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Retirement Planning > Saving for Retirement > 401(k) Plans

Debate: Should 401(k)s Offer a Social Security 'Bridge' Option?

By Robert Bloink By William H. Byrnes

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It’s not uncommon for Americans to begin claiming Social Security benefits early, often before they’ve reached full retirement age. Of course, claiming Social Security early means that the taxpayer receives a reduced benefit check for life (rather than the higher monthly benefit that would have been paid had the client waited until age 70 to begin claiming). 

Some have proposed that employers should be required to provide a “bridge” strategy that would use 401(k) assets as a substitute for claiming Social Security benefits early. The Social Security bridge option would pay 401(k) participants a portion of their account balance that’s roughly equivalent to what they would receive in Social Security benefits. 

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about requiring 401(k) plan sponsors to offer a so-called Social Security bridge option.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: This strategy would allow participants to delay claiming Social Security benefits so that they can claim a higher future benefit. Of course, 401(k) participants would have a hard time implementing this type of strategy on their own, given the complicated calculations that would be involved — so requiring employers to take the lead in offering the option makes perfect sense.

Byrnes: Allocating a 401(k) participant’s assets toward a “bridge” option would be an extremely complex undertaking — and that’s exactly why we shouldn’t require employers to take it on. This type of option might encourage some participants to delay claiming Social Security, sure.

However, we have to consider the fact that many participants would start claiming Social Security before full retirement age anyway — and could very well take the employer-sponsored opportunity as well, which would diminish their 401(k) assets early even while receiving that reduced benefit. 

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Bloink: A Social Security bridge option wouldn’t be mandatory at the employee level, but would provide an option to help hardworking Americans take advantage of the Social Security delayed retirement credits. If we could require 401(k) plans to simply offer that option, we could motivate many taxpayers to “buy” an increased Social Security benefit to secure their future retirement income — remembering that once the client reaches age 70, that maximum Social Security benefit is guaranteed for life.

Byrnes: The reality is that people make Social Security claiming decisions based on any number of reasons — and the reason doesn’t always involve an immediate need for added monthly income. Americans can make their own financial decisions. There’s no need to add yet another burden for small-business owners who are already struggling in today’s market.

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Bloink: The fact is, many clients still aren’t interested in purchasing an annuity to provide a guaranteed income supplement to their future Social Security benefit. The bridge strategy would allow clients to take advantage of a higher initial Social Security benefit and all of the inflation adjustments that are applied to increase that initial benefit based on real-life market conditions in the future.

The wealthiest Americans are able to rely on their accumulated assets to delay Social Security for as long as possible — meaning that their benefit levels tend to be much higher than those of ordinary Americans who lack the ability to defer. Requiring employers to offer a Social Security bridge would allow more ordinary Americans to take advantage of the deferral option.

Byrnes: A bridge requirement at the employer level would greatly increase administrative burdens with very little benefit to the plan participants themselves. Americans can already start taking withdrawals from their retirement accounts before reaching age 62 without penalty. There’s no need to add the complexities at the employer level. If the bridge option were mandatory, many employers might simply stop offering the retirement savings option due to yet another administrative headache.

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Robert Bloink

William H. Byrnes

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