Column: Ignore this piece of advice from Social Security to get maximum coverage

Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out

Editor’s Note: Boston University economist Larry Kotlikoff has spent every week, for over three years, answering questions about what is likely your largest financial asset — your Social Security benefits. His Social Security original 34 “secrets,” his additional secrets, his Social Security “mistakes” and his Social Security gotchas have prompted so many of you to write in that we feature “Ask Larry” every Monday. Find a complete list of his columns here. And keep sending us your Social Security questions.

Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version. His new book, “Get What’s Yours — the Secrets to Maxing Out Your Social Security Benefits,” (co-authored with Paul Solman and Making Sen$e Medicare columnist Phil Moeller) was published in February before the changes from the Bipartisan Budget Act of 2015 went into effect.

For the past few weeks, Social Security expert Larry Kotlikoff has been keeping readers updated on how the budget act changes a number of Social Security rules. We’ll continue publishing updates on what this new law means for your Social Security benefits. Stay tuned.

Steve: I’ve read a number of your articles over the years and appreciate the attention you are bringing to our troubled Social Security system. At 57, I really wonder how this all going to unfold over the next 20+ years. But there’s one thing I don’t understand — the advice from every financial planner is to not take Social Security benefits early but to wait at least until full retirement, and even longer, because your benefits will be reduced.

Yet here’s what Social Security says:

As a general rule, early or late retirement will give you about the same total Social Security benefits over your lifetime. If you retire early, the monthly benefit amounts will be smaller to take into account the longer period you will receive them. If you retire late, you will get benefits for a shorter period of time but the monthly amounts will be larger to make up for the months when you did not receive anything.


So if I’m worried about the government being able to make full Social Security payments down the road, or if I think I can invest the monthly SSA benefit and earn a greater return now, why wouldn’t claiming it early make sense? Wouldn’t it be better to get as much in the bank now rather than rely on promises of future payment from a clearly broke federal government? And if it’s the same total benefits over my lifetime, how am I penalized financially for taking it early?

Larry Kotlikoff: This is among the most economically backwards statements out of a long list of statements that Social Security has posted on its website. Before addressing your concerns, let me make a public demand on behalf of economists to the commissioner of Social Security.

Dear Acting Commissioner Colvin,

Impanel a team of economists and Social Security technical experts to rewrite every word on your website, which is chock full of false, misleading and incomplete information. And leave the economists — and only the economists — to rewrite every statement on your website that references longevity risk and whether to take benefits early or later.

If you were in my class and wrote this statement — “As a general rule, early or late retirement will give you about the same total Social Security benefits over your lifetime” — on an exam asking how to think about when to take Social Security, I would, quite frankly, flunk you. Let me explain. You are running an insurance company. Insurance company executives do not generally say on their websites that, as a general rule it doesn’t matter whether or not you should buy insurance. But this is precisely what your statement implies if you bothered to give it a moment’s thought. First, as an absolute rule, there is no general or average rule that applies to retirees taking Social Security. Any given retiree is only going to die once. A “general” rule suggests that what happens on average, as in across a large group of retirees, matters to a given retiree. It doesn’t. Any given retiree can’t play the averages. By analogy, Acting Commissioner Colvin, as a general rule your house won’t burn down. But if you were running a property insurance company, you would know enough to fire anyone who posted on your website that, as a general rule your house won’t burn down, so don’t buy home owners coverage.

To repeat, Social Security is an insurance company. Your institution can play the odds/count on the averages. But your clients can’t play the odds or count on the averages. They will die exactly once and that may be at age 100. If they do live excessively long, they will face horrendous financial risk. This is why they need longevity insurance and why they need to cover the catastrophic loss, which is not living to their life expectancy, but to their maximum age of life. You are in the business of selling longevity insurance. When someone waits to take dramatically higher retirement benefits starting at 70, they are giving up eight years of reduced benefits (since they could start their retirement benefits at age 62). These eight years of low benefits that are lost by not taking them represent the premium they are paying for the increase in benefits post age 70. That increase in benefits is the additional annuity they are purchasing by waiting. So Social Security is actively in the business of selling annuities, which is longevity insurance, but no one in your institution seems to have the slightest inkling that that’s what you are about. If you did, you would not tolerate for a nanosecond statements on your website that come close to consumer fraud, which I define as misleading the public to purchase a product under false pretenses.

Now back to you, Steve. I hope the above makes clear that your job is to ignore that statement by Social Security and approach your longevity risk like you’d approach any other kind of insurable risk — go for the maximum coverage. In this case, it means waiting to collect much higher benefits. As for your retirement benefits being cut, that seems highly unlikely. Finally, investing in the bank will yield a zero or negative or very low rate of return. Investing in the stock market will produce a high expected rate of return, but it comes with huge risk. In contrast, Social Security’s benefit increase from being patient embeds an enormous internal rate of return as well as incredibly generous actuarial factors. Being patient and taking 76 percent higher benefits starting at age 70 relative to age 62 is one of Uncle Sam’s all-time best deals. Plus, if you are married or divorced after being married 10 or more years, the higher benefit will likely be passed to your wife or ex-wife if you predecease them.