Stanley A. Tomkiel, III, Esq. is a practicing attorney and a partner in the New York law firm of Tomkiel & Tomkiel. Mr. Tomkiel was formerly employed by the Social Security Administration as a claims representative in several field offices in the Northeast. He first published the

Stanley Tomkiel--

If you were born in 1943, or any year after that before (but not including) 1955, your Full Retirement Age for social security benefits is age 66. This group is now at or approaching retirement. Under the current SS rules, once you reach Full Retirement Age your earnings will not reduce your monthly benefits. Even though the government calls it “Retirement Age”, you don’t have to be retired at all to collect retirement benefits from social security. You can be making a million dollars a year, to use a nice round number, and still get all your benefits. Your spouse can collect too on your account, up to one-half of your primary benefit. If she or he is age 66 and working, the spouse’s benefits are not affected by earnings either.

So why wouldn’t you take your benefits? What’s the downside? They’re not reduced for age. But there may be a good reason for you to consider deferring your benefits. The social security rules provide additional money if you do. This is an incentive to let the government hold your money. So what’s in it for you?

The short answer is: 32% of your primary insurance amount can be added to your benefit for life beginning at age 70! However, if your spouse can receive a spouse benefit on the account, the credit does not increase the spouse’s benefit, only yours. (But the credit will be applied to your widow’s benefit if you die.)

So the decision to defer or not is greatly influenced by whether or not your spouse will be entitled on your account, because there is no upside for deferring those spouse benefits.

Let’s look first at the worker who has no spouse entitled on his or her account. By the way, this does not necessarily mean that the worker is not married, only that the spouse does not qualify, for example if the spouse has a benefit on her (or his) own greater than one-half of the worker’s primary amount, or if the spouse is not over age 62.

So, for the individual who is entitled at age 66 to $2,000 per month, which is the current approximate maximum benefit, deferring or suspending benefits till age 70 will cost $96,000. That’s $2,000 per month for four years, not including cost of living increases. The payoff at age 70 is a 32% increase. This is calculated by the month, called “increment months,” at the rate of 2/3 of one percent per month, which comes to 8% per year, 32% for four years.

The 32% increase brings the benefit amount up to $2,640, a gain of $640. If we divide the $96,000 cost by 640, it will tell us how many months it will take to get it back the $98,000 after age 70. Answer: 150, which comes to 12 ½ years. This does not include cost-of-living adjustments that may increase the $640 monthly by about 3% each year. To gain from this deal, you must reach age 82 ½. If you die before then, you will lose out. Likewise, if you die between age 66 and 70, the deferred benefits cannot be claimed by your survivors or the estate. They’re gone, although your widow’s benefit, if any, will be increased by the applicable credit, i.e ¾ of 1% for each month you lived after age 66.

It may be risky business to defer or suspend benefits till age 70. But the odds may favor this approach because the life expectancy for the total overall population for those alive at age 70 is about 15 years (source: U.S. Life Tables, 2004, Table 1, Nat’l Vital Statistics Reports, v.56, n.9, 12/28/07, Centers for Disease Control, http://www.cdc.gov/nchs/data/nvsr/nvsr56/nvsr56_09.pdf ). So, there is a reasonable basis, if you are feeling healthy and lucky, to take the gamble. But please note that white females have the longest life expectancy (16.2), followed by black females (15.9), white males (13.7), then black males (12.4). See Tables 5, 6, 8, and 9. So this deal may not be so good for black men, at least on a statistical basis.

But if your spouse also must defer benefits on your account, then the break-even point for recovery of the deferred benefits is much later. If the spouse would have been able to receive $1,000 per month (one-half the worker’s benefit), that comes to an additional $48,000 cost of deferring, but the 32% Delayed Retirement Credit does not increase the spouse’s benefit. So now the total cost is $144,000. Dividing that by the 640 comes to 225 months, or 18.75 years. And that’s after age 70, so now we’re betting on reaching age 88 ¾. Hmmm. A bit riskier I’d say.

Of course, these are just examples, but they give you an idea of how it works, and how to analyze the issues.

Personally, if I didn’t need the money, I’d take the benefits anyway and put the money into some kind of private investment. At least I would have control over the money, and be able to pass it to my heirs if I didn’t use it, rather than let the government keep it. If I didn’t want to pass it on, I would look at some kind of lifetime annuity. That’s a good question. Would a lifetime annuity at age 70 costing $98,000 pay more than $640 per month plus cost-of living adjustments? Perhaps a financial-type reader out there can provide some estimates.

Caution: it is essential to apply for Medicare for health insurance coverage at age 65 (not 66) regardless of whether or not you intend to defer benefits.

© 2008, Stanley A. Tomkiel III

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