Some annuities may be cheaper than the ones used in the illustration, but the benefits would be less also, he said.
Social Security and annuity income can be subject to some income tax when benefits are paid, although the tax treatment of the income is different.
Alicia Munnell, a Boston College professor who is a well-known expert on retirement issues, wrote in "SmartMoney" in The Wall Street Journal that Social Security is a better deal than an annuity. As an example, consider a retiree who waits a year to claim benefits and uses savings to replace the benefits for that year.
He gets an 8 percent increase in benefits for life for waiting that year. He can consider the cost of replacing those benefits for that year from his savings as the cost of the annuity. A real annuity could be purchased to pay the same as the increase in benefits, but it would cost more than what replacing the benefits cost.
The reason that Social Security annuities are a better deal than those in the private markets is that Social Security can offer a product that is actuarially fair – they are based on the life expectancy of the average person (not those people whose parents lived into their 90s) and Social Security does not have to worry about marketing costs or profits, Munnell writes.
“So buying an annuity from Social Security, especially in today’s low interest rate environment, is the best deal in town,” Munnell writes. “Tell your friends with some 401(k) assets to use them to delay claiming their Social Security benefit.”