Does Covid Ruin Your Plan To Delay Social Security?

Classic advice: take benefits at age 70. The new advice, amid the pandemic, is a bit surprising.

Within a week, the Covid death toll in the U.S. will top 100,000. Maybe it wasn’t such a great idea to delay Social Security?

The recommendation to claim as late as possible has long been a staple of personal finance advice. If you’re reasonably healthy and can afford to wait, you have been told, you should wait. You can start collecting at 62, but, for those born in 1958, waiting eight years will make your monthly checks 77% bigger.

Putting aside widow(er)’s rights, waiting is the winning strategy only if you live past 80. Will you?

An early demise seems more likely these days. The virus has already killed a quarter of a percent of New York City overall; the death rate among retirees there is much higher.

So, time to change the claiming strategy? I decided to give Social Security another look in the light of viral mortality.

The result may surprise you. Covid makes late claiming even more desirable.

How can that possibly be? Two things are going on. One is increased mortality, which, as you would think, makes the expected payoff on an annuity smaller. The other is a recent decline in interest rates, which makes the expected payoff on an annuity larger. It turns out that the interest rate effect is much more powerful than the mortality effect.

Covid is a scary disease, and I put some scary numbers into a benefit calculator before arriving at my conclusion.

Suppose the pandemic kills another 700,000 Americans over the 12 months beginning tomorrow. This pessimistic figure would include both direct mortality (from the virus) and indirect (such as from people avoiding hospitals when they have symptoms of a heart attack).

Now let’s allow for another 280,000 excess deaths in the 12 months beginning in June 2021. This guess takes into account both the likelihood of a treatment or vaccine that mitigates the epidemic, and the likelihood that many of the most vulnerable people (such as nursing home residents) will have been early victims, so they aren’t in the later statistics.

For years three through five I think we can expect mortality slightly lower than would have occurred in the absence of the pandemic. That’s because a significant number of the victims over the next two years are already ailing and would have died of other causes by 2025. For that group the virus accelerates mortality but does not change the cumulative death rate over five years.

To sum up a grim Covid scenario: I put into my calculator mortality numbers that boost the five-year death total (over all ages) by a net 500,000 above pre-pandemic expectations. That sounds big. But it’s only 3.6% of the 14 million deaths we were expecting before the virus came along. This excess mortality, concentrated among older age brackets, moves the needle on Social Security payouts but does not move it a lot.

The interest rate decline, though, is pretty dramatic. The yield on ten-year inflation-protected Treasury bonds (“TIPS”) was 0.08% at the start of the year. Now, with a pandemic recession underway and a Federal Reserve fighting that recession, the real interest rate is -0.46%.

Why use TIPS rates, rather than those on conventional bonds? Because Social Security benefits are inflation-protected. The payouts are made with real dollars, which maintain their purchasing power.

A decline in rates makes the present value of a future dollar higher. With real interest rates dipping into negative territory, those future dollars are now so precious that they are worth more than present-day dollars. A real dollar of enhanced Social Security benefit you could have in the year 2030 has a present value of $1.05.

Claim Social Security early and you are, in effect, selling a bunch of TIPS. And you’re getting a crummy price for them. That’s because TIPS prices have gone up but the Social Security delay formula hasn’t changed.

For most couples, claiming early means selling TIPS for something in the neighborhood of 80 cents on the dollar. It means, for a couple with a good earnings record, turning a $1 milllion asset into an $800,000 asset.

I cranked interest rates and my pessimistic Covid predictions into a Social Security spreadsheet. You can follow along by downloading the spreadsheet, available here. If you want to insert numbers relevant to your own situation, make a copy of my spreadsheet and make changes on the copy (you can’t alter the original).

In my sample spreadsheet, I’ve got a retiree who just turned 62 and would be entitled, at the full retirement age of 66-2/3 years, to the maximum benefit. The spouse is younger and has a smaller earnings history. The higher earner in this example has a comorbidity like hypertension—reason, in other words, to be fearful of the coronavirus.

The surprise is that, despite the health risk, a delay in claiming makes this couple $251,000 better off: Their government annuity is worth $1.37 million taken late rather than $1.12 million taken early. As things stood at the end of last year, before the pandemic and before the crash in interest rates, their advantage to late claiming was only $205,000.

You can play around with the input numbers in the spreadsheet. Make the 62-year-old healthy by using 0% instead of +70% as the mortality adjustment for the high earner. This hypothetical healthy couple still gets a Covid penalty, but it’s not as big as the Covid penalty for the hypertensive retiree. The healthy couple gets a $313,000 benefit from delayed claiming, up from $257,000 in December.

Does it ever make sense to grab Social Security as soon as you can? Yes, but the circumstances have to be somewhat unusual. You have to be either sickly and single or sickly and married to a high-earning spouse. Bear in mind that survivorship benefits are an important part of the calculation. If the survivor is lower-earning than you, he or she will benefit from your decision to delay.

Before Covid, it usually made sense to wait. After, it usually makes sense to wait.

The fact that most Covid victims are over 62 does not mean that most people over 62 will succumb to Covid. More than half of people turning 62 this year, amid the crisis, will live to 81. You can get a sense of this from the “life expectancy” output in the spreadsheet.

One more thing to think about: The fact that you can earn something much better than a TIPS yield on your money is irrelevant. Don’t claim early just to invest in the stock market. There are better ways to increase your equity exposure than by selling TIPS at 80 cents on the dollar. You could, for example, just make your 401(k) more aggressive.

The pandemic is making people crazy with fear. Don’t let it lead to a bad decision about a $1 million asset.

Related story: Taking Social Security early if you’re laid off