More Than Cash: Social Security Buffers Longevity Risk

A social security card and money

What You Need to Know

Valuing Social Security claiming strategies only according to expected benefits neglects the program’s longevity insurance value, a new paper argues.
Reframing claiming decisions accordingly can help individuals facing greater uncertainty over their lifespans make better choices.
The research also shows how Social Security’s progressive benefit formula affects demographic and socioeconomic groups differently.

Financial advisors who help their clients claim Social Security often base their analysis primarily on the projected cash value of expected benefits. This emphasis, though, misses a key aspect of the program’s benefit to the American public: its value as de facto longevity insurance.

The approach also does a disservice to demographic groups with greater life expectancy uncertainty, including Black Americans and those with lower economic attainment. These groups face higher life expectancy uncertainty than white Americans as a whole and, as a result, may benefit from claiming analyses that put more focus on Social Security’s ability to help curb longevity risk.

This is the topline finding of a new working paper published by the Center for Retirement Research at Boston College. Because of its progressive benefit structure, which helps those with lower lifetime earnings more, Social Security is the most important federal program for improving equity by race and socioeconomic status, the analysis found

The paper, authored by CRR research economists Karolos Arapakis, Gal Wettstein and Yimeng Yin, argues that the Old-Age and Survivors Insurance (OASI) component of Social Security greatly equalizes economic outcomes in retirement. 

While the nature of OASI as an annuity helps those with lower mortality probabilities, who tend to be white and higher-earning, the researchers show by leveraging a simple lifecycle model that all household types value OASI at least as much as their lifetime contributions to the program. Black households value OASI more highly than their white counterparts, both overall and in terms of excess valuation over expected benefits. Generally, they find, the valuation of OASI beyond expected benefits strongly correlates with the unpredictability of longevity.

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Wealth Equivalence and OASI

At the heart of the analysis are projected estimates of the value of OASI, including the value of the program’s longevity insurance by race, education and marital status.

The exercise involves calculating how much more wealth households would need in order to be as well off in a world with no OASI program as they are with the program — in other words, the “wealth equivalence” of OASI.

The analysis is based on a simple lifecycle model that features survival uncertainty, the researchers explain. The model also accounts for group-specific mortality rates, pension income, wealth and OASI benefits, which include survivor benefits.

The ratio of wealth equivalence to lifetime OASI contributions is then compared to OASI’s “money’s worth,” a common measure in economic analyses that purposefully neglects the program’s insurance value.

As the authors explain, the results show that the wealth equivalence of OASI is at least as large as the lifetime OASI payroll taxes paid for all household types, and that finding holds regardless of race, gender, education or household composition. According to the authors, this result strongly suggests they all prefer a world in which OASI exists to one in which it does not.

What’s more, the authors find that Black households derive more longevity insurance value from OASI than their white counterparts, suggesting that OASI plays a more important role in equalizing retirement security across race than what is suggested by measures based solely on the cash value of expected benefits.

Finally, the authors find that singles derive more longevity insurance value than couples, as couples are already partially self-insured against longevity risk through intra-family resource pooling.

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