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Does it pay to delay social security?*

  • JOHN B. SHOVEN (a1) and SITA NATARAJ SLAVOV (a2)
Abstract
Abstract

Social Security benefits may be commenced at any time between ages 62 and 70. As individuals who claim later can, on average, expect to receive benefits for a shorter period, an actuarial adjustment is made to the monthly benefit to reflect the age at which benefits are claimed. We investigate the actuarial fairness of that adjustment in light of recent improvements in mortality and historically low interest rates. We show that delaying is actuarially advantageous for a large number of people, even for individuals with mortality rates that are twice the average. At real interest rates closer to their historical average, singles with mortality that is substantially greater than average do not benefit from delay, although primary earners with high mortality can still improve the present value of the household's benefits through delay. We also investigate the extent to which the actuarial advantage of delay has grown since the early 1960s, when the choice of when to claim first became available, and we decompose this growth into three effects: (1) the effect of changes in Social Security's rules, (2) the effect of changes in the real interest rate, and (3) the effect of changes in life expectancy. Finally, we quantify the extent to which the gains from delay can be expected to increase in the future as a result of mortality improvements.

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This research was supported by the U.S. Social Security Administration through grant number 5RRC08098400-04-00 to the National Bureau of Economic Research (NBER) as part of the SSA Retirement Research Consortium, and by the Sloan Foundation through grant number 2011-10-18 to Stanford University. The findings and conclusions expressed are solely those of the authors and do not represent the views of SSA, any agency of the Federal Government, the Sloan Foundation, or the NBER. The authors are grateful to Phoebe Yu for outstanding research assistance; to Jim Poterba, Jason Scott, David Weaver, participants at the 14th Annual Retirement Research Consortium Conference, and two anonymous referees for helpful discussion and comments; and to Steve Goss, Michael Morris, and Alice Wade of the Social Security Administration for providing the cohort life tables used in this paper. The first author is a member of the board of directors of Financial Engines, a NASDAQ-listed company which assists individuals with retirement planning. Financial Engines provided no financial support for this research. The authors are doing related research that is also supported by a Social Security Administration grant to the NBER as part of the SSA Retirement Research Consortium. The views and approaches in this paper are solely those of the authors. This paper is based on two earlier working papers: ‘The Decision to Delay Social Security: Theory and Evidence’ (NBER Working Paper no. 17866) and ‘When Does it Pay to Delay Social Security? The Impact of Mortality, Interest Rates, and Program Rules’ (NBER Working Paper no. 18210).

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Journal of Pension Economics & Finance
  • ISSN: 1474-7472
  • EISSN: 1475-3022
  • URL: /core/journals/journal-of-pension-economics-and-finance
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