The Social Security Administration continues to warn that its retirement program’s trust fund reserves will be depleted by 2035, resulting in an annual benefit reduction of about 24%. That is without factoring in the pandemic and a proposed payroll tax cut that could move the date even closer.

The possibility of broken promises with Social Security is troubling for the millions of Americans who are depending on Social Security benefits as a primary source of retirement income. But David Duley says that worry can be eased with his new breed of insurance products.

Duley, founder and CEO of Atlanta-based PlanGap, has introduced the PlanGap Annuity, a new class of financial solutions called retirement insurance. The company describes the newfangled vehicles as a suite of “trigger-based” annuity and life insurance products designed to protect Americans from potential retirement shortfalls due to possible systemic failures of guaranteed income sources like Social Security and pensions.

PlanGap has been backed by retirement industry heavyweights including Tim Hill at the actuarial firm Milliman; Paul Atkins, former commissioner of the Securities and Exchange Commission and the chief executive of the financial and consulting firm Patomak Global Partners; and risk management expert Dr. Gordon Woo of RMS.

The PlanGap Annuity, which was approved in April by the Insurance Interstate Compact, is built on a five-year guaranteed annuity structure that has two features. The first feature, Duley explained, is a bonus payout in the event that a Social Security recipient’s benefit is reduced.

The bonus is a percent of the base premium that the policyholder initially put into the annuity. For example, if you put in $100,000, the PlanGap Annuity can grow up to 30% of that value. “So let’s say 2035 rolls around and that person who owns that amount Social Security gets cut. That annuity would pay them an extra $30,000 [or $6,000] spread out over five years to help offset the reduction of Social Security from the government,” Duley explained.

The second feature is the Flexibility Bonus that takes into account the possibility that Social Security benefits don't get slashed. Duley explained that if the benefits are not reduced and the customer no longer feels the need for the insurance, she would redeem an additional 1.5% of account value bonus upon surrendering the policy, or she can continue on and earn additional bonus. In year 10, that bonus would be 3% and 4.5% in year 15.

“We didn’t want to get people locked into something long term because the nature of Social Security and, often some annuities, are longer term lock-ins,” he said. “We wanted to give people flexibility to say, ‘Hey, I want the power to hedge against this risk, but if they fix it, I want to get out of it’,” he said.

While the product is for anyone who pays into Social Security, Duley concedes that the first annuity might not be for everyone. “Our product roadmap as we develop more and more products, we will have a full gamut of products accessible to basically any income level and level of protection,” he said.

Duley posits that because consumers are looking for solutions to mitigate the risk of a reduction in their retirement income, that creates a new paradigm shift with financial advisors to say,  “Look, I can help navigate this (reduction). For the first time ever, we have a solution that we can consider,” he said. 

Some financial advisors, Duley noted, are not keen on annuities. But once they learn about this new breed of annuity, he maintains they agree that it is something that they absolutely have to have as part of their financial planning. “We feel if we could empower financial advisors with a new tool to be able to say, ‘We have an answer for that,’ that’s going to change the way financial planning happens.”

He added that the product was developed around data that showed half of the U.S. population would buy Social Security gap insurance if it were available to them because they have little trust that the system will be fixed.

Duley also noted that some software companies that advisors engage with are already changing their software to build in the potential of future retirement benefit cuts.  

According to the Social Security Administration, its retirement program cash reserves will be partially depleted in 2035, triggering a 24% reduction in benefits. And the elimination of the payroll tax, as President Donald Trump has threatened, could deplete the reserves by 2023, Social Security chief actuary Stephen Goss said recently. Furthermore, the impact of the pandemic on the trust fund is unclear but many expect it to trigger a spike in the number of Americans claiming Social Security at 62 or thereabouts..

Tim Ash, CEO of Fort Wayne, Ind.-based Ash Brokerage, the largest privately held insurance brokerage in the U.S., has also endorsed the product. Ash said the annuity industry has had little product innovation in decades, and PlanGap is addressing one of the most important assets of America’s retirees: Social Security. “PlanGap is retirement Insurance and is a much-needed new category of product the vast majority of Americans could benefit from,” he said in an email exchange.

Like Duley, Ash believes that financial advisors need should educate their clients and make them aware of PlanGap Annuity. “With 90+% of Americans dependent on maintaining their Social Security benefits, it’s my belief advisors have a duty to educate their clients on financial matters that could affect their lifestyle in the event of a reduction in benefits. It’s as simple as downloading your social security statement at ssa.gov and start the conversation,” he added.

Duley said the product is available in 18 states and the District of Columbia. He expects it will be available in 48 states this time next year, he said. “We will be offering this, kind of in the spirit that this is the new story, the new innovation to start talking about,” he said.