One part would be funded through taxes and another
would be similar to a 401(k) plan
Imagine if Social
Security were a hybrid system, with one part funded through payroll taxes and
another operating similarly to a 401(k) plan.
Along with the monthly benefit check that
Americans already receive in retirement, retirees would have an additional pool
of money to withdraw from, accumulated through years of contributions.
Under this system, the fundamentals of Social
Security wouldn’t change much. Employees and employers would still split
responsibility for the payroll deduction, and retirees would get a check
starting as early as age 62. But, under the proposed second branch of Social
Security, Americans would be able to save on their own in a supplemental
retirement account, regardless of whether they have access to an
employer-sponsored 401(k) or similar account. The money would be contributed
through payroll deductions, just as the payroll tax is taken out of a paycheck
to fund the system now, and placed in an account similar to the tax-deferred Thrift
Savings Plan that the government uses for federal employees.
Most Americans are underfunded for retirement
partly because some lack access to a 401(k) or other employer-sponsored plan.
In fact, some of the baby boomers closest to retirement have only $157,000
saved in their 401(k), and the generation behind them, $71,000, according to a
TransAmerica Center for Retirement Studies report. The proposed hybrid system
would be a first step to ensuring financial security in retirement, as it would
make it simple for working Americans to set aside money for the future at
levels they’ve determined, said Chad Parks, an advocate of such a plan. He’s
the founder and chief executive officer of Ubiquity Retirement + Savings, a
company that provides retirement plans to small businesses. Paying into Social
Security is already mandatory for most workers, and it isn’t attached to any
company, he noted. Employees and employers share the 12.4% tax (unless the
worker is self-employed, in which case he or she pays all of it). The second
prong of the hybrid Social Security account would be funded with contributions
in excess of that 12.4%. “Maybe even up to 20%,” Parks said.
Proposals have been written around ideas like
this. Marc Goldwein, senior vice president and senior policy director for the
Committee for a Responsible Federal Budget, a bipartisan nonprofit that
educates the public on issues with fiscal-policy impact, and his colleagues
drafted a proposal for Social Security reform recently that included
incorporating an automatic supplemental retirement account, saying that doing
so would ensure Americans have a nest egg to fall back on when they retire, in
addition to a Social Security check.
Their proposal suggests workers automatically
begin funding the supplemental account with 2% to 3% of their wages, but with a
choice available to opt out of the program. Studies have shown that workers are
more likely to stay in a plan if they’re automatically enrolled, especially if
an employer match is included. (Companies would not be required to add or match
contributions to these plans under this proposal.)
How we got here
The trust funds that fuel Social Security are
expected to run out of money by 2035, and if that occurs, the program will rely
on revenue from current taxes to pay out benefits. Should nothing change before
then, future retirees would still get a benefit check, but for only 80% of what
they’re owed, according to the Social Security Administration’s recent
trustee’s report.
“Unless we take action, which Congress has the
ability to do, millions of retirees will be in a precarious situation when they
retire,” said Alan Barber, policy director at the Congressional Progressive
Caucus Center, a left-leaning political-action committee.
Americans are already in the midst of a
retirement crisis. The average 401(k) account balance for all investors was
about $104,000 in 2017, and the median was just over $26,000, according to
Alicia Munnell, director of the Center for Retirement Research at Boston
College. There are a small number of accounts with large balances (typically
those of affluent participants), which causes such a large discrepancy between
the mean and median. For comparative purposes, the average account balance for
participants between 55 and 64 — those closest to retirement — was $191,000 in
2017, while the median was
$71,000.
And that’s if workers are even offered a
401(k), which most are not. Only 14% of companies had 401(k) plans for their
employees in 2012, according to a 2017 report by two U.S. Census Bureau
researchers who reviewed W-2 tax forms. The companies that did were mostly
larger, and only a third of
workers with access to a 401(k) were actually contributing.
States have stepped in to offer, and in some places mandate, retirement plans,
in the form of individual retirement accounts that automatically enroll
employees. One caveat, however, is that these and all IRAs have significantly
lower contribution limits. An individual can save $19,000 a year in a 401(k)
plan, plus an additional $6,000 if they’re over 50, compared with only $6,000
for an IRA, plus $1,000 in catch-up contributions for people 50 and older. And,
unlike many 401(k) plans, these programs do not allow a company match.
Only 14% of companies had 401(k) plans for
their employees in 2012. The companies that did were mostly larger, and only a
third of workers with access were actually contributing to the plans.
The uneven success rate of personal savings is
why Social Security serves as a lifeline for many older Americans and their
families. One-third of retirees receive nearly all of their
income from their benefit checks, according to the Social
Security Administration. The average monthly Social Security benefit check was
about $1,400 in January 2019, according to the
SSA.
Experts are hopeful the program will avoid
insolvency in the next decade and a half. “Social Security never reached a
point where it couldn’t pay full benefits because Congress always eventually
steps in,” said Steve Goss, chief actuary at the Social Security
Administration. Although many Americans question whether they will get a
benefit check in the future, they shouldn’t, said Nancy Altman, president of
Social Security Works, an organization dedicated to maintaining Social Security
and partially funded by the public. “It’s called Social Security for a reason;
it’s supposed to give you security, a peace of mind,” she said.
Others aren’t as optimistic. “The most likely
path is we fail,” Goldwein said. “We get to 2034 and throw our hands up and
say, ‘It’s too hard.’”
A 401(k)-style Social
Security
There’s no set way the funds in a
supplementary Social Security account would be invested. One strategy would
center on well-diversified, low-fee funds owned by the worker. Another could
feature a portfolio of stocks and bonds or a target-date fund, which places
younger workers in higher-risk investments and gradually shifts to lower-risk
options as they get older. Proposals like Goldwein’s and Parks’s incorporate
choosing from a list of diversified funds across stocks and bonds. Were such a
plan to move toward implementation, legislators would need to address numerous
other considerations, such as whether the government would provide matching
contributions as an extra incentive to save or how and when workers would
withdraw assets, said Melissa Favreault, a senior fellow at the Urban
Institute, a Washington, D.C.-based think tank.
This is not the first time an add-on has been
proposed for Social Security, but the notion has a better chance to stick as
Americans grow increasingly anxious about a potentially insolvent system.
Lawmakers, by and large, haven’t wanted to touch Social Security legislation.
“Even if there’s considerable agreement to automate savings, there’s wide
disagreement over what that should look like,” Goldwein said, with
constituencies ranging from unions to employers to financial-services firms.
This idea falls in the midst of numerous other
suggestions to fix Social Security, such as changing the way benefits are
calculated and increasing the full retirement age at which one would get 100%
of the benefit owed (the full retirement age currently stands at 67 for people
born in or after 1960). It’s different from George W. Bush’s proposal to
privatize Social Security in 2005, which would have invested workers’
contributions in equities (thus potentially increasing their rate of return —
but also their exposure to risk) instead of the Treasury bonds that the program
uses. Many Americans at the time said Social Security had major problems, but
Americans were torn over whether privatizing the program was the right move:
40% said it was a good idea, and 55% said it was a bad one, according to a
January 2005 Gallup poll for CNN and USA Today.
A hybrid approach would mean workers would
have retirement savings they know they can fall back on, if they chose to
participate. “I think this would put me out of business but in a way, that’s OK
as long as we accomplish financial security for everyone,” said Parks, of
Ubiquity Retirement + Savings. Of course, in a new hybridized system, companies
could still offer retirement accounts to employees, and investment firms would
still have IRAs and other plans for those who want to save even more.
Still, a supplemental account wouldn’t prevent
Social Security from running out of money, and the program itself still needs
immediate attention and infrastructure changes made possible through law. “It
can serve as a sweetener for insolvency issues, but it doesn’t get you out of
them,” Goldwein said.
Why it all matters
Americans in or near retirement are safe for
now, but the country as a whole is facing an impending retirement crisis.
Decades ago, retirement income was based on
three sources: a worker’s pension, his or her own savings and Social Security.
But most private companies have moved away from traditional pension plans. Some
financial advisers tell younger clients with doubts about receiving Social
Security not to consider it in their calculations at all. That way, no matter
how small or large the Social Security check they ultimately receive, they’ll
be prepared.
“I would rather tell investors to take
ownership themselves,” said Bill Van Sant, senior vice president and managing
director at Girard Investment Services in Souderton, Pa., effectively endorsing
a central concept of supplemental retirement accounts. “Rely 100% on what you
can control.”
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