Why does adding opportunity cost change lifetime Social Security benefits so much?

Adding an Opportunity Cost (or, “discount rate”) to lifetime Social Security benefit calculations can have a large effect on the calculation, even if the opportunity cost is fairly low. The reason is that, over a long period of time (such as a 20-30+ year retirement), the opportunity cost compounds.

For example, $1 received 35 years from now at a 0% opportunity cost is still worth $1 today. However, with a 3% opportunity cost, that same dollar is worth only $0.36 today. (If you had $0.36 today and invested it at 3%, you'd have $1 in 35 years.) At a 5% opportunity cost, that $1 is worth just $0.18 today.

In other words, that far-in-the-future dollar is five times less valuable today at a 5% opportunity cost, and three times less valuable at a 3% opportunity cost. So, in aggregate, adding an opportunity cost to the lifetime Social Security calculation can change things quite a bit.

For example, someone who is evaluating claiming options in their late 50s might see that they would receive $297,000 in lifetime benefits from age 70 to age 90. But when adding a 3% opportunity cost, it would reduce to $173,000. In other words, a 3% opportunity cost reduced the value of those benefits today by more than $100,000.

0% Opportunity Cost

3% Opportunity Cost