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Deciding When to Claim Social Security

Alicia Munnell, the director of the Center for Retirement Research at Boston College, is a weekly contributor to “Encore.

As noted last week, a recent blog suggesting that people delay claiming Social Security ran into a buzz saw of hostile comments. The argument was that people should use their financial assets to support themselves early in retirement so that they could gain an actuarially increased monthly benefit that would enhance their security.

One group expressed great anxiety over whether Social Security would be there if they waited to claim. The answer is that people have a right to be angry that a financing shortfall existing for decades has not been addressed. But the fix is conceptually simple, fiscally manageable, and just requires political will. Social Security will be there.

The other group worried that they would not “break even.” That is, they would not live long enough to make up for the benefits they missed by not claiming at age 62. But monthly benefits at 62 are actuarially reduced to reflect the fact that people claiming at 62 will receive benefits for about 8 more years than someone claiming at 70. This adjustment is substantial. For example, an individual who stops working at age 62 but waits to claim benefits at age 70 will receive 76% more (real) dollars per month for the rest of his life, than if he claimed benefits at age 62.

Prior to 2008, the Social Security Administration actually offered a break-even analysis to help individuals choose their claiming age. People were told what their benefits would be at 62 versus, say, 65, that they were “forfeiting” benefits by claiming later, that the deferral would result in a higher monthly benefit from 65 on, and that they would “come out ahead” by claiming later only if they lived to some specific age, when the cumulative benefit payments under the two claiming ages were equal.

The problem with this simplistic financial calculation is that it places little value on what people receive beyond the break-even date. People are averse to risk and knowing that they will receive the higher benefit for the rest of their lives is extremely valuable. Moreover, the goal is not to get the most dollars from Social Security, but to have an adequate retirement income. For the great majority of households now entering retirement, securing an adequate income is the most critical financial problem they face.

It is true that people who claim Social Security early will get more dollars if they die “too soon.” But they will get less if they live “too long” and receive the actuarially reduced benefit over an extended period. They will be forced to scrape by with less in their 80s and 90s. People in reasonably good health are more likely to live “too long” than die “too soon.” Moreover, in the case of couples, the claiming age of the higher earning spouse matters a lot, since the surviving spouse is entitled to the higher of her own or her spouse’s benefit. A husband age 65 and wife age 63 with average health, face a 50-50 chance that at least one spouse will live to age 91. That’s well past the “break-even” age.

The Social Security Administration has abandoned the break-even framework for the claiming decision and now simply lays out the benefits at different ages. The wisdom of that decision was highlighted by a recent paper which reported an experiment where individuals were told their retirement options using a host of different frames. The frames varied along three dimensions: (1) consumption versus investment; (2) gains versus losses; and (3) older versus younger reference ages. The key finding, however, is that the break-even frame encouraged people to move up their planned retirement age by 12 to15 months compared to any manner of framing the choice. Thus, Social Security had been inadvertently encouraging people to claim early.

Claiming later is the most important step towards ensuring a secure retirement. For people in average or better health, break-even analysis is not a helpful way to make this important decision. The goal should be to get as much monthly inflation-indexed income for life as possible.


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    • We can now see how Google has managed to dapmen out any negative AGW stories. It will probably drive more and more people away from them because people have now got other alternatives such as this very popular site.

    • 1) Enough money? Inflation is a big problem. At some point I will have to buy etiehr land or house, but of course not now. I save roughly $4000 a month and it’s not as much as you think it is (or, it is as little as it sounds, depending where you stand). I did have paid off RE but left it (willingly) to my ex-wife. Why? I just don’t like to leave woman out in the cold. Fool, you’ll say. Maybe, will not argue.2) Benefits from the Gov? I will take anything, no questions asked. How much it’s worth, is another question.3) Savings? $4000, or about 55% (after tax)4) Place to retire? SoCal (where I live now), or Buenos Aires. Some place with nice weather.5) I am 39. Maybe 60? Despite people wishing their own business (I had one, made millions but then lost millions…), most people never make it big, get a lot of headache, never live their lives and get really ill… Watch out people, watch out your health, it’s the only thing really worth something. I am happy to be strong and healthy. Everything else I will work out one way or the other. Don’t stress out about inflation or stocks or RE. All you have is today and that sunshine outside. Yes, really that’s all you have. And I have been bankrupt and lived homeless at somepoint in life, it’s not just the good times. Believe me I know.

    • Thank you Stan. The uncertainty in what the govt will do is depressing. One other thing the instructor said was when he started doing these retirement classes, he used to joke, “take it while the taking is good.”. He said it is no longer a joke and recommends taking it at 62. He is a DC economist that has been doing this for 25 years. His actuarial analysis is identical to yours, but he feels the govt is not in a good position to buy more treasuries during the growing federal debt crisis. While both you and he agree on the math, you have diametrically opposed recommendations. This is what our govt has done to us when experts in the field can’t give consistent advice because they have spent so much money, they have rendered everything uncertain. Preservation of one’s net worth vs what the govt promises to give you in the future. That used to be an iron clad decision, trust in the full faith and credit of the USGovt. No more.

    • Note to Jbob:

      The instructor is correct. (i.e. SS taxes collected now roughly equal benefits paid out) The government’s reduction in the employee SS tax rate from 6.2% to 4.2% to fight the recession certainly has not helped the situation. Assuming no changes in the SS program going forward the SS administration can cover this upcoming shortfall until around 2035 with the excess of taxes collected to date versus benefits paid out to date. Remember this excess cash (i.e. the SS fund) has already been spent by the other parts of the government and thus the SS administration will soon have to start cashing in the IOU’s issued by the other parts of the government. The government in turn will have to start to issue more treasury securities to get the cash to repay the SS administration. Then when all of the IOU’s have been repaid around 2035 (assuming no changes have been made) taxes collected at this time will roughly cover only 78% of the benefits to be paid. Note: It also has been estimated that this shortfall could be eliminated with an immediate 13% reduction in SS benefits for all current and future retirees.
      Notwithstanding this information and assuming no changes to the SS program I still do not think this information should change your thinking to a ” 1 in the hand is worth 2 in the bush” mentality. If one has to absorb a 22% reduction in benefits I would still prefer it be on a benefit that is 80% higher than another.
      Also within the context of SS changes going forward there is a chance than some people will be grandfathered under some set of circumstances.

    • One more thing Stan if I could trouble you. In my retirement class today, the instructor said something like SS will take in less than the current benefits beginning in 2015, PERMANENTLY! Is this true? If so I may be back to take it while it’s still there.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.