Waiting to Claim Social Security Can Boost Income by 10.4%: Study

Optimizing the choice of when to claim Social Security can produce a more than 10% increase in the average worker’s lifetime income, yet few Americans appear to be making optimized claiming decisions.

This is the hallmark finding in the latest paper published by the National Bureau of Economic Research, aptly titled “How Much Lifetime Social Security Benefits Are Americans Leaving On the Table?” The analysis flatly states that Americans are “notoriously bad savers,” suggesting their Social Security claiming decisions are a big reason why.

Authors of the analysis include NBER contributors David Altig, Laurence Kotlikoff and Victor Yifan Ye. The trio used an analysis method that feeds data from the 2018 American Community Survey and the 2019 Survey of Consumer Finance respondents into the Fiscal Analyzer, with the goal of measuring the size and distribution of forgone lifetime Social Security benefits.

As noted in the paper’s abstract, the Fiscal Analyzer is a lifecycle, consumption-smoothing research tool that incorporates Social Security and all other major federal and state tax and benefit policies. The tool can be used to help demonstrate optimal lifetime Social Security choices.

Using this method, the authors find that virtually all American workers ages 45 to 62 should wait beyond 65 to start collecting Social Security, while more than nine in 10 should wait till age 70.

Lifetime Spending Gains

According to the authors, just 10.2% of Americans appear to do so, and the median loss for this age group in the present value of household lifetime discretionary spending is in excess of $180,000. Expressed in another way, optimizing claiming decisions would produce a 10.4% increase in typical workers’ lifetime spending.

For one in four, according to the NBER analysis, the lifetime spending gain exceeds 17%, and for one in 10, the gain exceeds 26%. Among the poorest fifth of 45- to 62-year-olds, the median lifetime spending increase is 15.9%, the authors find, with one in four gaining more than 27.4%.

The paper shows these findings hold even when assuming what the authors call an “unrealistically low maximum age of 85.” Even in this scenario, three-quarters of workers would do best by waiting until age 70.

Related: Why Clients Want to Claim Social Security Early and What Advisors Can Do

Of course, as the authors point out, a small number of workers don’t gain from waiting to collect their retirement benefits. Such workers lose benefits from other transfer programs and face higher lifetime taxes, with the present value net tax increase exceeding the gain in lifetime Social Security benefits.

Ultimately, the precise gains and cash-flow constraints that will dictate a real-world workers optimal choices are highly dependent on household characteristics. Hence, no single claiming strategy fits all, the authors conclude. Moreover, they warn, the results may overstate the gains from Social Security optimization, given their maintained assumption that workers take their Social Security benefits as soon as they retire.

The bottom line, according to Altig, Kotlikoff and Ye? Social Security lifetime benefit optimization represents a clear means of improving the welfare of retirees. High-income retirees have the most to gain in absolute terms from maximizing their lifetime benefits, the paper explains, but low-income retirees can raise their living standards by a far higher percentage.

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