A Fix for Social Security?

At an April 18 conference on retirement security hosted by the Brookings Institution in Washington, D.C., Nobel laureate economist Richard Thaler put forward an idea for utilizing the Social Security system to help insure that retirees don’t outlive their income. Thaler suggested allowing those with 401(k) accounts to “top up” their Social Security benefit accounts with funds from their 401(k) plans, perhaps to a limit of $100,000–$250,000. The behavioral economist offered several benefits that would accrue from such an arrangement. 

First, he suggested that the Social Security Administration (SSA) is already in the business of performing the actuarial work necessary to match accumulated contributions with expected lifespan; the voluntary additions from 401(k) plans would create no new burden. Second, he asserted that the federal government is perhaps the best and most cost-effective source for an annuity guaranteed for life, a big help in solving the problem of those “unlucky” enough to live to age 100 or beyond. Finally, Thaler specified that his proposal would be aimed, not at those with seven-figure retirement accounts, but rather at those in the middle: persons with incomes ranging from $50,000 to $100,000 per year pre-retirement who, he says, are not at the bottom of the income ladder but who also typically have not accumulated huge retirement nest eggs.

Reactions to this somewhat unconventional proposal have been varied. While some note that the idea has some commendable ideas, others suggest what they consider the elephant in the room: the worrisome financial state of the Social Security and Medicare trust funds. While an inflow of voluntary contributions would boost the fund in the short term, it isn’t clear to some observers that the SSA has the ability to take on the added responsibility of administering and guaranteeing payouts for the many decades needed to assure lifetime income. Others suggest another related problem, referencing some fairly technical actuarial principles: adverse selection. The theory is that those reaching retirement in better health would be more likely to find the longer-term income guarantee attractive, and thus, the income streams would have to be guaranteed for more years. In other words, the usual actuarial assumptions would no longer be valid. Finally, private insurers have registered displeasure at the prospect of having to compete with the federal government for annuity sales.

Of course, a “do-it-yourself” version of Thaler’s proposal has always been and continues to be available to everyone: deferring Social Security income until age 70. For every year you wait, from earliest eligibility at age 62 until the maximum age of 70, your monthly Social Security benefit will increase by about 8 percent. So, whether through continuing to work at a career that one still enjoys or by spending down 401(k) plan, IRA, and other balances in early retirement (similar to Thaler’s proposal), waiting until age 70 to claim Social Security permits anyone to receive a 64 percent higher monthly Social Security benefit, guaranteed for life. Not only that, but if more people waited longer to begin receiving Social Security, it would help to alleviate the current mismatch between payments received and funds expended: a potential win-win.

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Go to the Bernhardt Wealth Management Blog where this was first published to read this and other blog entries.

About Gordon J. Bernhardt: President and founder of Bernhardt Wealth Management and author of Profiles in Success: Inspiration from Executive Leaders in the Washington D.C. Area, Gordon and his team provide financial planning and wealth management services to affluent individuals, families and business-owners throughout the Washington, D.C. area. Since establishing his firm in 1994, he and his team have been focused on providing high-quality service and independent, unbiased financial advice to help clients make informed decisions about their money. For more information, visit Bernhardt Wealth Management and Profiles in Success.