About 40% of American workers file their claims for Social Security benefits at age 62 — the earliest possible age. Yet many of these workers would be much better off if they had waited longer to start receiving benefits. Claiming at age 70 — the latest possible age — boosts their monthly Social Security checks by 76% compared with claiming at age 62.
And Social Security income is a wonderful source of support. Those benefit checks are adjusted for inflation, so their purchasing power remains constant throughout retirement. Those checks continue for as long as you and your surviving spouse live — the absolutely cheapest way to get "annuity" payments.
So how can we encourage American workers to wait longer to file for Social Security benefits? One option is to have a "Social Security bridge" provision within 401(k) plans. This provision would authorize payments from the 401(k) plan of participants equal to what they would have received from Social Security. They can use this income to cover living expenses and delay claiming Social Security in order to get the higher monthly benefit.
For a simple example of how the strategy could work, consider a typical American worker approaching retirement with a 401(k) plan who had approximately $77,000 in annual earnings in 2019. If she claimed Social Security at 62, she would receive a monthly income of about $1,500. However, if she waited until age 66, she would receive a monthly income of about $2,000 — which would continue for the rest of her life.
Of course, some workers cannot delay claiming because they need Social Security benefits to live reasonably once they retire. That's why so many workers file for these benefits as soon as they are eligible. But some of these retirees have meaningful balances in their 401(k) plans. We estimate that almost half of workers with a 401(k) approaching retirement have a 401(k) balance of $140,000 or more. Using roughly half of these assets would allow someone retiring at 62 to delay claiming Social Security for four years.
Specifically, if these retirees were given access to a Social Security bridge provision, they could receive $1,500 per month from their 401(k) balances as a replacement for the Social Security benefits that they would have gotten if claiming at 62. When these retirees then reach age 66, they would file for Social Security and start to receive $2,000 per month for the rest of their lives.
A recent study from the Center for Retirement Research at Boston College evaluates the effectiveness of the bridge provision against commercial annuities in generating lifetime income for retirees. The study compares the Social Security bridge to immediate and deferred annuities. It finds that, when market and health risks are included alongside uncertain lifespans, the Social Security bridge is the best option for households with median wealth. Wealthier households can also benefit from combining the bridge with a deferred annuity.
Given the effectiveness of the bridge in generating lifetime income, employers should at the minimum offer such a withdrawal option for the participants in their 401(k) plans. Although participants could adopt a bridge strategy on their own, they generally do not use their 401(k) assets to delay Social Security claiming due to lack of knowledge or behavioral inertia.
While a voluntary bridge option could encourage some people to delay claiming, a more effective approach would be for employers to make the bridge the presumptive default at age 62 in their retirement plans. That is, a specific share of assets from the employee's 401(k) account would automatically be allocated to her, starting at age 62 for several years, to facilitate delayed claiming of Social Security. As with any default, the worker would retain the ability to opt out in favor of taking a lump sum or other withdrawal, or leaving her assets in the 401(k) account.
In the past, most employers have been reluctant to include any type of annuity option in their retirement programs because of the perceived liability if the insurance company supplying that option could, at some point, no longer make the monthly payments. This hurdle has been lowered by the SECURE Act passed at the end of 2019, which offers a safe harbor to employers following certain procedures. But sponsors still seem reluctant to move forward, and commercial annuities are expensive. The beauty of the Social Security bridge is that it does not involve an insurance company, it costs the participant nothing in fees, and it would significantly increase lifetime income.
In short, a bridge is an excellent vehicle for many workers worried about outliving their retirement savings. By using part of their 401(k) balances to delay claiming Social Security, workers can boost their monthly government checks by up to 76% for the rest of their lives, plus an annual inflation increase. All employers with 401(k) plans should consider including a bridge provision in their retirement offerings.
Alicia Munnell is the Peter Drucker Professor of Management Sciences at Boston College, where she is the director of the Center for Retirement Research. Robert Pozen is a senior lecturer at MIT Sloan School of Management and former president of Fidelity Investments. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.
