Misconceptions About Delaying Social Security

There are many common misconceptions about Social Security planning, but two that I see pop up very often are the ideas that:

1. Delaying Social Security is like buying a bond that pays 8% interest, and
2. Delaying Social Security gets you an 8% return.

Social Security: Not a Bond

I’ve seen several writers make the case that delaying Social Security is a good deal, because it’s like buying a bond that pays 8% interest per year, adjusted for inflation. But Social Security makes for a very strange bond, doesn’t it? You cannot sell it. It pays nothing at maturity. And it matures at an unknown date in the future (i.e., when you die, or, in some cases, when your spouse dies).

In other words, delaying Social Security is not like buying a bond at all. It is, however, exactly like buying an inflation-adjusted lifetime annuity (or, if you prefer to think of this way, like buying a pension).

An inflation-adjusted lifetime annuity that pays 8% per year (or more precisely, 6.5%-8%, depending on which year of delaying we’re talking about) is still a good deal relative to what you can get on an annuity from an insurance company. But it’s not even close to the screaming-hot, nobody-should-ever-pass-it-up bargain that an inflation-adjusted Treasury bond with an 8% yield would be.

Delaying Social Security Gives an Unknown Return

A similar misconception about Social Security is the idea that delaying your retirement benefit gets you an 8% rate of return. In reality, the rate of return you get from delaying Social Security will depend upon how long you live (and, perhaps, how long your spouse lives).

As an obvious example, consider an unmarried person who chooses to delay Social Security all the way until 70, but who dies shortly before his 70th birthday. This unlucky fellow does not get an 8% return on the money he gives up in order to delay his benefits. In fact, every dollar he “invests” in this manner gets a -100% return, because he never gets any of it back.

The point here is not that it’s a bad idea to hold off on claiming Social Security. For many people, delaying benefits is quite advantageous. The point is simply that there’s no way to calculate your rate of return in advance, because there’s no way to know exactly how many Social Security checks you will collect — unless you somehow know exactly when you will die.