Social Security: Factors Affecting The Decision of “When To Begin” Benefits

December 2008

This paper examines the two sets of factors controlled by a worker and affecting a person’s Social Security benefit. The first set of factors affect a worker’s base benefit, known as the Primary Insurance Amount (PIA), and include years of coverage in the Social Security system and an individual’s history of taxable earnings under the Social Security system. The second set of factors pertain to changes in the primary insurance amount, including early retirement reductions, delayed retirement credits, the earnings test, and the tax on benefits. Taken as a whole, careful planning is required into and through retirement to ensure that an individual maximizes lifetime Social Security benefits. Financial planning programs typically take Social Security benefit payments as the foundation for estimating what retirement income will be and what additional saving is needed to provide for a secure retirement. Many programs use the annual projected base benefit provided by the Social Security Administration (SSA). For example, if an 80 percent income replacement rate (IRR) is desired and base projected Social Security benefit provides a 30 percent IRR, then a household would need to save enough to provide for a 50 percent IRR out of other retirement assets. There are two potential problems with this approach. First, the SSA makes a number of simplifying assumptions about future earnings and age of benefit receipt, possibly making the projected benefit a poor benchmark for the actual benefit. Second, using the projected benefit as the Social Security IRR can substantially reduce total retirement income because the method neglects how the benefit receipt decision interacts with other sources of income. In particular, careful consideration of the second set of factors is needed to determine when to begin benefits in order to maximize lifetime Social Security benefits. Making a poor decision can potentially cost a retiree thousands of dollars of retirement income