Optimal Claiming of Social Security Benefits

TL;DR

This paper develops a lifecycle model with Epstein-Zin utility and mixed-integer optimization to determine the optimal age for claiming Social Security benefits, considering wealth, mortality, and preferences.

Contribution

It introduces a threshold-based approach using a sufficient statistic to optimize claiming age, accounting for utility and mortality assumptions.

Findings

Optimal claiming threshold depends on wealth-to-PIA ratio

Threshold increases with age from 62 to 69

Claiming decisions are less sensitive to market assumptions

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.