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Social Security’s Actuarial Neutrality

At the program-wide level, Social Security is set up with the intention of being approximately “actuarially neutral.” That is, the program is indifferent to whether people tend to claim benefits before full retirement age (FRA), at FRA, or after FRA, because, on average, the increase that people receive from claiming later should be approximately offset by the fact that they’ll receive fewer monthly payments.

In the last couple of weeks, I’ve come across two articles making the case that, because Social Security as a program is actuarially neutral, it doesn’t especially matter whether you decide to claim your own benefits earlier or later. To be blunt: This line of thinking is incorrect.

Basing your personal Social Security claiming decision upon Social Security’s program-wide actuarial neutrality is like basing your personal tax planning decisions on the average effective tax rate paid by individuals in the U.S. (rather than on your own personal tax rate). It makes no sense at all.

For an individual person trying to decide whether to claim benefits now or later, there are numerous factors involved, which almost always sway the decision in one direction or the other. That is, there usually is an option that is likely to turn out better than the other options.

Factors to Consider

Factors that should influence the when-to-claim decision for both married and unmarried individuals would include:

  • Do you need the money immediately?
  • Are you in good health? (The longer you expect to live, the more advantageous it is to delay taking benefits.)
  • Do you have a family history of people with unusually long lifespans? (Alternatively, do you have, for example, a family history of people dying at a relatively young age due to heart failure?)
  • What are inflation-adjusted interest rates like at the moment? (The higher they are, the more advantageous it becomes to take benefits early and invest the money.)
  • Are there tax planning reasons to claim benefits early or to hold off on claiming benefits?

Additional factors for married individuals to consider would include:

  • Do you have a higher or lower retirement benefit than your spouse? Having the spouse with the higher benefit hold off on claiming increases the amount the couple receives as long as either spouse is still alive, whereas having the spouse with the lower retirement benefit hold off on claiming only increases the amount the couple will receive as long as both spouses are still alive.*
  • How does your spouse’s age compare to your age? The younger your spouse is compared to you, the more advantageous it is for you to delay claiming your retirement benefit.
  • Is your spouse in good health? And does he/she have a family history of unusually long or short lifespans?
  • Are there strategies available for a few years of “free” spousal benefits, which only work if you claim your retirement benefit at a certain age?

*This is why it is often preferable to have one spouse (the one with the lower earnings record) claim retirement benefits early and one spouse (the one with the higher earnings record) claim retirement benefits late rather than having both spouses claim retirement benefits at or near FRA.

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Topics Covered in the Book:
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If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
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