Optimizing Social Security Claiming Could Boost Spending Capacity by 10%

For one in four, according to the NBER analysis, the lifetime spending gain exceeds 17%, and for one in ten, the gain exceeds 26%. Among the poorest fifth of 45- to 62-year-olds, the median lifetime spending increase is 15.9%, the authors find, with one in four gaining more than 27.4%.

The paper shows these findings hold even when assuming what the authors call an “unrealistically low maximum age of 85.” Even in this scenario, three-quarters of workers would do best by waiting until age 70.

Of course, as the authors point out, a modicum of workers doesn’t gain from waiting to collect their retirement benefits. Such workers lose benefits from other transfer programs and face higher lifetime taxes, with the present value net tax increase exceeding the gain in lifetime Social Security benefits.

Ultimately, the precise gains and cash-flow constraints that will dictate a real-world workers optimal choices are highly dependent on household characteristics. Hence, no single claiming strategy fits all, the authors conclude. Moreover, they warn, the results may overstate the gains from Social Security optimization, given their maintained assumption that workers take their Social Security benefits as soon as they retire.

The bottom line, according to Altig, Kotlikoff and Ye? Social Security lifetime benefit optimization represents a clear means of improving the welfare of retirees. High-income retirees have the most to gain in absolute terms from maximizing their lifetime benefits, the paper explains, but low-income retirees can raise their living standards by a far higher percentage.

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