New Social Security statement prototypes recently unveiled online provide much clearer illustrations of the benefits of delayed claiming. A worker turning 62 in 2022 can increase their benefit by 5% for the first two years of delayed claiming, 6 2/3% for the next three years, and then 8% for each year beyond age 67. A worker with adequate savings who retires before full retirement age can decide whether it makes sense for them to wait to receive a higher lifetime income benefit.
This formula is supposed to be actuarially fair. In other words, the present value of expected future benefit payments should be the same if he or she retires at 62, 67 or 70. This is because the government expects to pay the benefit for about one less year for each year of deferral.
For most clients of financial advisors, the delayed claiming benefit isn't actuarially fair. It is a gift. Higher income Americans have made significant improvements in longevity over recent decades.
For example, a Brookings study finds that men in the top 10th percentile of income gained six years in longevity in just 20 years. Average Americans have a 1 in 5 chance of living to the age of 95, while among highest-income healthy Americans the probably is about 1 in 2. The average financial planning client will receive their Social Security benefits for more years than the average American.
The Social Security formula also assumes a positive real discount rate on future earnings. Interest rates today are at historical lows, and discount rates for the inflation-protected income provided through Social Security are even lower.
Today's investors place a high value on inflation protection — so high that rates on Treasury Inflation Protected Securities (TIPS) are negative for future income payments up to 20 years in the future. Higher income clients are more likely to receive a payment in 20 years, and the value of that payment is far higher today than it was in the 1990s.
