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Why Delayed Social Security Claiming Is More Valuable Than Ever

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What You Need to Know

  • The average financial planning client will receive their Social Security benefits for more years than the average American.
  • Today’s investors place a high value on inflation protection.
  • Even if the Social Security trust fund runs out, the benefits of delaying claims remain.

New Social Security statement prototypes recently unveiled online provide much clearer illustrations of the benefits of delayed claiming. A worker turning 62 in 2022 can increase their benefit by 5% for the first two years of delayed claiming, 6 2/3% for the next three years, and then 8% for each year beyond age 67. A worker with adequate savings who retires before full retirement age can decide whether it makes sense for them to wait to receive a higher lifetime income benefit.

This formula is supposed to be actuarially fair. In other words, the present value of expected future benefit payments should be the same if he or she retires at 62, 67 or 70. This is because the government expects to pay the benefit for about one less year for each year of deferral. 

For most clients of financial advisors, the delayed claiming benefit isn’t actuarially fair. It is a gift. Higher income Americans have made significant improvements in longevity over recent decades.

For example, a Brookings study finds that men in the top 10th percentile of income gained six years in longevity in just 20 years. Average Americans have a 1 in 5 chance of living to the age of 95, while among highest-income healthy Americans the probably is about 1 in 2. The average financial planning client will receive their Social Security benefits for more years than the average American.

The Social Security formula also assumes a positive real discount rate on future earnings. Interest rates today are at historical lows, and discount rates for the inflation-protected income provided through Social Security are even lower. 

Today’s investors place a high value on inflation protection — so high that rates on Treasury Inflation Protected Securities (TIPS) are negative for future income payments up to 20 years in the future. Higher income clients are more likely to receive a payment in 20 years, and the value of that payment is far higher today than it was in the 1990s.  

Increasing longevity and lower discount rates on after-inflation income mean that advisors need to work even harder to persuade clients to delay claiming. My co-authors David Blanchett of Morningstar and Sophia Duffy of The American College and I estimate that a healthy man earning $100,000 a year would gain the equivalent of $154,821 of retirement wealth by claiming at age 70 instead of age 62. A man with an expected longevity equal to the average American would only gain $87,926 by waiting until age 70.

Since the gap between higher-earning and lower-earning men is wider than the gap for women, improvements in longevity have an even greater impact on the relative value of delayed claiming.

However, since Social Security uses the same benefit formula for men and women, the gain from delayed claiming will always be higher for women because they can expect to live longer than men. In addition to a lack of underwriting for longevity and higher than current discount rates baked into the delayed claiming formula, unisex longevity is a third gift provided by Social Security to women who wait until the age of 70 to claim benefits. 

What if Social Security goes bankrupt? If the government does nothing, benefits for all beneficiaries could be reduced by as much as 21% in 2026 when the trust fund runs out. Does this affect the value of delayed claiming? As it turns out, not that much. If the cut occurs, which isn’t likely, the benefit for a healthy man falls to a positive $100,721.

It is important for advisors to remember that retirement age isn’t claiming age. A client who retires at 64 can draw assets in a low-tax environment or sell taxable investments to fund a spending bridge until Social Security kicks in.