Why This Scholar Is Challenging Long-Held Assumptions About Retirement

As Social Security benefits are paid as a life annuity, delayed claiming reduces the expected length of time over which benefits are received, the paper explains. Thus, the benefit calculation rules call for an actuarial adjustment so that individuals who claim later receive larger monthly payments.

According to Slavov and Shoven, delaying Social Security is the functional equivalent of purchasing an annuity. That is, an individual who delays drawing Social Security forgoes benefits during the delay period in exchange for an increase in monthly benefit payments for life.

“Conventional wisdom has long held that the adjustments made for delaying Social Security benefits are actuarially fair,” Slavov says. “In other words, the average individual receives the same expected present value regardless of when benefits begin. In our paper, we revisit the question of actuarial fairness in light of the dramatic mortality improvements of the past several decades, as well as historically low interest rates.”

Slavov and Shoven find both of these factors can be expected to increase the gains from delaying Social Security. In addition, as a result of law changes seen since the 1960s, the terms for delaying Social Security have become substantially more generous, such that couples can now delay benefits on more advantageous terms between ages 62 and 65 due to changes in the rules for calculating survivor benefits.

Moreover, for both couples and singles, the terms for delaying beyond full retirement age have become more generous over the years. Specifically, members of the 1924 birth cohort could earn 3% of their base benefit per year of delay beyond full retirement age, while members of cohorts born in 1943 and later can earn 8% of their base benefit per year of delay beyond full retirement age.

The paper also investigates how the gains from delaying benefits vary across demographic groups and household structures, because even if the adjustments to Social Security benefits were actuarially fair for the population on average, they would not necessarily be so for every individual.

For example, those who expect to live longer than average could benefit from delaying, while those who expect to live shorter than average could benefit from claiming early.

In addition, Slavov and Shoven find, the spousal and survivor benefits offered by Social Security make delaying benefits a particularly attractive option for married couples.

As the paper posits, one member of a two-earner married couple may claim spousal benefits upon reaching full retirement age, leaving the benefit based on his or her own earnings record to accumulate through deferral. The secondary earner in a couple also receives a survivor benefit that is equal to the primary earner’s benefit. Thus, delaying the primary earner’s benefit is equivalent to purchasing a second-to-die or joint life annuity.

In contrast, a single person who delays claiming only receives a single life annuity based on his or her own earnings record, the paper explains.

Ultimately, comparing across time, Slavov and Shoven find that the terms for delay between ages 62 and 65 were “slightly actuarially disadvantageous” in the early 1960s for those in average health, except for single women.

Rule changes since that time have made delays slightly less attractive for singles and substantially more attractive for couples.

What Comes Next

Slavov says there is no end to the possible avenues of research for her and her colleagues to tackle in the future. In fact, Slavov just recently attended the 10th annual Working Longer and Retirement conference at Stanford, organized by Shoven, and she says she came away with fresh inspiration and ideas for new projects.

Notably, the conference was originally funded by a series of grants from the Sloan Foundation, but this year’s conference was supported by the Financial Freedom Initiative funded by the Charles Schwab Foundation. Shoven says such support is critical for the continuation of her work and the work of her esteemed colleagues across academia.

As Slavov explains, the conference concentrated on all manner of issues regarding retirement, including Social Security, employer-sponsored retirement plans, increasing life expectancy, labor force participation, long-term care and health insurance.

The basic premise of the conference, Slavov explains, is that Social Security, Medicare and most state pension plans are inadequately funded to meet their obligations. How to adjust these programs to deal with this problem is one of the key topics Slavov and her colleagues will continue to explore.

In the end, Slavov says, it will take ongoing collaboration among researchers, policymakers and financial professionals to ensure U.S. workers achieve positive outcomes in an evolving and challenging world.