May 25, 2012
--- One way workers can increase retirement income is to
delay claiming Social Security to increase their monthly benefit. ---
A brief from the Center for
Retirement Research at Boston College contends when workers do so, they are, in
effect, buying an annuity from Social Security. The savings they use to pay
monthly expenses while they wait is the price, and the increase in monthly
benefit gained from waiting is the so-called annuity income it buys.
For example, according to the report,
a retiree could claim $12,000 a year at age 65 and $12,860 at age 66—an
additional $860 a year. If he delays claiming for a year and uses $12,860 from
savings to pay the bills that year, $12,860 is the price of the extra $860
annuity income. The annuity rate—the additional annuity income as a percent of
the purchase price—is 6.7% ($860/$12,860).
annuity from Social Security by delaying benefits is generally more attractive
than buying a commercial annuity for several reasons, the brief contends. The
annuity a retiree purchases from Social Security is the increase in benefits
for claiming at an older age. These increases are designed to be
actuarially fair—so “no additional cost to the system arises” due to
participants claiming at different ages. Commercial annuities, by contrast,
cannot be “actuarially fair.” Insurance companies have marketing, management,
and risk-bearing costs that must be added to the “actuarial” price—the expected
present value of the income the annuity provides.