Personal Finance

States could help future retirees get more cash from Social Security

Key Points
  • Since 2012, more than 40 states have acted to implement or consider legislation to establish government-run retirement programs for workers whose employers don't offer a 401(k) plan.
  • About a fifth of workers in such strategies could delay tapping Social Security by two years or more, according to research from the Pew Charitable Trusts.
  • For every year a person puts off claiming benefits, their monthly payment jumps by about 8 percent.

State-run retirement programs that automatically enroll private workers could help future retirees maximize their Social Security benefits, a new study suggests.

Based on projected account balances in 2050, 39 percent of participants in such auto-enrollment strategies would have enough to delay claiming Social Security by a year or more even at low contribution levels, according to research released Wednesday by the Pew Charitable Trusts.

For every year a person puts off claiming benefits, their monthly payment jumps by about 8 percent.

Hinterhaus Productions | Getty Images

"Some people have questioned whether these accounts will make a difference, but these findings show they could have a big impact for both higher- and lower-income earners," said Alison Shelton, a senior research officer on Pew's retirement savings team.

The research, done with help from the Social Security Administration, assumed an average contribution rate of 3 percent of a worker's income. For about a fifth of all account holders, their balances would be enough in 2050 to provide income equivalent to their Social Security benefit for at least two years, based on current formulas.

While you can tap your benefits as early as age 62, your monthly payments are lower than if you wait because they are stretched out over a longer period of time.

For illustration purposes: A person who is expecting $700 at age 62 could delay their benefits by a year if they have $8,400 in an account (12 monthly withdrawals of $700). A two-year delay could be funded by a $16,800 balance.

Tapping Social Security benefits early

Age at claiming Reduction to benefit Monthly benefit after reduction for claiming early Change from delaying claiming by one year
6230 percent$700 --
6325 percent$750 7.1 percent
6420 percent$800 6.7 percent
6513.3 percent$867 8.4 percent
666.7 percent$933 7.6 percent
67 (full retirement age if born after 1960)--$1,000 7.2 percent

Source: Source: Pew Charitable Trusts

"This shows that even small account balances can make a big difference," Shelton said.

For many people, delaying or supplementing Social Security proves tricky due to minimal or nonexistent savings. About 42 percent of Americans have less than $10,000 set aside for retirement, according to a recent study from GoBankingRates.

Since 2012, more than 40 states have acted to implement or consider legislation to establish state-run retirement programs for workers whose employer doesn't offer a 401(k) or similar workplace retirement savings plan, according to Georgetown University's Center for Retirement Initiatives.

Those employees — about 57 million, according to AARP — are left to fend for themselves.

"That's the group we're trying to help," said Joshua Gotbaum, chair of the Maryland Small Business Retirement Savings Board. His group is in the process of searching for an executive director and expects to begin enrollment in its program in 2019.

The looming retirement crisis
The looming retirement crisis

Various research over the years has shown better retirement outcomes for workers who have access to savings through work versus those who don't. Additionally, employees are 15 times more likely to save for retirement if they have a workplace option, according to an AARP study.

In Oregon, officials began rolling out its OregonSaves program in phases last year. Employees are automatically enrolled, and 5 percent of their paycheck goes into a Roth IRA. Workers can opt out if they want or change the withholding rate.

So far, 436 employers have registered through OregonSaves, covering more than 35,800 eligible employees. Of those workers, about 7,400 (about 21 percent) have chosen not to participate. The remainder have invested $1.6 million in assets through the program thus far.

Other states — including Illinois, Connecticut and California — are in various stages of implementing similar strategies.

State-run retirement initiatives for private workers*

* Map doesn't reflect legislation introduced in 2018 in some states including Michigan, New Hampshire and Wyoming.

While there was opposition to OregonSaves from various business groups leading up to its debut, a lawsuit filed against the state aims only to eliminate the compliance requirements for companies that already offer a 401(k) or similar plan. As it stands, those employers must request an exemption from the Oregon program every three years.

That lawsuit, filed by The ERISA Industry Committee, is still pending. The group represents large employers that offer retirement plans.

More from Personal Finance:
Labor Department won't enforce investor protection rule after court decision
For financial success, plan for the best and prepare for the worst
42% of Americans are at risk of retiring broke