Social Security may be one of your largest assets. What and when you collect will make a huge difference to your lifetime benefits.
Today’s Social Security question is about how estimates of lifespan affect your Social Security decisions.
Question: Why shouldn't we use estimates of life expectancy when making decisions about when to file for Social Security benefits?
Answer: I’m appalled by Social Security’s ongoing effort to mislead the public into thinking they should focus on their life expectancy instead of their maximum ages of life in deciding whether to take their benefits early. Social Security has a warning on their website that many people will live beyond their life expectancies. But their life expectancy calculator, simply by its prominent position on their website, strongly encourages people to focus on life expectancy when it comes to collecting benefits. This is absolutely disgraceful and should be removed.
Social Security’s formal name is the Old Age Survivors Disability Insurance system. Social Security is an insurance company. It’s taking money from us and promising insurance benefits in exchange. (Yes, it’s funded on a take-as-you-go basis and is deeply insolvent, but that’s neither here nor there for this issue.) Insurance companies don’t go out of their way to encourage people to ignore risks and focus on average outcomes. Homeowners insurance companies don’t have calculators showing us that the expected loss we face from having our house burn down is small and, thereby, implicitly suggest that we not buy homeowners insurance. Health insurance companies don’t have calculators showing us that on average we won’t get cancer so we, wink wink, shouldn’t buy insurance against that possibility. Car insurance companies don’t have calculators showing us that, on average, we won’t total our car this year and, wink wink, we can get by without full coverage.
Insurance companies don’t discuss or display average outcomes because they know that their clients can’t play the averages. They know they have only one house to lose, only one body that can require super expensive cancer surgery, and only one car that may end up smashed to bits. It’s time Social Security recognized the obvious — each of us has only one life to lose and we may lose it at age 100 or even later.
Social Security is now and has always been dominated by actuaries who look at averages, called expectations. Actuaries are good with numbers, but seem remarkably dense when it comes to the basic economics of insurance. They spent years telling people they might as well take their benefit early since they’d get the same amount on average either way. In the process they lost millions of people billions upon billions of dollars in benefits, when one properly values the insurance feature of Social Security. They are no longer telling people to take their benefit early. But by focusing attention on life expectancy, as opposed to the worst-case scenario, living to one’s maximum age of life, Social Security is doing a grave disservice. So, here’s my appeal to Social Security, which I’m sure virtually all economists would endorse: Take down your life expectancy calculator!
My weekly Social Security column appears on PBS NEWSHOUR’s website.
