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Efficient Retirement Design

Mar 2013
Policy Brief
By  John Shoven

The pension system in the U.S. has changed dramatically over the past forty years. Social Security benefits have been inflation-indexed and many different benefit commencement options have been introduced. Getting the most out of Social Security is now quite a complex calculation. The predominant private pension system has switched from the old defined benefit system which typically provided monthly benefits for life to defined contribution programs such as 401(k) accounts which simply provide mutual fund account balances. There have been lots of studies by economists of the defined contribution system, concentrating on the accumulation phase with such topics as the impact of automatic enrollment, the effect of employer matching or the consequences of hardship withdrawals on the resources available at the time of retirement. On the other hand, there have been very few studies on what retirees should do with their defined contribution assets once they retire. Similarly, until very recently, there have been only a few analyses of the best commencement strategy for people eligible for Social Security. For the past couple of years, I have been working on strategies to combine private defined contribution assets and Social Security so as to maximize retirement resources. That is, how can people use the assets and entitlements that they have to maximize their standard of living in retirement? My co-author on all of this work is Sita N. Slavov of the American Enterprise Institute. We have produced a booklet called Efficient Retirement Design which can be found here.