Archives for June 2018

A common question about the Open Social Security calculator is why it uses mortality tables (to calculate a probability of being alive in each given year) rather than simply assuming the user will die precisely at their life expectancy.

Another common question is why, relative to other calculators, this calculator is more likely to recommend an early filing age for the lower earner in a married couple.

Both questions have the same answer, and it has to do with survivor benefits.

Specifically, as we will discuss more thoroughly below, assuming that each person will die precisely at their expected date generally results in:

1. An underestimation of the value derived from the higher earner delaying benefits, and
2. An overestimation of the value derived from the lower earner delaying benefits.

Let’s look at an example.

Consider a husband and wife, each born 4/15/1960. The husband has a PIA of $1,800, and the wife has a PIA of $1,000. And let’s assume that they are in average health.

Let’s imagine a simple filing strategy in which the wife files at her full retirement age (67), and the husband files at age 70.

Looking at Individual Life Expectancies

Let’s model what happens with that filing strategy, if we were to use fixed “death date” assumptions (as other calculators do).

If we look at the SSA 2015 period life table to find their life expectancies at age 62, we see that:

• The husband has a life expectancy of age 82, and
• The wife has a life expectancy of age 84.81.

Given these life expectancies and a fixed “death date” assumption:

• The wife will collect her own benefit starting at age 67,
• The husband will collect his own benefit starting at age 70,
• The wife will begin collecting survivor benefits when the husband dies at age 82, and
• She will collect that survivor benefit until she dies at age 84.81 (i.e., 84 and 10 months).

Given this outcome, how beneficial was it for the wife (lower earner) to wait, and how beneficial was it for the husband (higher earner) to wait?

The wife waiting until her FRA had the effect of increasing her total monthly benefit from age 67 to age 82 (at which point the survivor benefit kicked in). That’s 15 years of increased benefits.

And the husband waiting until age 70 had the effect of increasing the total household monthly benefit from age 70 until the wife dies at age 84 and 10 months. That’s 14 years and 10 months of increased benefits.

Now let’s look at what happens when we use a more realistic model, which accounts for the fact that people usually do not die exactly at their life expectancy.

Using a More Realistic Model

When we use year-by-year mortality calculations (i.e., calculating the probability that each person is alive, each year), we get a different result.

Specifically, using the same mortality table as above (i.e., the SSA 2015 period life table) — but now accounting for the fact that people can, and usually do, die earlier or later than their life expectancy — we find that:

• By age 78 (and 0 months), there’s already a 50% chance that at least one of the spouses has died, and
• The probability that both spouses have died doesn’t reach 50% until age 88 and 10 months.

So with this more realistic model, how beneficial was it for the wife (lower earner) to wait, and how beneficial was it for the husband (higher earner) to wait?

The wife waiting until her FRA had the effect of, on average, increasing the total household monthly benefit from her age 67 until age 78 (after which point it’s more likely than not that either she has died or the husband has died and therefore she has begun collecting a survivor benefit). That’s 11 years.

The husband waiting until age 70 had the effect of, on average, increasing the total household monthly benefit from age 70 until age 88 and 10 months (after which point it becomes more likely than not that both spouses have died). That’s 18 years and 10 months.

Comparing the Two Approaches

So to summarize, when we used less realistic “fixed death date” assumptions:

• The value derived from the lower earner delaying was overstated by 36% (15 years of increased benefit, rather than the more likely 11 years).
• The value derived from the higher earner delaying was understated by 21% (14 years and 10 months of increased benefit, rather than the more likely 18 years and 10 months).

And to be clear, this overall concept still holds true if we vary the ages of the spouses (i.e., if one is older or younger than the other). And it still holds true if we use a different mortality table for one or both spouses (i.e., if one or both people are in better or worse than average health).

That’s because:

• When the lower earning spouse delays benefits, it increases the amount the couple receives per month as long as both people are still alive (so we’re concerned with a first-to-die joint life expectancy), and
• When the higher earning spouse delays benefits, it increases the amount the couple receives per month as long as either person is still alive (so we’re concerned with a second-to-die joint life expectancy).

And it’s always true that:

1. The first-to-die joint life expectancy of a couple is shorter than the shorter of the two individual life expectancies, and
2. The second-to-die joint life expectancy of a couple is longer than the longer of the two individual life expectancies.

In other words, when you assume that each person dies precisely at their life expectancy, the result is that you are:

• Using the shorter of the two individual life expectancies as a stand-in for the couple’s first-to-die joint life expectancy (thereby overstating the value of having the lower earner delay), and
• Using the longer of the two individual life expectancies as a stand-in for the couple’s second-to-die joint life expectancy (thereby understating the value of having the higher earner delay).

If you use Open Social Security as well as other Social Security calculators, you will find that Open Social Security often recommends an earlier filing age for the lower earning spouse than what other calculators recommend. This is because other calculators are using “fixed death date” assumptions, and thereby generally overestimating the value of having this person delay benefits.

When deciding when to claim Social Security benefits, it can be helpful to use a calculator that runs the math for each possible claiming age (or, if you’re married, each possible combination of claiming ages) and reports back, telling you which strategy is expected to provide the most total spendable dollars over your lifetime.

Maximize My Social Security and Social Security Solutions are the two best-known paid calculators in the field. For a few years though, there was a decent (basic) free option as well: “SSAnalyze,” hosted by an advisory firm called Bedrock Capital. Unfortunately, Bedrock Capital was bought by another financial firm late last year, and the buyer did not repost the calculator on their own site.

So, in April of this year I decided to make my own. It’s available now, and you can try it out it here:

https://opensocialsecurity.com/

I’m calling it “Open Social Security,” because I’m making it open-source, with three goals in mind:

1. This way, anybody who is especially interested in the details can see for themselves how the calculator functions, rather than having to trust me or wonder about what assumptions I’m using.
2. Possibly, somebody else will make use of the code in some other way — building some Social Security-related functionality into other financial planning software for instance.
3. If something happens to me  — or I simply stop updating the calculator — somebody else can take the code and put it up on their own website so people will still have access to a useful tool.

I’ve been testing the heck out of it, but it’s certainly possible that there are still bugs. If you see something that doesn’t make sense or isn’t working, please let me know.

FYI, it runs much faster in Chrome or Firefox than it does in Safari. And Safari is in turn several times faster than Edge or Internet Explorer. In other words, if you’re using the calculator as a married person (i.e., a situation that requires your computer to do a lot of calculations), you might not want to use Internet Explorer or Edge, especially if you have an older computer.

Also, I would encourage you to please read the About page, as it has some basic information about how the calculator works, and it notes some important caveats.

Finally, for anybody who’s interested, here’s the GitHub page, where you can view/download the source code.