A new proposal would create retirement saving accounts that would enable people to postpone the age at which they claim Social Security, thereby increasing monthly benefits.
This idea comes from a trio of well-known policy experts – Gary Koenig (AARP), Jason Fichtner (Mercatus Center at George Mason University), and Bill Gale (Brookings Institution).
Their proposed Supplemental Transition Accounts for Retirement (STARTs) would be mandatory accounts, fully integrated into the Social Security program, and funded by employees, employers, and a progressive government contribution.
Every individual with a START – if claiming Social Security before their full retirement age – would be required to exhaust the account’s assets before receiving retired worker benefits, age-based spousal, or survivor benefits. Raising the age at which benefits are first paid would lower the total actuarial reduction that applies to benefits claimed early, yielding higher monthly benefits over the life of the recipient.
The proposal would improve the adequacy of retirement income because Social Security benefits are reduced by about 6% for each year they are claimed before the full retirement age. When the full retirement age reaches 67 (for those born in 1960 or later), those claiming at 62 will receive only 70% of the full benefit. The actuarial reductions are designed so that lifetime benefits are, on average, roughly the same regardless of the age when people claim. The reduction, however, results in an inadequate benefit.
Nevertheless, many people claim Social Security before the full retirement age, and those without an employer retirement plan are totally reliant on Social Security. By delaying the start of Social Security benefits, people would end up with higher monthly benefits, which will be increasingly necessary as retiree health costs continue to rise. And higher benefits for a retired worker also mean higher benefits for a surviving spouse.
START contributions would be required for all workers below the full retirement age. Both the worker and the employer would contribute 1% of earnings (2% combined) up to the annual Social Security maximum ($128,400 in 2018). In addition, the government would contribute up to 1% for low-income workers to reflect the progressive nature of Social Security benefits. For married couples, total contributions would be split equally between the spouses. The employer’s contribution is pretax; the employee’s contribution is after-tax. Income taxes would be levied on the pretax distribution at retirement, and these monies would be deposited in the trust fund to offset the government’s contribution for low-wage workers.
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Simulations suggest that this program would increase average income by about 5% to 7% and 10% for the lowest-earning workers. The range in the estimates depends on the extent to which participants reduce their other saving. Importantly, the Social Security portion of this income cannot be outlived or eroded by inflation.
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Generally, mandatory account proposals for Social Security make me very nervous, but the START proposal differs from others in a number of ways. Most important, money distributed from the account does not reduce Social Security benefits. Second, participants are not required to buy a private sector annuity but rather they can purchase an inflation-adjusted annuity through Social Security. Finally, the authors explicitly argue that any adjustments to Social Security benefits to address the long-run solvency problem should not take account of the START assets.
Despite all the strengths of the proposal, it faces a tough future. Essentially, it raises the payroll tax rates by 2 percentage points and uses that money to start a new program rather than to close the 2.83% 75-year deficit. That is a tough sell.
But STARTs made me think about other ways to use the proposal. What if, up until the full retirement age, people could not claim their Social Security benefits until they exhausted some portion — say, half — of their 401(k)/IRA balances? That requirement would counter people’s resistance to drawing down their nest egg and enable them to purchase the best annuity in town!
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Requiring the use of a portion of 401(k)/IRA balances before claiming Social Security retirement benefits would involve a very simple change in the legislation that regulates 401(k)s and IRAs. The government has a dog in this fight since 401(k) plans and IRAs are supported by foregone tax revenues, and all taxpayers should want them used efficiently.