Leaving Big Money on the Table : Arbitrage Opportunities in Delaying Social Security

Recent research has documented that delaying the commencement of Social Security benefitsincreases the expected present value of retirement income for most people. Despite this research,the vast majority of individuals claim Social Security at or before full retirement age. ClaimingSocial Security early is not necessarily a mistake, as delaying Social Security commencementrequires forgoing current income in exchange for future income. The decision to claim earlycould therefore rationally be driven by liquidity constraints, mortality concerns, bequest motives,a high time discount rate, or a variety of other preference related factors. However, for someindividuals, delaying Social Security offers a significant arbitrage opportunity because they candefer Social Security and have higher income in all future years. Arbitrage exists for mostprimary earners who either purchase a retail-priced annuity or opt for a defined benefit annuitywhen a lump sum payout is offered, while forgoing the opportunity to defer Social Security.These individuals are essentially buying an expensive annuity when a cheaper one is available,and their decision to claim Social Security early is almost certainly a mistake. The magnitude ofthe mistake can reach up to approximately $250,000