Buying an Annuity from Social Security “Best Deal in Town”

May 25, 2012 ( – One way workers can increase retirement income is to delay claiming Social Security to increase their monthly benefit.

A brief from the Center for Retirement Research at Boston College (CRR) contends when workers do so, they are, in effect, buying an annuity from Social Security. The savings they use to pay monthly expenses while they wait is the “price” and the increase in monthly benefit gained from waiting is the annuity income it “buys.”  

For example, the report says, consider a retiree who could claim $12,000 a year at age 65 and $12,860 at age 66 – $860 more.  If he delays claiming for a year and uses $12,860 from savings to pay the bills that year, $12,860 is the price of the extra $860 annuity income. The annuity rate – the additional annuity income as a percent of the purchase price – is 6.7% ($860/$12,860).  

“Buying” an annuity from Social Security is generally more attractive than buying a commercial annuity for several reasons, the brief contends.  The annuity a retiree “buys” from Social Security is the increase in benefits for claiming at an older age.  These increases are designed to be actuarially fair – so “no additional cost to the system arises” due to participants claiming at different ages. Commercial annuities, by contrast, cannot be “actuarially fair.”  Insurance companies have marketing, management, and risk-bearing costs that must be added to the “actuarial” price – the expected present value of the income the annuity provides.

More importantly, Social Security benefit adjustments are based on the life expectancy of the “average” individual.  As individuals who purchase commercial annuities tend to have above-average life expectancy, the cost of the yearly income these annuities provide is higher.   

According to the brief, buying an annuity from Social Security is especially attractive when interest rates are low, as they are today.  Living on the interest today is essentially impossible, as interest rates on safe assets are currently less than the rate of inflation.  Drawing an income from a portfolio invested in stocks and bonds is also less attractive, as bond interest rates are low and any increase would reduce the value of the bonds retirees hold.  Commercial annuities funded by bonds also provide much less income than they would in “normal” times.  By contrast, the additional income available by claiming Social Security later is not affected by current interest rates.  

The brief concludes: “[B]uying an annuity from Social Security, especially in today’s low interest rate environment, is the best deal in town.”  

The brief can be downloaded from