More U.S. retirement savers should probably buy ordinary annuities before they retire, but they don’t, and policymakers need to come up with an alternative, according to Alicia Munnell, a top academic retirement policy researcher.
Munnell — director of the Center for Retirement Research at Boston College — says she thinks promoting use of “Social Security bridge” arrangements may be the best solution.
A Social Security bridge is a mechanism for helping retirees put off claiming Social Security benefits, by having retirees make regular withdrawals from retirement assets between the day they retire and the day they file for Social Security benefits. She notes that retirees can increase monthly benefits amounts by 76% if they begin collecting benefits at age 70, rather than at age 62.
Munnell teamed up with two colleagues to publish an academic analysis of the Social Security bridge concept in October. In December, she gave a presentation on the concept, at a policy forum in Washington that was organized by the Employee Benefit Research Institute.
- A link to a slidedeck that includes Alicia Munnell’s presentation is available here.
- An article about Alicia Munnell’s thoughts about Social Security is available here.
- An academic discussion of the Social Security bridge proposal is available here.
Here are five points drawn from her Social Security bridge presentation slidedeck, for financial professionals.
1. She doesn’t hate annuities.
Munnell and colleagues assume in the academic version of the Social Security bridge analysis that retirement savers could also consider buying immediate annuities, or annuities that would start paying benefits immediately after they retired, or deferred annuities, which would start paying benefits when retirees reached age 85.
Munnell and colleagues found that, under their assumptions, typical retirement savers in the top quarter in terms of income — in other words, the types of people who already tend to buy annuities — would be better off if they bought more deferred annuities.
2. She says there are a number of potential barriers to annuitization.
For a look at five of annuity sellers’ possible enemies, see the idea cards in the slideshow above. (Wiggle your pointer over the first slide to make the control arrows show up.)
3. She says Social Security income has some advantages over private annuities.
Here are reasons Munnell likes Social Security income:
- It’s guaranteed by the federal government.
- It’s inflation-adjusted.
- Its price does not include marketing costs or issuer profits.
4. She says defined contribution retirement plan sponsors could build Social Security bridge arrangements into their plans now, without legislation.
Munnell, who has worked for the U.S. Treasury Department and the Federal Reserve system, says she thinks sponsors could even make bridge arrangements a default without help from new legislation.
5. Her model has limitations.
Munnell and her colleagues calculated how much total retirement wealth median-wealth households would end up with if those households used a baseline strategy — if the households did not bother to annuitize anything and simply collected Social Security at the normal time — in 1,000 simulated market return scenarios.
Even after stock market crashes and health emergencies were factored in, median-wealth households that simply deferred collecting Social Security till age 70 would need to start with only 75% as much resources to end up with the same results as the household using the baseline strategy, according to the analysis.
A median-wealth household that put 40% of its assets in an immediate annuity at age 65 would need to start with about 85% as much resources as the baseline household to end up with as much total retirement wealth as the baseline household.
One limitation of the team’s analysis is that the team focuses mainly on what would typically happen to households, given the simulated market conditions, not on what would happen to the households with the worst Social Security bridge arrangement investment results.
Another limitation is that the team assumes that the Social Security program and private annuity issuers will pay the benefits promised, without changes in rules or benefits levels.
Correction: Alicia Munnell’s name was given incorrectly in an earlier version of this article.
— Read RIAA: Pull Curtains Off Annuitized Money, on ThinkAdvisor.