Delaying Social Security claiming, facilitated by a well-designed bridge strategy, can significantly enhance retirement security and improve the financial well-being of American retirees, finds a new report authored by Emerson Sprick, director of retirement and labor policy at the Bipartisan Policy Center.
By using a bridge strategy to delay claiming, individuals can substantially increase their monthly Social Security benefits and enhance their protection against longevity risk.
BPC paper
The report, “Hedging the Risk of a Longer-than-Expected Life: The Value of a Social Security Bridge Strategy,” highlights the value of delaying Social Security claiming to maximize the program’s usefulness as insurance against inflation and living longer than expected.
BPC notes the report is especially timely, as it is seeing concerning signals that an increasing number of Americans are claiming Social Security benefits early.
In fact, according to the Urban Institute, the U.S. experienced record growth in the number of people claiming Social Security retirement benefits. The Social Security Administration’s (SSA’s) online retirement application system reveals retirement claims were up by more than 276,000 (13%) from October to April compared with the previous year, with more retirees claiming Social Security earlier.
This is concerning because early claiming not only reduces expected lifetime benefits but also undermines Social Security’s vital role as longevity insurance, the new BPC report states. The report analyzes the merits of the “bridge strategy” in which a household bridges the gap between retirement and the claiming of Social Security by drawing down retirement savings.
The report shows that by using a bridge strategy to delay claiming, individuals can substantially increase their monthly Social Security benefits, enhance their protection against longevity risk, and mitigate the financial uncertainties inherent in retirement, including market volatility and macroeconomic shocks. Sprick notes that suboptimal claiming decisions remain prevalent, however, due to psychological biases, a lack of “longevity literacy,” and structural barriers within the financial industry and public policy.
Delaying claiming, Sprick writes, mitigates the single largest risk to retirement security: longevity risk. “No one knows how long they will live, which causes retirees to spend conservatively to avoid running out of money. But Social Security provides a guaranteed, inflation-protected stream of income for as long as someone is alive,” the paper states. “Maximizing this monthly income allows beneficiaries to spend more comfortably, knowing that they will receive another check the following month. It also protects against future expense shocks by maximizing the baseline, inflation-protected income a retiree can rely on.”
Those who use a bridge strategy are able to start retirement with less in assets than they would need if they do not use a bridge, and they can spend more in retirement than they could spend with the same level of assets not using a bridge. Or they can make their assets last longer than they would with the same level of spending but not using a bridge.
But despite all of these benefits, the paper says few Americans use any guaranteed-income solutions, let alone products to facilitate bridge strategies, pointing to the psychological barriers and insufficient product offerings as reasons. “Both industry and the public sector could help by improving education, products, and policy,” Sprick writes.
The paper cites earlier research showing that only 4% of retirees make the financially optimal decision about when to claim Social Security. About 57% of retirees would build more wealth through their life if they waited to claim until they were 70 years old, yet only 10% of retirees currently claim their benefits at age 70, according to SSA. A study from the National Bureau of Economic Research found retirement benefits taken at age 70 are 76% higher than retirement benefits taken at 62.
On the flip side, 35% of retirees currently claim benefits before age 64, which research found maximizes wealth for only 6.5% of retirees. And research from 2019 found that current retirees would collectively lose $3.4 trillion in potential retirement income—an average of $111,000 per household over the course of retirement—because they claimed Social Security at a sub-optimal time.
Recommendations
The BPC paper proposes a series of actionable recommendations for the financial industry and policymakers:
• Industry leaders should continue to innovate and provide products that better facilitate bridge strategies. This includes enhancing the flexibility of protected income products, providing education and clarity on product offerings and strategies, and integrating Social Security claiming optimization tools into retirement plans.
• Financial professionals should reframe the Social Security claiming decision away from the “breakeven analysis” and focus on the program’s value as longevity insurance. They should also work to improve clients’ understanding of their life expectancy.
• Policymakers should build on the progress made by the SECURE Act and SECURE 2.0, further clarifying regulatory requirements for incorporating protected-income products into retirement plans and mitigating litigation risks for plan sponsors. Moreover, policymakers should consider ways to further expand access to 401(k)-type plans and improve public understanding of Social Security benefits.
Read the full BPC paper here.
SEE ALSO:
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• $1.3 Million Needed to Retire Comfortably, Say Workplace Retirement Plan Participants