Small Savings Accounts Can Help Defer Social Security, Raise Total Retirement Benefits

Millions of Americans are relying on Social Security for their future retirement—and are understandably worried they won’t have enough money to cover their basic expenses. But small savings can play a crucial role in providing a more secure retirement by supplementing Social Security and other pensions. One new way for some workers to accumulate savings is through state-sponsored retirement plans. Workers are automatically enrolled in these plans, known as auto-IRAs (automatic individual retirement accounts) or Secure Choice programs, and contribute a default percentage of their wages or salaries. They can choose to opt out of participating or change the percentage of their contribution. California, Connecticut, Illinois, Maryland, and Oregon are implementing auto-IRAs, and 12 other states have considered them since 2017.

When workers retire, they have a number of options for using their auto-IRAs and other savings. They could make regular, scheduled withdrawals; convert their savings to annuities, if appropriate; or spend their auto-IRA balances for unexpected medical bills, home and car repairs, and numerous other purposes.

Although workers often associate retiring from the workforce with starting Social Security benefits, the two are independent of each other. So one promising option for the use of auto-IRAs or other savings, even for relatively small accounts, is to withdraw from the accounts to delay the start of Social Security benefits — which could increase Social Security payments by as much as 7 to 8 percent for every year that the benefit is deferred. For example, a person who is entitled to a $700 monthly Social Security benefit at age 62, and who also has $8,400 or more in a state auto-IRA account, could withdraw $700 a month from the IRA for a year instead of beginning to take Social Security. When the retiree claims Social Security a year later, at age 63, the benefit would be $750 a month.

Waiting to claim Social Security can be particularly helpful to married couples, because when one spouse dies the surviving spouse continues to receive the higher of the couple’s benefits whether or not he or she was the primary earner.

To examine the potential of using auto-IRAs to increase total retirement benefits, The Pew Charitable Trusts worked with the Social Security Administration (SSA), which used a model with a 3 percent contribution rate starting in 2019 to simulate how auto-IRA accounts affect retirement savings. Based on results from a Pew survey, some workers were assumed to opt out of the auto-IRA program from the beginning. Many others were assumed to enter or leave the program as their employment status or pension coverage changed, with the result that workers with mixed participation would have commensurately lower account balances at retirement. The SSA was able to calculate for these varied participation rates and work patterns.

The results indicate that by 2050, 39 percent of workers who had participated in an IRA program could delay claiming Social Security by a year or more, and a fifth could delay claiming for at least two years. And this approach works for a wide range of people. For example, the modeling shows that Hispanic workers, who have among the lowest rates of employer pension coverage, often could accumulate enough funds in auto-IRA accounts to delay taking Social Security for as long as, and sometimes longer than, other groups.

Of course, the strategy may not be appropriate for everyone. Some workers still might want or need to claim Social Security as soon as they’re eligible, usually at age 62. People who are unemployed or facing serious health problems may want to take their benefits then to increase their income. Retirees with lower-than-average life expectancies could find that deferring Social Security while withdrawing from their auto-IRA accounts would increase their eventual monthly benefits, but also could result in lower total benefits over their lifetimes because of how Social Security adjusts payments based on average life spans.

But for those who can do it, delaying Social Security after retirement — and using even small withdrawals from auto-IRA balances as a substitute — could mean higher Social Security and total retirement income.

John Scott directs The Pew Charitable Trusts’ retirement savings project.

This article was originally published on Forbes on June 27, 2018.