Optimal Claiming of Social Security Benefits

24 Pages Posted: 1 Jun 2021

See all articles by Steven Diamond

Steven Diamond

BlackRock AI Labs

Stephen Boyd

Stanford University - Department of Electrical Engineering

David Greenberg

affiliation not provided to SSRN

Mykel Kochenderfer

Stanford University

Andrew Ang

BlackRock, Inc

Date Written: May 19, 2021

Abstract

Using a lifecycle framework with Epstein-Zin (1989) utility and a mixed-integer optimization approach, we compute the optimal age to claim Social Security benefits. Taking advantage of homogeneity, a sufficient statistic is the ratio of wealth to the primary insurance amount (PIA). If the investor's wealth to PIA ratio exceeds a certain threshold, individuals should defer Social Security for at least a year. The optimal threshold depends on mortality assumptions and an individual’s utility preferences, but is less sensitive to capital market assumptions. The threshold wealth to PIA ratio increases from 5.5 for men and 5.2 for women at age 62 to 11.1 for men and 10.4 for women at age 69. Below the threshold wealth to PIA ratio, individuals claim Social Security to raise consumption. Above this level, investors can afford to fund consumption out of wealth for at least one year, and then claim a higher benefit.

Keywords: Social Security, optimization, lifecycle models

JEL Classification: D14

Suggested Citation

Diamond, Steven and Boyd, Stephen and Greenberg, David and Kochenderfer, Mykel and Ang, Andrew, Optimal Claiming of Social Security Benefits (May 19, 2021). Available at SSRN: https://ssrn.com/abstract=3855696

Steven Diamond (Contact Author)

BlackRock AI Labs ( email )

400 Howard Street
San Francisco, CA 94105
United States

Stephen Boyd

Stanford University - Department of Electrical Engineering ( email )

Stanford, CA 94305-6104
United States

David Greenberg

affiliation not provided to SSRN

Mykel Kochenderfer

Stanford University ( email )

Stanford, CA 94305-9025
United States

HOME PAGE: http://https://mykel.kochenderfer.com/

Andrew Ang

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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