Social Security Bridge Option Helps Improve Retirement Readiness

Social Security Bridge options may be the best new idea for new retirees – since the last Social Security increase!  It can immediately make retirement readiness more of a possibility.  Guaranteed income products, such as annuities, in retirement plans are getting a lot of attention lately.  The passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in late 2019 made it easier for employers to offer guaranteed income options in workplace retirement plans.  SECURE 2.0, currently under consideration on Capitol Hill, introduces additional provisions that would make guaranteed income potentially more enticing for participants.

However, a new study from the Center for Retirement Research at Boston College demonstrated that there is another way for 401(k) plan participants to annuitize their savings and create a predictable income stream for life, beyond using traditional guaranteed income products.  Specifically, the study explores a Social Security “bridge” option.  The social security bridge is where 401(k) participants could delay collecting government Social Security benefits, and instead, use their savings to pay themselves an amount equivalent to their Social Security benefits for several years.  This allows them to postpone Social Security, and also increase the size of their payout when they do collect benefits.

According to the CRR study, claiming Social Security later could increase monthly benefits by at least 76% by claiming at age 70 (the maximum claiming age) rather than 62, the earlier eligibility age.  A Social Security bridge option would enable participants to delay Social Security and enjoy the benefits of doing so without having to push back their retirement age.  The isolated bridge income stream would continue until the retiree reaches age 70, at which time they could begin collecting their government Social Security benefits.  This is a win for employers, who could transition older employees into retirement on time, as well as potentially reduce healthcare costs, which tend to rise as a workforce ages.

The bridge option in a retirement plan would automatically allocate a percentage of a participant’s 401(k) assets to it.  The bridge would also be a default option that capitalizes on participants’ inertia, much the same way automatic enrollment works.  What’s more, employers could implement a bridge solution without any legislative or regulatory changes.

In the study, CRR asked four different groups their opinions about a Social Security bridge option.  The following results reflect the attitudes of the control group, which was given minimal information about the bridge option and asked for their responses.  In that group, 26.8% of respondents said they would use the bridge, and the share of their assets they would allocate to it is 14.9%.  For the control group, a bridge strategy would increase their Social Security benefits by $272 per month.

The CRR study showed that some participants would, indeed, be interested in a default Social Security bridge option in their 401(k) plan.  It would be simple for employers to implement, potentially more so than a traditional guaranteed income solution.  Given the benefits and potential interest from participants, a Social Security bridge option may be worthy of additional consideration.  It may be beneficial for plan sponsors to first survey their own participant population to gauge interest in such an option, then consider acting based on the results.  Consulting with an outside advisor and/or ERISA attorney about the feasibility and fiduciary obligations of a bridge option would also be prudent.

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