If we don’t do something in ten years, 40% of middle-class older workers will be downwardly mobile into retirement poverty – a potential political flash-point and certain human tragedy. Older workers don’t have adequate retirement accounts and Social Security won’t be enough for most retirees to maintain their living standards. The median older worker, age 55-64, has only $15,000 in their retirement account; the middle-class worker has $60,000; and even those in the top 10% of the income distribution don’t have enough, the median balance is only $200,000.
Two fixes could help secure adequate retirement income without extra cost or new bureaucracies. Congress could allow Social Security to administer bridge annuities to help people delay claiming Social Security benefits and allow people to buy extra Social Security credits. Social Security should innovate fast to save Americans’ retirement future.
Though most people don’t have enough retirement income to spread over their retirement life, many can use their IRAs and 401(k)s to delay claiming higher Social Security benefits — benefits are reduced by as much as 44 percent if beneficiaries claim before age 70. My coauthor and I, Tony Webb, propose that Social Security Administration help people use their retirement account to bridge to a higher Social Security benefit. We also proposed in a recent AARP innovation competition, with another coauthor Michael Papadopoulos, that people could buy extra Social Security credits., called Catch-Up Credits
Fix #1: Bridge Annuities: Workers should maximize their Social Security benefits by spending down their IRA and 401(k) balances and delay claiming. Congress could help people do that efficiently by allowing Social Security to convert retirement balances to “bridge” annuities to delayed Social Security receipt.
Let’s take Wanda, an average wage earner who has $100,000 in her retirement account. She has several choices and unless she has a fatal disease and no spouse only one is a good choice. Her bad choice is to keep her $100,000 and claim a reduced $1,125 Social Security benefit at 62. Her good choice is to delay claiming Social Security until age 70 to get a lifetime monthly of $1,980. How would she survive those 8 years waiting? Wanda can get by in those eight years by spending down her $100,000.
Another way to see how bridging can maximize benefits is to calculate the present value of Wanda’s choices. If Wanda waits, she gets more in present value terms. A 2018 price-indexed annuity of $1,125 at age 62 is worth about $291,000. But a $1,980 monthly annuity in 2026 is worth $307,000 today! And people could choose how long to bridge. Bridge to age 63 with $100,000 and live on $8,502 per month. Bridge to age 70 and live on $1230 per month until the $1980 Social Security benefit kicks in. The bridge works with more or less money and at various ages.
Fix #2: Buying Extra Catch-Up Credits in Social Security
Congress could also help workers boost their lifetime Social Security benefits by defaulting workers into Social Security catch-up contributions of 3.1% of earnings starting at age 50. This extra credit would increase the chance a person can maintain their pre-retirement living standards. The proposed program uses the existing structure of Social Security. It would not increase the Social Security deficit, instead it would strengthen the program’s financial health. All workers would get a decent return from their contributions of 3.1%. Low- and middle-income workers would earn additional benefits of 7% of pre-retirement income and higher income workers would earn 3-4%. The detailed proposal is here
Social Security needs more revenue — by raising the payroll tax from 12.4% to 15.4% and/or raising or eliminating the taxable earnings limit. Without more revenue Social Security benefits will fall by 25% for the median household in retirement in less than 15 years.
But, Congress should look ahead and beyond just maintaining current benefits. Social Security is a well-run and efficient agency. It can effectively spread risk across a large population and over time. Adding bridge annuities and catch-up credits to Social Security reform is the type of old age income security we so desperately need as the current American retirement system crumbles described so well in the Wall Street Journal this summer.