Annuity Options in Public Pension Plans: The Curious Case of Social Security Leveling

Abstract

Social Security Leveling is an annuity option that allows defined benefit pension participants to receive a level income throughout retirement by taking a larger pension benefit before they reach Social Security eligibility. This option can enable retirees to access a greater proportion of their employer pension wealth at younger ages and have a smoother income stream in retirement, at the cost of a lower pension payment during later retirement years. To evaluate the desirability of this option, a retiree must consider pricing, anticipated life expectancy, and income needs throughout retirement. We show that plan design features of this annuity option favor those who expect a shorter-than-average period of retirement and who have higher personal discount rates. This study uses detailed administrative records on all North Carolina state and local government retirees from 2009 through 2014. Among individuals claiming retirement benefits before age 62, over 20% chose the Social Security Leveling annuity option. Using multivariate regression analysis, this study finds evidence that North Carolina public sector retirees choose the Social Security Leveling option in a manner that is consistent with predictions.

TOPICS: Retirement, legal/regulatory/public policy