There aren’t many things good about a zero-interest-rate-policy world for retirees or those planning their retirement. But researchers say there is one bright spot.
Most households benefit from waiting to claim Social Security when real interest rates are close to zero, as they are now, according to research just published by National Bureau of Economic Research.
That’s even true for households with mortality rates that are twice the average, according to the authors of the paper, John Shoven, an economics professor at Stanford University and Sita Nataraj Slavov, a researcher at the American Enterprise Institute.
“As Social Security benefits are paid as a life annuity, delayed claiming reduces the expected length of time over which benefits are claimed,” the authors wrote. “Thus, the benefit calculation rules call for an actuarial adjustment so that individuals who claim later receive larger monthly payments.”
[Related: 8 Retirement Realities in a Stumbling Economy]
The authors say it is widely believed that this adjustment to benefits is actuarially fair, meaning that, on average, individuals can expect to receive the same present value of benefits regardless of when they claim. In other words, 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.
However, the researchers say this claim is false, particularly in today’s environment of near-zero real interest rates. “Instead, delay appears to be actuarially advantageous for a very large subset of the population,” the authors wrote.
In fact, a couple could add upward of $250,000 to their overall Social Security benefit by using an informed claiming strategy. The reason, according to Shoven and Slavov, is this: “Delaying Social Security is equivalent to purchasing an annuity,” they wrote. “An individual who delays forgoes benefits during the delay period in exchange for an increase in benefit payments for life.”
According to Lita Epstein, author of the “Complete Idiot’s Guide to Social Security and Medicare,” each year you delay Social Security after reaching full retirement age, which for baby boomers generally is 66, you get an 8% increase in benefits. “That’s a 32% increase in benefits if a baby boomer waits until 70,” said Epstein.
In the private sector, companies that sell annuities generally adjust their terms frequently, making payouts less generous when mortality improves (which increases the expected payout) or when interest rates fall (which reduces the return that can be earned on funds that are used to purchase the annuity), the authors wrote.
But that’s not how Social Security works. In fact, the terms for delaying Social Security have, in many cases, become more generous over the past several decades despite improvements in life expectancy and fluctuations in real interest rates.
Of course, few households wait to take their Social Security. In fact, most households claim Social Security at the earliest possible age, 62. But in general that is not in their best interest. “No one defers Social Security and almost everyone should,” said Shoven.
In their paper, Shoven and Slavov examined the data every which way. They looked at the actuarial advantage or disadvantage of delay for individuals whose life expectancy differs from average. They also looked at the benefits of delaying for single males, single females, one-earner couples, and three two-earner couples from different race and education groups, using mortality rates that are differentiated by race and education.
In short, they left no stone unturned.
And what they found is this: A “delay” strategy is particularly beneficial for married couples, according to Laurent Belsie, a writer for the NBER Digest. 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 wrote. “In contrast, a single person who delays claiming only receives a single life annuity based on his or her own earnings record.”
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http://finance.yahoo.com/news/rates-low-pays-delay-social-040148291.html
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