Getting the Most Out of Your Social Security Investment

The Social Security Administration periodically updates its analysis of the real rate of return that benefits generate for workers, male and female, at various income levels.  In its most recent report, from July of this year, the calculated rates of return are considerable, especially for low to moderate income earners whose returns range between around 3% and 6%.  Interestingly, even if benefits are cut in 2033 (when the Trust Fund is exhausted and assuming the only payments are from current payroll tax collections, a cut of about 25%), the range of returns for these earners is 2% to 6%.

In general, the returns go down for more recent generations.  Those born in the 1920s and 1930s have by far the highest rates of return.  Also, the returns for women are higher in all categories because on average they live longer and therefore collect longer.  Still, even high earners get real rates of return above zero under all scenarios.

I became aware of this analysis from an article by Steve Vernon writing at CBSNews.com.  Mr. Vernon writes often about Social Security and excels at explaining some of the intricacies of claiming strategy.  As he points out in the article, "Looking at all the various combinations, large numbers of hypothetical workers received estimated real rates of returns of 2, 3 or 4 percent per year."  Considering there is a near zero risk on this "investment", that's not bad!

One assumption used in their analysis deserves special notice from our vantage point: all calculations are based on the beneficiaries retiring at age 65.  Our own analysis shows that most of these claimants would enjoy far greater cumulative lifetime benefits if they claimed later, closer to age 70.  The result for most couples would be an increase in benefits approaching or exceeding $100,000, an amount that would increase the rate of return considerably.  Make the most of the investment you made in the Social Security system by adopting a smart claiming strategy.