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Should You Delay Social Security Benefits

  Sanjiv Gupta CPA  Published 
Should You Delay Social Security Benefits

Social Security is a scheme in which employees are encouraged to retire later than their actual tenure. There was legislation that got passed in the year 1983 which had allowed the retirement age to be fixed at 67 for people who were born after the year 1959. Delaying the Social security benefits has been under the scanner for long and researches were conducted by many to check if this scheme was beneficial to the aged people.

One idea that came up during analysis was to offer lump-sum amounts to employees who retire later than their actual term. The idea of this bulk payment might motivate the aged people to extend their tenure, without having to compromise on their benefits. This research was conducted by four researchers- Jingjing Chai, Raimond Maurer, Ralph Rogalla (from the Goethe University, Germany) and Olivia Mitchell (from the Wharton School).

The basic finding from their research was that the lump-sum payment option did motivate the workers to extend their retirement by 2 years, on average. The number-crunching concept behind this research was simple. It was calculated that a person who retires at 66 years instead of 65 years, would get 1.2 times more benefits than he would have got at 65 years in addition to the normal benefits that he is entitled to, at his actual retirement age.

The amount that is calculated as the bulk payment is the expected current value of the extended retirement package. There would not be any increased costs to society or decreased benefits for the worker. Hence this system was found out to be “cost-neutral” to society. The workers reacted well to this delayed social security scheme as results proved that the workers who extended their retirement age rose by 49%. Workers who were lured by this delayed social security package were the ones who gave priority to work than vacations, were risk-takers and who were keen to invest in the stock market for increased returns.

Another factor in favor of the delayed social security scheme was that the lump-sum payment paid out by the extended tenure did not directly relate to giving away to legal heirs. This amount was mostly used by the people to take care of them as they grow older. This was the motive of the Social security scheme; to be of help to the retired people as they step into their relaxed lifestyles.

Social security schemes are considered as the primary source of retirement fund by around 42% of people whose annual income is less than $30,000 and around 33% of people whose annual income is between $30,000 and $75,000. However, people who earned more than $75,000 did not see Social security as one of the top retirement funds. Around 65% of these people used the options of 401K or IRA, which the workers used to deposit their lump-sum payments in. Delaying the retirement benefits was helpful for people with low class or middle-class income levels.