The option to claim Social Security before the full retirement age (FRA) has been around for over 50 years. But claiming benefits early has an inherent trade-off: more years of income are received in exchange for an actuarially reduced monthly benefit. The actuarial reduction is designed to be “fair” for the average worker in that, regardless of the age at which a person claims, he can expect to receive the same expected present value (EPV) of his lifetime benefits. Aside from a period of high interest rates in the 1980s, this equality has roughly held for the average worker since the inception of the actuarial reduction. But the key word here is average. Workers who live less long than the average might maximize the EPV of benefits by claiming early, while those who live longer than average might benefit more from delay. This paper analyzes this issue by calculating the EPV of Social Security benefits by race, education, and gender, all three of which are correlates of both mortality and earnings.
This paper found that:
- Non-Hispanic men, both black and white, who do not hold a college degree maximize their EPV of benefits by claiming before the full retirement age, especially using a 3-percent interest rate in the EPV calculation.
- On the other hand, white men with a college degree and white women with at least a high school degree maximize the EPV of their benefits when claiming after their FRAs.
- Within some groups, delayed claiming can result in a substantially higher EPV than early claiming, given today’s low interest rates. For white female college graduates, the maximum EPV occurs at age 70 and is 16 percent higher than the EPV at 62, assuming an interest rate of 1 percent.
The policy implications of this paper are:
- More educated workers have more incentive to delay claiming than less educated workers, and non-blacks have more incentive to do so than blacks.
- Since the EPV is not a welfare measure, this result does not necessarily advocate early claiming for some, but it does point to differential incentives across socioeconomic groups.
- Since some workers can maximize their EPV by claiming at 62, policies that delay the early eligibility age to 64 but hold the actuarial reduction constant would cause some workers to sacrifice expected lifetime benefits, although the decrease is small.