Building a Bridge

Richard Connor

WHAT IF WE MADE IT easier to delay Social Security, so more retirees ended up with a larger monthly check?

Last year, I wrote about a study from Boston College’s Center for Retirement Research (CRR) that detailed the value in claiming Social Security later. A new CRR paper examines the topic further.

The paper describes a survey of those nearing retirement. The goal: to gauge interest in using a 401(k) “bridge” to generate income while folks delayed claiming Social Security. The bridge was pitched as a new feature of 401(k) plans. A portion of participants’ 401(k) savings would be dedicated to paying regular monthly income until they started their Social Security benefit. In essence, they’d be using 401(k) dollars to buy a higher Social Security payment. For each year folks delay, those benefits increase by some eight percentage points above the inflation rate.

The idea that retirees might use savings to pay living costs, while allowing their Social Security benefit to grow, isn’t new. What’s new about the 401(k) bridge is that it would be an additional, automated option within 401(k) plans.

The paper provides a simple example. Assume you’re eligible for a $1,500-a-month Social Security benefit at age 62. Waiting until 65 to claim would provide an increased benefit of about $1,900. If you elected a 401(k) bridge, you’d receive $1,900 a month at age 62, or $23,000 per year, from your 401(k). At 65, that monthly payment would stop and you’d claim your $1,900 Social Security benefit.

The research was structured to gauge people’s interest in this unfamiliar option, if the way the option was framed made a difference, and how much of their 401(k) they’d be willing to allocate. In general, no more than a third of respondents showed interest in the bridge option. The authors cite TIAA data showing that this share is consistent with the number of people who choose annuities when retirement plans offer lifetime-income options.

In the CRR study, when the 401(k) bridge was framed as “income insurance,” there was a small but significant increase in interest. The other framing technique that increased interest: making the bridge the default option. Having to opt out, as opposed to opting in, increased enrollment.

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