Social Security Bridging: A Low-Hanging Strategy for Plan Sponsors, Participants?

Before thinking about implementing in-plan annuities or other guaranteed retirement income solutions, one researcher suggests an easier first step for plan sponsors: to offer a Social Security bridging strategy, encouraging retirees to delay collecting Social Security in order to fully maximize their benefits. 

While relatively few retirees delay claiming today, research from PGIM and, most recently, the Schwartz Center for Economic Policy, found that delayed claiming of Social Security benefits can be a valuable way for defined contribution plan participants to generate lifetime income. 

According to the PGIM report, for example, an individual who claims Social Security benefits at age 70 in 2022 would have received a lifetime income benefit approximately 77% higher than if benefits are claimed at age 62, adjusted for inflation.

Additionally, the Schwartz report explained that if a hypothetical retiree was born in 1960 and filed for Social Security in 2022 at age 62, they would receive a $1,400 monthly benefit. The same person would receive a $2,000 monthly benefit if they waited until age 67, and a $2,480 benefit if they waited until age 70.  

David Blanchett—managing director, portfolio manager and head of retirement research at PGIM DC Solutions—says, “Social Security is the best annuity [one] could buy today,” as it is not issued by a private insurer, it is tax-advantaged and there are survivor benefits.  

“If we’re talking about where Americans [should] look first when it comes to more guaranteed lifetime income, I think it needs to be Social Security,” Blanchett says. “… No one can force someone [to claim at a particular time]—that’s an individual household decision. But if we’re creating separate [investment] sleeves, if we’re actively messaging to participants … I think it’s going to make it an easier process for plan sponsors.” 

In his paper, “Delaying Social Security Retirement Benefits: The Bridge to Better Outcomes in Defined Contribution Plans?,” Blanchett discussed the idea of creating an explicit “delaying claiming account” sleeve within the qualified default investment alternative of a retirement account, which is typically a target-date fund. 

This bridging sleeve would be used to accumulate money specifically to cover the income gap between a retirement date and claiming of Social Security benefits and would be invested in relatively liquid securities—mostly fixed income, but also equities and alternatives. The idea is that the sleeve geared toward delayed claiming would not only precondition participants to delay claiming, but it would also provide a higher level of flexibility compared to other retirement income strategies that require a higher level of commitment, both from participants and plan sponsors. 

“It could just be something simple like a stable value fund,” Blanchett says. “Really, all you’re doing is creating a separate pot of money. While in theory, it’s targeted toward delaying [Social Security] payments, you can use it for whatever you want.” 

For example, the money in a bridging sleeve could be used to purchase an annuity or it could simply be used to supplement a plan participant’s main pot of money in retirement, while waiting to claim Social Security payments. 

Blanchett argued in his paper that the strategy does not require plan sponsors to select a single strategy, nor does it commit a participant to a certain type of annuity.  

“I think the key here is creating awareness about [Social Security bridging] and then giving participants access to tools to help them make a more informed decision,” Blanchett says. “Decisions like delayed claiming are a lot easier if you’ve been preparing for it mentally and financially for, say, five years. … One of the more attractive aspects of this is it gives plan sponsors a way to directly address longevity risk for participants in a very non-committal way.” 

According to PGIM’s survey, “The Evolving DC Landscape,” from April 2023, only 13% of the plan sponsors surveyed were offering some sort of Social Security optimization tool. As funding issues with the Social Security trust fund become more pressing and urgent, Blanchett predicts plan sponsor awareness of this issue will increase and more will need to communicate optimization strategies with their participants. 

Blanchett also recognizes that if larger numbers of retirees start delaying when they collect Social Security, it will certainly put pressure on the system as a whole, but he says the primary issue right now is the overall funded state of the system. The Social Security Administration projected, as of March 2023, that the Old-Age and Survivors Insurance Trust Fund will fall short by 2033. 

He argues that the largest headwind for delaying Social Security claiming now is the persistent uncertainty around the system’s funding status, and if benefits were cut, it could incentivize individuals to want to claim earlier. 

“That’s why having the sleeve … could be really advantageous,” Blanchett says. “If interest rates go way up, private annuities become very attractive relative to Social Security. … That’s why I think directionally giving someone guidance is really important, but providing optionality is in some ways more important, because people have very different perspectives on what is the best way for them, and for their household, to solve this retirement income paradox.”