By Alessandra Malito, MarketWatch June 16, 2019 8:05 a.m. ET
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
workerswith 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.
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.”
No comments:
Post a Comment