Social Security as a Source of Annuities
A Simplified Social Security Option*
C. Eugene Steuerle, Institute Fellow and Richard B. Fisher Chair
- People have inadequate longevity and inflation & long-term care protection
- Newly retiring couples will on average have one spouse living to age 90 or later
- The threat grows over time
- Ever-smaller shares of Social Security benefits in last years of life & rising health costs
- Social Security already offers a great annuity option to retirees.
- Requires delaying benefits
- Each $10,000 investment usually buys about $800 in additional annual payments
- Plus inflation and longevity insurance
- A worker can almost double annual Social Security annuity benefits
- The public does not understand this. It thinks mistakenly that the following 3 decisions are 1:
- Retiring (usually fully)
- Choosing to receive Social Security
- Buying annuities within Social Security
- Partial retirement actually possible (but not understood):
- After full retirement age or FRA (now 66), one can get benefits, suspend, get benefits
- Before FRA, earnings test forces higher earners to buy the annuity
- Many think it is merely a huge tax for working
- Make the annuity (and retirement and benefit) option more distinct
- Let people choose partial retirement (e.g., 1/3 or 1/2 or 2/3 benefit)
- Technically, they can do this already after FRA, but administratively cumbersome
- Let people plan ahead & choose to buy annuities with cash, not just reduced benefits
- Up to what is already allowed them or some other maximum
- Let financial planners show how to convert IRAs and 401(k)s into a higher SS annuity
- Allow people to adjust over time (e.g., as many go back to work)
The Two Solvable Complications:
- Cost: Proposal mainly clarifies current law, but let Social Security actuaries keep deficit neutral
- Before FRA: Earnings Test could be kept but it already confuses people
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