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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Did You Know?
A joint-and-survivor annuity is an annuity that pays a monthly benefit over the lives of the participant and his or her surviving spouse. This is the default form of benefit for married participants in most defined benefit pension plans. Because it lasts for the life of both the worker and the spouse, a joint-and-survivor annuity typically results in a lower monthly benefit payment than a single-life annuity.