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Social Security as a Source of Annuities

A Simplified Social Security Option*
C. Eugene Steuerle, Institute Fellow and Richard B. Fisher Chair
Urban Institute

The Problem:

  • 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

    The Proposal:

    • 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

    *To read an op-ed about a simplified Social Security option, click here.  For a scenario illustrating options available with a simplified Social Security annuity, click here