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The Downside Risk of Postponing Social Security Benefits

Joseph Friedman and Herbert Phillips ()
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Herbert Phillips: Department of Finance, Temple University

No 1008, DETU Working Papers from Department of Economics, Temple University

Abstract: The point that only live participants may initiate or receive Social Security benefits is typically overlooked. Thus a postponement of benefits at any eligible retirement age may be likened to participation in a game of chance in which the participant is subject to a variant form of gambler's ruin at death. The typical assumption, therefore, that a participant should automatically opt for a postponement if the present value of the resulting benefits, discounted to breakeven age, higher than the present value of the opportunity costs, carries with it the implication of risk neutrality in relation to the consequence of dying before reaching breakeven death age. While this implication of risk neutrality is sometimes correct, it is more likely not. In marked contrast to conclusions reached in previous studies, this paper shows that a single Social Security participant, who is risk averse as regards the chances -- and contingent consequences -- of dying before reaching breakeven death age, would be well advised to initiate benefits at the earliest age at which he or she would not be subject to earned income tax penalties.

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 (search for similar items in EconPapers)
Date: 2010-06
New Economics Papers: this item is included in nep-age
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http://www.cla.temple.edu/RePEc/documents/detu_10_08.pdf First version, 2010 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:tem:wpaper:1008

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