State-run Retirement Programs (“SRRPs”) provide a platform that can fill the savings gap for millions of Americans who have not saved for a financially sound retirement. State Administrators are challenged, however, when people are unaware that starting early and saving even a small amount regularly over time can build a foundation for future financial security.
Compounding this problem, people who consider starting a savings regimen later in life may erroneously conclude that it’s “too late” to set aside enough money to have a meaningful impact on their retirement.
In addition to providing a workplace-facilitated retirement option, SRRPs can have a big impact on their participants’ retirement security. Educating participants about a strategy to increase their Social Security benefits and providing a mechanism to do so will improve their ultimate financial well-being.
Building a Bridge to Higher Social Security Benefits
As the pool of soon-to-be retirees increases, the ability of retirement assets to provide lifetime income has come into focus. Congress recognized the value of a reliable retirement income stream with provisions in the SECURE Act of 2019 that reduced legal liability for employers that offer annuity options in their qualified plans. We believe this recognition for ERISA plans has potential parallels for SRRPs.
This opportunity involves Social Security benefits, which provide retirees with guaranteed monthly benefits bolstered by cost-of-living adjustments and backed by the US government.
The amount that individuals receive, however, depends on when they first claim the benefit. People who wait until age 70, for example, receive a monthly benefit that is approximately 32% more than they would collect at age 62, according to 2018 data from the Social Security Administration (“SSA”).
Despite the value of waiting to claim Social Security benefits at age 70, however, only about 5% did so, according to the SSA. The rest claimed the benefit earlier and as a result received smaller monthly payouts.
SRRP participants can bolster their financial stability by accumulating assets to provide income for a few years (e.g., ages 65 to 70) so they can delay claiming Social Security benefits until age 70. In this way, SRRP savings create a bridge to increased Social Security payments.
SRRPs Can Lead the Way
SRRPs can clearly communicate this opportunity, through financial planning education and outreach, and thus significantly improve the future financial security of their participants. An important component of education will be making participants comfortable drawing down their accumulated assets early in retirement — which may be counterintuitive — in exchange for greater Social Security income flows down the road.
As SRRPs assess and evaluate program design elements, we believe it would be beneficial to look closely at incorporating an investment option or other mechanism that addresses the Social Security bridge strategy. By increasing awareness and presenting an achievable goal to participants, States can enhance the intended goals of their SRRPs: to provide a comfortable path to a financially sound retirement.
We would be happy to discuss these insights in more detail at any time. Please contact us if we have piqued your interest.