As More Americans than Ever Rely on Social Security for Protected Income in Retirement, Annuities Could Help Maximize Their Monthly Benefits

2 minute read

In a recent economic analysis about the greatest surge American’s turning 65 in the nation’s history, economist and Alliance senior fellow Jason Fichtner examines the nation’s public and private sector retirement systems. The old metaphor of the three-legged stool of retirement planning—employer pensions, personal savings and Social Security—no longer holds.¹ As a result, millions of Americans will almost certainly lack sufficient protected retirement income that lasts for the rest of their lives.

There are only three types of protected lifetime income sources available in the U.S. today—pensions, annuities and, of course, Social Security. However, as pensions have virtually disappeared in recent decades, Americans have become overly reliant on Social Security. While it was designed to replace about 40% of pre-retirement income for the average worker,² many people rely more heavily on it today because they don’t have other sources of protected lifetime income.³

Compounding the problem, most people claim Social Security benefits before reaching full retirement age, when they could receive full benefits, losing out on as much as $3.4 trillion in potential protected lifetime income. In fact, the U.S. General Accounting Office reports that 62 is the most common age for claiming Social Security benefits, meaning they will only receive approximately 44 percent of the income they would get by waiting just four more years.

What’s more, the unprecedented surge in retirees coincides with the approaching depletion of the Social Security trust fund. According to the Social Security Trustees, the combined trust funds face a financial shortfall of $16.8 trillion in present value through 2094 and $53 trillion over an infinite horizon. Further, the Social Security trust funds may be exhausted and unable to finance full benefits in 2035.⁴

These concerns highlight the valuable role for insurance and how solutions such as annuities, life insurance, and long-term care insurance are designed to protect desired outcomes and reduce financial risks in retirement. When calculating the value of an annuity, recent research by the Center for Retirement Research at Boston College estimates that when the insurance value of annuities is taken into consideration “…the wealth equivalence measure suggests that everyone gains from purchasing annuities.”⁵

A common, flexible approach to measuring retirement income security—and determining the role annuities might play in their retirement planning—is the replacement rate. A replacement rate is a ratio of one’s income after retirement compared to before. Financial professionals typically advise their clients to target a replacement rate of between 70-75%.⁶ For example, a worker would only need $70 per year in retirement to replace the living standard that $100 provided during working years.

One important and valuable protected income strategy that can be used to gain the maximum Social Security benefit would be to purchase an annuity as a source of “bridge income” between the time a person stops work and Social Security claims benefits at, or above, their full retirement age. For example, by claiming Social Security at age 70 instead – and replacing the eight-year gap with protected income from an annuity instead – a person can realize monthly Social Security income that is 77% more than what they would receive by claiming benefits at age 62. This additional income would last for the rest of the person’s life, allowing them to cover their basic expenses and live the retirement they want.

1. https://www.ssa.gov/history/stool.html
2. https://www.ssa.gov/benefits/retirement/learn.html
3. https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
4. https://www.ssa.gov/oact/tr/2020/
5. https://crr.bc.edu/briefs/what-is-the-value-of-annuities/
6. https://crr.bc.edu/working-papers/what-replacement-rates-do-households-actually-experience-in-retirement/