Leaving Big Money on the Table: Arbitrage Opportunities in Delaying Social Security

31 Pages Posted: 16 Nov 2018

See all articles by Gila Bronshtein

Gila Bronshtein

Stanford University

Jason S. Scott

Financial Engines, Inc.

John B. Shoven

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Sita Slavov

George Mason University - School of Policy, Government, and International Affairs

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2016

Abstract

Recent research has documented that delaying the commencement of Social Security benefits increases the expected present value of retirement income for most people. Despite this research, the vast majority of individuals claim Social Security at or before full retirement age. Claiming Social Security early is not necessarily a mistake, as delaying Social Security commencement requires forgoing current income in exchange for future income. The decision to claim early could therefore rationally be driven by liquidity constraints, mortality concerns, bequest motives, a high time discount rate, or a variety of other preference related factors. However, for some individuals, delaying Social Security offers a significant arbitrage opportunity because they can defer Social Security and have higher income in all future years. Arbitrage exists for most primary earners who either purchase a retail-priced annuity or opt for a defined benefit annuity when a lump sum payout is offered, while forgoing the opportunity to defer Social Security. These individuals are essentially buying an expensive annuity when a cheaper one is available, and their decision to claim Social Security early is almost certainly a mistake. The magnitude of the mistake can reach up to approximately $250,000.

JEL Classification: D14, H55

Suggested Citation

Bronshtein, Gila and Scott, Jason S. and Shoven, John B. and Slavov, Sita, Leaving Big Money on the Table: Arbitrage Opportunities in Delaying Social Security (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=3279694 or http://dx.doi.org/10.2139/ssrn.3279694

Gila Bronshtein

Stanford University ( email )

Stanford, CA 94305
United States

Jason S. Scott

Financial Engines, Inc. ( email )

1050 Enterprise Way, 3rd Floor
Sunnyvale, CA 94089
United States

John B. Shoven

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-326-5377 (Phone)
650-328-4163 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sita Slavov (Contact Author)

George Mason University - School of Policy, Government, and International Affairs ( email )

Founders Hall
3351 Fairfax Dr.
Arlington, VA 22201
United States

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