&l;p&g;&l;img class=&q;dam-image shutterstock size-large wp-image-1049235014&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/1049235014/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Shutterstock
Everyone&a;rsquo;s looking for the Holy Grail, the figurative Retirement Holy Grail, that is &a;ndash; a way of increasing Americans&a;rsquo; retirement income that&a;rsquo;s low-cost and low-risk, or, failing that, places the cost and risk on on the federal government or other people and/or entities better equipped to handle it.&a;nbsp; That&s;s why&a;nbsp;the most common proposal for shoring up Social Security finances is simply to raise taxes on those whose income exceeds the wage base (with or without some nominal but tiny benefit accrual to go along with it), and during the 2016 election we saw proposals from both Hillary Clinton and Bernie Sanders to do exactly that, and in 2017, Sanders &l;a href=&q;https://www.huffingtonpost.com/entry/bernie-sanders-social-security-bill_us_58a61e12e4b045cd34bff1dd&q; target=&q;_blank&q;&g;introduced not-going-anywhere legislation&l;/a&g; to tax &l;a href=&q;https://www.fa-mag.com/news/sanders–social-security-plan-31629.html&q; target=&q;_blank&q;&g;wages and investment income above $250,000&l;/a&g; and direct the proceeds to Social Security to &l;a href=&q;http://thehill.com/blogs/floor-action/senate/319989-sanders-introduces-bill-to-boost-social-security&q; target=&q;_blank&q;&g;extend solvency and boost benefits&l;/a&g;.
Now a group of scholars at the New School for Social Research, Teresa Ghilarducci (also a &l;a href=&q;https://www.forbes.com/sites/teresaghilarducci/#3105278e653b&q;&g;Forbes contributor&l;/a&g;), Anthony Webb, and Michael Papdopoulos, have developed their version of a (partial) Retirement Holy Grail, in the form of what they call Social Security catch-up contributions, as explained in a &l;a href=&q;http://www.economicpolicyresearch.org/images/docs/research/retirement_security/Catch-Up_Contributions.pdf&q; target=&q;_blank&q;&g;recent policy note&l;/a&g;, &q;Catch-Up Contributions:&a;nbsp; An Innovative Policy Proposal for Social Security.&q;
The core idea builds off the notion of 401(k) catch-up contributions, that is, the idea that in the years following age 50, one is permitted to make additional tax-deferred contributions to one&s;s 401(k) account beyond the usual tax limits.&a;nbsp; This makes sense, given that those tax limits are intended to limit the extent to which high-income individuals can benefit from the tax-deferral by limiting contributions to the level that a middle-class person (defined as widely as we Americans tend to do) might reasonably make, but that in one&s;s later working lifetime, one is both more motivated to save by seeing retirement approach ever nearer, and also likely to be better able to save, what with the kids out of the house and all.
However, in Ghilarducci and team&s;s proposal, the extra contributions are not made to an individual savings account, but to Social Security.&a;nbsp; On an autoenrollment-with-opt-out basis, workers over age 50 would contribute 50% more to Social Security and, in return, would receive a boost of 50% in the earnings recorded for any year in which they accepted this increase in taxes.&a;nbsp; For example, a worker earning $40,000 per year would pay an extra $24 per week and would be credited with $60,000 in earnings for that year.&a;nbsp; (Employers would not be required to make extra contributions.)&a;nbsp; Workers earning a medium pay would receive a 7 percentage-point boost in their benefits as a percent of preretirement pay, from 45% of pay to 52%.&a;nbsp; Lower earners would benefit more than higher earners, but all workers would benefit from the program, when measured by whether they would see a positive return on their contributions. What&s;s more, this would be a win-win, since the program would delay the exhaustion of the Trust Fund by 3 years, from 2034 to 2037, and would slightly reduce the total 75 year shortfall.
Which sounds great.&a;nbsp; But there&s;s a catch — several of them, in fact.
In the first place, Ghilarducci acknowledges the fact that benefits vary by income level.&a;nbsp; Up to the &q;medium&q; income level (presumably corresponding to the medium earner in analyses by the Social Secuirty Administration), workers receive a quite-respectable rate of return of about 4% (men) or nearly 5% (women), but &q;high&q; and &q;maximum&q; earners (that is, an earner whose wages are, for each year, equal to or higher than the Social Security maximum taxable earnings) have much lower rates of return, hardly over 0% for men and 1% for women.&a;nbsp; Yet Ghilarducci writes,
&l;/p&g;&l;blockquote&g;The participation of both high and low earners is important to the success of the program.&a;nbsp; If low earners fail to participate, it will fail to meet the policy goal of targeting those at greatest risk of downward mobility.&a;nbsp; If high earners fail to participate, the higher returns of low earners will weaken Social Security finances.&l;/blockquote&g;
But imagine this plan in operation.&a;nbsp; Every financial planner worth his or her salt will be advising clients, and preparing informational brochures, on the question of, &q;should you participate in the catch-up contributions?&q;&a;nbsp; They&s;ll take into consideration client&s;s income, longevity, forecast Social Security benefits, and other relevant factors, to give a thumbs up or down on the decision, and the same firms which provide retirement income modelers will come up with modelers to advise clients on this benefit.&a;nbsp; Now, it may be that Ghilarducci&s;s calculations don&s;t take into account the longer life expectancy of the upper-middle-class and wealthier folk, so perhaps the ultimate returns are more balanced than you&s;d expect, but the moment such a plan relies on one group voluntarily subsidizing another, it&s;s headed for trouble.
What&s;s more, the plan is simply too clever.&a;nbsp; I can&s;t make any claim to have assessed whether, in terms of the actuarial value of the benefits provided and the contributions collected, collectively or individually, the plan pays for itself.&a;nbsp; Ghilarducci&s;s two measures — the solvency of the fund and the 75-year shortfall — don&s;t do that either, since all participants necessarily pay in contributions first, then collect benefits later.&a;nbsp; But it is likewise clear by the simplicity of the program design — bump your individual contributions up by 50% for your late-career years and receive a 50% boost in credited pay — that Ghilarducci and her co-designers have not done so either.
And fundamentally, trying to accomplish a Social Security benefit enhancement through voluntary contributions — and, what&s;s more, from only the 50 and ups, presumably because they&s;re more willing to participate as retirement comes nearer — highlights the difficulties of this muddled system with progressive benefits and flat-rate contributions.
That being said, I remain a fan of the idea of trying to come up with innovative paths forward with Social Security that extend beyond, &q;raise payroll taxes on the wealthy.&q;&a;nbsp; The way I see it, if we have enough discussion and enough proposals, sooner or later, something will stick, a consensus will form, and, if enough of the discussion filters down to the general public, we&s;ll be ready to have that larger discussion about Social Security, in general (did you know &l;a href=&q;https://www.forbes.com/sites/ebauer/2018/03/11/take-cover-its-another-retirement-reform-proposal/#257c43944244&q;&g;that I have a plan&l;/a&g;?), that moves us forward.
&l;em&g;What do you think?&a;nbsp; Tell me at &l;a href=&q;https://janetheactuary.com/2018/04/08/forbes-post-social-security-catch-up-contributions-and-the-quest-for-the-holy-grail/&q; target=&q;_blank&q;&g;janetheactuary.com&l;/a&g;!&l;/em&g;