a second-to-die or joint life annuity," the authors write. "In contrast, a single person who delays claiming only receives a single life annuity based on his or her own earnings record."

Interest rates also play a role in determining the financial rewards to claiming benefits at different ages. The lower the real rates, the better it is to delay benefits. Secondary earners in two-earner households benefit less from delaying than primary earners, but even they can increase the present value of their benefits by delaying if real interest rates are 1.6 percent or less. Singles also gain from delaying benefits until age 64 if interest rates are below 3.5 percent (for men) or 4.1 percent (for women).

Life expectancy also figures into the equation. While benefits have been adjusted downward in private annuities to account for increasing life expectancy, the terms of delaying Social Security benefits from 62 to full retirement age have been largely unchanged for a half century (although the full retirement age has been adjusted modestly upward). And the benefits of delaying beyond full retirement have improved: someone born in 1924 added an extra 3 percent in base benefits for every year of delay; for those born in 1943 or later, the advantage is 8 percent a year.

Although the study's simulations suggest that many people would be able to raise the net present value of their Social Security benefits by delaying, that's not how new retirees tend to act. Among those who were not working at the time of their claim, more than 75 percent claim benefits within two months of stopping work or turning 62, whichever is later. "Delaying is strongly associated with working in the wave just prior to turning 62, and with planning to work after age 62," the authors conclude. Moreover, the authors find little impact for the factors that affect the present value calculation. "We find no evidence of a consistent relationship between claiming behavior and factors that influence the actuarial advantage of delay, including gender and marital status, interest rates, subjective discount rates, or subjective assessments of life expectancy," they write. The only characteristic beyond date of retirement that seems to influence the timing is college education: those with some college are more likely to delay benefits than those who haven't attended.

--Laurent Belsie