For Married Couples, Social Security is a Team Sport

Retirement advisors emphasize that Social Security decisions are among the most important decisions to make.  Most encourage individuals to wait until age 70 if possible, to maximize the payout, or to at least wait until full retirement age (FRA, ~67), but for sure avoid starting payments when first eligible (age 62) or shortly thereafter.  The exceptions they typically cite include poor financial situations or physical issues such that life expectancy is greatly reduced.

This advice is not without merit, as it rests on the solid foundation of nominal financial incentives provided by the Social Security Administration (SSA) to suggest delaying payments is better.  The table below shows the penalties and rewards for deviating from the SSA-determined FRA.

So, if a person was born in 1947 and was entitled to $3,000 monthly when claiming at FRA in 2013, for example, they would receive only $2,250 if claiming at 62 but $3,960 if waiting until 70.

By delaying collection by 8 years, they would be rewarded with an extra $1,710 from 70 onward.

However, evidence collected by the SSA (Table 2) clearly indicate that most eligible recipients choose to begin taking Social Security prior to their FRA, and very few wait until age 70.  Why?

Yes, for some they don’t believe they can afford to wait, and for others they don’t believe they will live to 70 or far beyond.  However, a more plausible explanation for most is more subtle.  As shown below (https://flowingdata.com/2017/11/01/who-is-married-by-now/), at earliest retirement age (ERA), 92% of eligible women and 91% of eligible men will have married at least once.

Marriage has implications for Social Security benefits.  The implications vary, depending on whether you currently married, divorced but were married 10 or more years, have underage children from a married relationship, or are a surviving widow or widower.  Here we’ll focus on the a common scenario, that you are approaching retirement in a married relationship.

In our example, the husband is age 73, retired, delayed his claim on Social Security until age 70, and currently receives $3,500 monthly from SSA.  The wife is 63, also retired, trying to make an informed decision on when to claim Social Security, and on what basis.  She has set up an account (at https://www.ssa.gov/myaccount/) and learned the following regarding her choice:

Since her claim at FRA exceeds 50% of her husband’s monthly benefit, she rules out waiting to file as a spouse.  She recognizes that FRA is a rather arbitrary benchmark age, and that the actual choice is anywhere on the continuum between today and her 70th birthday.  Since the couple currently is financially secure and in good health relative to their respective ages, she decides the relevant choice for her is binary: either claim now or wait until her 70th birthday.

In this situation, the most significant variable may well be their differential in age.  Since both husband and wife believe they are in good health, it is reasonable to rely on standardized actuarial data to estimate longevity for each, as well as variability around that expectation.  She turns to a source (https://flowingdata.com/2015/09/23/years-you-have-left-to-live-probably/) that builds on published government data to simulate longevity distributions by age and gender: 

According to the simulation there is a 10% probability she will die before age 73, and obviously if she dies before age 70 then the beneficial choice would have been for her to file now.  More instructive, there is an estimated 82% probability that her husband will die before he reaches age 93, at which time she would be no older than 82 and would then assume his Social Security payments of $3,500 monthly (before cost-of-living adjustments).  These initial observations suggest there is a rather narrow window in which both husband and wife would be alive and she would benefit by waiting until age 70 to claim her own Social Security benefit.  A more precise approach to the problem would be to construct a breakeven analysis between her two options.

Of course the future is unknown, but to estimate the present value of future Social Security  cashflow streams to a recipient we must estimate future growth rates and appropriate discounting back to the present.  Here we assume constant rates of 1.5% growth and 2.5% discounting.  Table 6 combines these factors with the specific data Social Security provided for the wife to project future cashflows (CF) each year, the cumulative future cashflows (Cum_CF), and the differential (Diff) in CF, Cum_CF, and present value (Diff_Cum_PV) between options.

Table 6 reveals that the wife would accumulate $130,819 in Social Security payments if she filed now and lived to age 70.  If the husband were to die prior to her 70th birthday, she would have received even more from Social Security during this period by filing now.  Assuming her husband is alive at age 80 (when she turns 70), then beginning at age 70 her strategy of having declared early will result in an opportunity cost (Diff_CF), which will accumulate as long the husband lives.  The differential in cumulative cashflows between the two options will decrease from its $130,819 peak.  The net advantage shifts to the delay option (Diff_Cum_CF, as well as the present value, Diff_Cum_PV) when she is age 80 — and her husband is age 90.  Only if he survives past age 90 does the claiming benefit for her shift from claim now to delay until 70.  From Table 5 we see there is a 1% expectation he would survive to 93, so 90 is quite unlikely.

The plot below provides a visualization of the net benefit to declaring now, assuming both parties survive to 2047, when he is 100 and she is 90.  The breakeven point is reached in the year 2037, far later than when she is likely to take over his much higher Social Security payments.  While nothing is certain, this “team approach” to the analysis clearly indicates that conventional wisdom of delaying claims on Social Security until FRA or age 70 are misleading.