The High Price Retirees Pay for Collecting Social Security Too Early

The researchers looked at lifetime discretionary spending and determined that almost 90% of workers age 45 to 62 would benefit by waiting until age 70 to collect Social Security. Indeed, waiting would boost the typical worker’s median discretionary spending over a lifetime by $182,370, or around 10%.

Yet less than 10% of retirees are likely to wait that long, the researchers said.

“Figuring out when to collect payments, especially if someone is eligible for multiple benefits or coordinating with a spouse, can be almost impossible to get right,” says

Laurence Kotlikoff,

a professor at Boston University and one of the paper’s co-authors.

The wealthiest 20% of people who are now 45 to 62 years old could boost their lifetime discretionary spending by almost $290,000 on average, by waiting to collect until age 70—a boost of about 2.4%, the researchers found. And the 1% of people who benefit the most by waiting to collect Social Security could see a lifetime boost of almost $600,000.

But even less wealthy retirees benefit significantly from waiting until age 70 to start Social Security, the study suggests. People now 45 to 62 years old, whose assets and income put them in the bottom 20% for wealth, could increase their lifetime discretionary spending by almost $110,000—a boost of about 15%.

To arrive at their findings, the researchers used three large data sets: the Federal Reserve’s 2019 Survey of Consumer Finances, the U.S. Census Bureau’s annual American Community Survey between 2000 and 2020, and the Current Population Survey conducted by the Bureau of Census for the Bureau of Labor Statistics. The first data set was used to observe the finances of 6,000 households. The second two data sets were used to model different retirement dates.

The data were analyzed with a software program that takes into account numerous variables, including federal and state income taxes, federal and state benefits and Medicare premiums, which all play a role in how much money retirees actually have to spend.

If it’s no secret that waiting to collect Social Security pays off in the long run, why don’t more people do it?

One big problem is that it can mean taking a financial hit in the short term. The authors found that 47% of the households in the study would have to reduce their spending in the near term if they postponed collecting Social Security. One solution, according to Prof. Kotlikoff, might be for the government to consider allowing people to collect a portion of their Social Security benefits early and another portion later on, so that they could receive the higher payout down the road.

Another issue is that many retirees don’t account for the value of their Social Security benefits over a 30- or 40-year period, thinking they won’t live that long. Financial experts and even guidance on the Social Security website recommend that retirees use average death rates to estimate the value of their Social Security benefits and cash flow during retirement. But Prof. Kotlikoff says that “using averages is highly irresponsible.”

“It’s more important to think about how long you could possibly live,” he says, adding that Social Security becomes a lot more valuable if someone expects to live to 100 years old and maximizing benefit becomes even more essential.

Complexity is another big problem. Social Security can include benefits for spouses, widows, divorcées, disabled children, orphans and parents, and trying to coordinate and maximize those benefits is difficult.

“Optimizing Social Security benefits is like thinking ahead 15 moves in a chess game,” Prof. Kotlikoff says.

Ms. Ward is a writer in Vermont. Email her at reports@wsj.com.