The Optimal Time for Claiming Social Security Benefits: A Methodological Note

Joseph Friedman

No 1404, DETU Working Papers from Department of Economics, Temple University

Abstract: The optimal age for initiating Social Security benefits and the initiation versus postponement of benefits decision are the subjects of a number of recent papers. It is generally agreed that an initiation versus postponement of benefits decision may have significant consequences, but there is less agreement about how to model the problem or measure its financial implications. By law benefits are paid only to live beneficiaries. Thus, the anticipated future benefits should be weighted by the recipient's survival probabilities --- the probabilities that the recipient is alive when the benefits will actually be received. Many published papers argued that benefits will be received "on average" throughout the recipient expected remaining lifetime (ERL) and estimate the present value of Social Security benefits by discounting the cash flow through life expectancy. This paper will show that the preferred approach is to estimate the Expected Present Value (EPV) which weighs each future payment by the probability that it will be received. Based on survival probabilities and life expectancy tables that are compiled by the SSA the paper will demonstrate at the present value through life expectancy approach overstates the EPV by approximately 10%. Therefore, timing decisions that are not based on the EPV are probably suboptimal.

Keywords: Social Security; Social Security Benefit Initiation; Social Security Benefit Postponement; Social Security Benefit Optimization; Retirement Annuities (search for similar items in EconPapers)
JEL-codes: D14 H55 J14 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-age
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