Social Security And The Lump Sum Option

By Cyril Tuohy

InsuranceNewsNet

Substituting a lump sum payment for delayed Social Security annuity payments provides an incentive for workers to voluntarily defer retirement with little or no reduction in lifetime welfare, according to a new research paper.

The findings, published in the latest Working Paper Series by the National Bureau of Economic Research, offer another option for lawmakers looking to extend the life of the Social Security Disability Trust Fund, which is projected to be depleted in 2033.

A delayed retirement credit in the form of a lump sum would also boost the average retirement age by as much as two years, according to the study’s authors, Jingjing Chai, Raimond Maurer and Ralph Rogalla of the Finance Department at Goethe University and Olivia S. Mitchell at The Wharton School.

There are three reasons why the lump sum policy is attractive, the researchers found.

It offers workers more flexibility, particularly in the early retirement years when they are still relatively healthy and have the ability to enjoy leisure time. Lump sums are “liquidity-driven,” which make it easier for retirees to leave assets to their heirs. And lastly, lump sums are easier to invest for workers who prefer to take advantage of the stock market.

“Having a lump sum in lieu of a higher lifetime Social Security benefit allows retirees to shift consumption to the earlier phase of retirement when mortality risk is low,” the researchers conclude in their 31-page study. “In addition, the lump sum payment permits households to participate in the stock market, seeking to earn the risk premium.”

Households without access to the stock market are less interested in the lump sum option, the researchers also found, “but even there, the less risk-averse also work longer and retire later, and the lump sum policy general does not detract from wellbeing.”

Workers who delay their retirement date due to a lump sum means they would continue to pay Social Security payroll taxes and extend the life of the Social Security program, the researchers also wrote.

The lump sum policy is under study because some see it as a viable alternative to cutting Social Security benefits, which is politically unpopular. 

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at Cyril.Tuohy@innfeedback.com.

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.