Social Security Annuity

Far too many state, “I’m taking my Social Security as soon as I can!”  or  “It might not be there if I wait!”

The numbers reflect those views.  About 40% of men and 45% of women claim Social Security at the earliest possible age, 62 years old.  In doing so, they can shortchange themselves, in terms of lifetime benefits, by a considerable amount.  If you delay taking benefits from age 62 to age 70, your benefit at age 70 will be at least 76% higher than if you claim at age 62.  This does not include the annual cost of living increase (COLA) that beneficiaries receive.

Research by Steven Sass looks at Social Security from a different perspective.  He suggests looking at Social Security as an annuity.  In his analysis, you would “purchase” additional Social Security income by using current savings to support your lifestyle.  The following example will illustrate the benefit of deferring taking Social Security from age 66 to age 67.

A 66 year old male, with a Social Security benefit of $18,000/year, would receive a Social Security benefit of at least $19,440/year ($18,000 x 1.08) if he waits until age 67 to start collecting benefits.  I say, “at least” because Social Security has a COLA.  The COLA for the next year is 1.7%.  

To defer, suppose the retiree uses $19,440 from his savings to make up for deferring his claim for one year (waits until age 67).  The annual annuity benefit for deferring, ignoring the COLA, is $1,440 ($19,440-$18,000).  He has “purchased” an annual, inflation indexed, annuity for $19,440.  

How much of an annual non-inflation adjusted annuity could he buy on the open (insurance company) market.  Using the website the best annual benefit is $1,416/year.  Social security does not differentiate between men and women for the benefit increase, but the insurance companies do!  The best annual benefit purchased from an insurance company for a woman, following the same parameters as for the man in this example, is $1,332/year.  Clearly deferring Social Security for one year and using your savings to bridge the gap is the better economic choice for a man and an even better economic choice for a woman, than buying an annuity on the open market.

The benefits of “annuitizing” social Social Security are as follows:

  • A higher annual benefit than can be currently purchased from an insurance company
  • Social security has an annual COLA adjustment, few if any annuities provide this same benefit
  • A maximum of 85% of the Social Security benefit is taxed (under current tax law) while 100% of the annuity benefit is taxed
  • Non-discriminatory benefits for women
  • Social security is effectively backed by the US Government (i.e. the taxpayers).  The entire insurance industry can’t match this revenue source making Social Security more secure than any annuity
  • Social security doesn’t charge commissions or other fees, insurance companies do

Social security certainly has its faults and critics.  When you take a deeper look at the alternatives for producing retirement income, Social Security often provides the best option.

Read Dr. Sass’s article

Bill HigginsComment