Workers show interest in Social Security bridge strategy

If America is facing a retirement crisis, then a potential 401(k) plan distribution option that helps workers delay claiming Social Security could serve as a bridge over troubled waters.

(Forgive me. I just saw the new musical, "The Simon & Garfunkle Story," and I'm still reliving the soundtrack of my youth.)

The first wave of baby boomers, who are almost entirely dependent on 401(k) plans rather than traditional defined-benefit pension plans for their future income, are now entering retirement. The great retirement income conundrum facing financial advisers and their clients — along with the millions of aging Americans who don’t work with an adviser — is how to turn a lifetime of savings into a stream of income that lasts as long as the account holder.

The one class of products that experts consistently recommend for this purpose is annuities, but only a small fraction of the population buys them.

One of the best and cheapest annuity equivalents is Social Security. It provides guaranteed income every month for life. The longer an individual waits to claim benefits, up to age 70, the bigger the monthly benefit. And individuals can increase their monthly benefit by 76% by claiming at age 70, the maximum claiming age, rather than at the earliest eligibility age of 62.

A new study from the Center for Retirement Research at Boston College explore what would happen if employers could increase the availability of lifetime income by adopting a Social Security “bridge” strategy within their 401(k) plans.

“The bridge option would use 401(k) assets to pay retirees an amount equivalent to their Social Security benefits for several years so they can postpone claiming, thereby increasing their monthly payment when they eventually do claim,” the report said. “Using their 401(k) assets as a substitute for Social Security benefits when they retire — as a bridge to delayed claiming — would allow participants to, in essence, buy a higher Social Security benefit.”

For example, a 62-year-old worker with a monthly Social Security benefit of $1,500 and a $150,000 401(k) balance could retire at 62 and withdraw $1,900 per month — the equivalent of his age-65 Social Security benefit — from his 401(k) for three years before claiming Social Security at 65. At that point, he would have withdrawn $69,000 from his 401(k), less than half of his account balance, and could reduce or temporarily suspend future withdrawals (until required minimum distribution age) once his Social Security payments begin.

“Prior research has clearly demonstrated that a bridge option could significantly improve employee welfare,” the CRR report found. “Moreover, a bridge strategy could be implemented by employers without any legislative or regulatory changes. Yet, employers have not introduced a bridge option in their 401(k) plans. One reason for employer reluctance may be that they are dubious about employee interest in such a strategy.”

The purpose of the CRR study was to gauge interest in an employer-facilitated bridge by interviewing a representative sample of older workers.

A panel at the University of Chicago interviewed more than 1,300 workers between the ages of 50 and 65 who had 401(k) balances of at least $25,000. Respondents shared their household and personal income to allow projections of their expected Social Security benefits and 401(k) savings as a function of their eventual claiming age.

Respondents were randomly assigned to one of four groups. Each group was presented with the choice of whether to participate in the bridge option and how much of their 401(k) assets to allocate to that option. Roughly a third of each group said they would be interested in using the bridge option. The group that was given the most details about how a bridge option would work showed the highest level of interest, at 35%.

“The substantial interest in the bridge strategy is noteworthy, given that the survey is likely the first time the respondents would have encountered the idea of drawing down their 401(k)s to postpone claiming Social Security,” the report concluded. “The results also compared favorably with the share of workers who choose annuities in existing plans that offer lifetime income option.” For example, in 2018, 30.5% of TIAA beneficiaries elected a lifetime income option.

“Given that any additional information seems to increase interest in the bridge approach, the popularity of the option could increase with more exposure to the concept,” the authors of the study, Alicia Munnell and Gal Wettstein, concluded.

[Questions about Social Security rules? Find the answers in Mary Beth Franklin’s ebook at Maximizing Social Security Retirement Benefits]