Delaying Social Security payments: The ongoing debate

We’ve started talking a bit about the importance of saving early for retirement.  It might not be the first thing on most people’s minds upon entering their first job, but not saving for just 2 years can drastically affect how much money is available for retirement later on given the amount of interest that can accrue.  So I thought this recent Wall Street article on collecting social security payments later, would be pretty relevant.

The article is a two-sided argument which considers the merits of waiting until reaching 70 or cashing out at age 62 which is the current minimum age.  The side in favor of waiting until age 70 gave the following three main arguments:  1. Giving away free money  2. Proper financial planning and early saving makes it less necessary to cash out early.  3. A guaranteed 8% return.

The giving away free money argument is based on the premise that since Social security calculates the average of your top 30 annual incomes and pays out accordingly.  Social security also adjusts for cost of living by 1.5% annually so this would naturally accumulate and create a divergent gap than if you were to collect at 62.   The second argument is fairly intuitive in that saving on your own through private funds will allow you to still realize gains until you are 70 and then file for retirement benefits.  Then there is the notion of a guaranteed 8% return when you are 70, which is no different than when you are 62.  Drawing on personal resources from retirement up until age 70 is a bit more of a personal strain but afterwards there will be a big surge in cash flow.  This makes sense for people who are expected to live longer.

While those arguments were made, there were arguments saying that collecting at age 62 is better than age 70.  Most of these arguments were premised around risk and uncertainty, along with the fact that most people do not make enough nor are they expected to live long enough past 70 to make waiting worthwhile.  While payments could be less when collecting at age 62, the ability to collect early allows enough financial cushion to invest in private savings accounts to multiply and have for the more immediate future.  Then of course there’s the argument that social security benefits have a short shelf-life as only spouses can continue to collect on them.  Private savings portfolios can be passed along to relatives or the next generation for their benefit.   After all, social security is just an inter-generational wealth transfer and not an inheritable fund where each person saves for their own retirement.

Based on these two arguments, what matters is whether or not the money you have is enough for how long you are going to live. US citizens are living longer on average and it is possible for them to be able to work for a longer period of their life; however, there is a lot of uncertainty as to how long someone will live and based on evidence or risk-aversion some may opt for earlier payments, even if it makes sense to wait until 70.  Both sides of the cashing-out age argument acknowledge that there could be more private portfolio options for seniors, given the current state of social security and the uncertainty surrounding life expectancy.  The only question is when would they invest and when would they have a better chance of profiting by combining their Social Security benefits with portfolio returns.