Delay Social Security by Building a Retirement Income ‘Bridge’

John Sullivan

The benefits of delaying Social Security benefits are by now generally accepted. While not appropriate for everyone, waiting to age 70 (the maximum age allowed) means a 24% increase in benefits versus claiming at age 67 (full retirement age). 

Add in the fact that benefits are inflation-linked and tax-advantaged, and a compelling argument can be made to hold off as long as possible.

However, less than 10% of participants can fully delay claiming Social Security benefits to age 70, and only roughly 5% of Americans actually do, according to David Blanchett, Head of Retirement Research with PGIM DC Solutions.

In order to nudge more Americans in the delay direction, he suggested creating an explicit “delayed claiming” account sleeve within the defined contribution plan default investment (typically a target-date fund).

“The bridge sleeve (or account) would be used to bridge the income gap during the delay period and would generally be expected to be invested in relatively liquid securities (e.g., mostly fixed income but also equities and alternatives),” Blanchett wrote in a new paper, appropriately titled Delaying Social Security Retirement Benefits: The Bridge to Better Outcomes in Defined Contribution Plans? “Having the explicit sleeve geared towards delayed claiming would not only precondition participants to delay claiming (i.e., behaviorally prepare them for it), but it also results in a significantly higher level of flexibility compared to other strategies that require a higher level of commitment, from both participants and plan sponsors.”
 
He added that delaying until age 70 results in a lifetime income benefit that is approximately 77% higher compared to claiming early at age 62, adjusted for inflation, an increase he called “staggering.”

The money in the sleeve account would most likely be allocated to fixed income but could also include equities and alternatives.

“While an annuity is going to be a better solution for certain participants given various preferences and situations, delayed claiming is simply a more attractive starting place in the absence of complete participant information and an affirmative decision around preferences,” Blanchett concluded.

“Therefore, delayed claiming of Social Security retirement benefits should likely play a more central role in strategies focused on getting participants to allocate more to longevity protected income.”