Retirement Policy Wonks Pitch New Pre-Social Security Accounts

A new proposal from three prominent retirement economists would mandate contributions to new savings accounts to offset the impact of filing early for Social Security benefits.

Supplemental Transition Accounts for Retirement would impose a 2 percent payroll tax increase to fund add-on savings accounts that would have to be exhausted before workers can file for Social Security.

Under existing filing options, the most popular age for drawing Social Security benefits is 62—the earliest possible filing age. Data from the Center for Retirement Research at Boston College shows 42 percent of men and 48 percent of women file at age 62. Only 2 percent of men and 4 percent of women maximize monthly benefits by waiting until age 70 to file.

That trend has a considerable impact on monthly checks from Social Security. Workers born before 1954, who have a full retirement age of 66, see their benefits reduced by 25 percent a month when they file early at age 62, according to the Social Security Administration. Workers with a full retirement age after 66 see their benefits reduced up to 30 percent when they file at 62.

Under the proposed START accounts, beneficiaries would have the option of drawing down the accounts at the earliest eligibility age for Social Security. Benefits would be based on what they would have otherwise received under current claiming rules.

"STARTs would mitigate the effects of actuarial reductions for claiming early and could allow workers to gain additional monthly Social Security benefits through delayed retirement credits," according to a paper published from economists at the AARP, Mercatus Center at George Mason University, and the Brookings Institute.

The 2 percent increase in payroll taxes would be split between employers and workers, while the self-employed would fund the full amount. The cap on the tax would be $127,000, the same as the current cap on Social Security's payroll tax. Employees' share would be made on and after-tax basis; employer contributions would be made pretax.

Potential windfall for private sector money managers

Under the program, the government would pitch in another 1 percent for low-income workers.

That cost would be more than offset by taxes on distributions from START accounts, according to modeling by the Urban Institute. The rest of the new revenue would be credited to Social Security's trust funds, reducing the programs' long-term deficit by 12 percent.

The Social Security Administration would pool START assets, and management of the funds would be outsourced to the private sector "with an emphasis on keeping administrative fees as low as possible," according to the economists. Individuals would not be allowed to choose investment options.

STARTs represent a version of public-private models favored by some conservative lawmakers. Under existing law, Social Security's trust funds are only invested in specially issued Treasury bonds.

Modeling the impact

The Urban Institute's analysis of STARTs' impact on future retirees is based on the assumption that workers reduce contributions to private sector retirement plans to account for the new tax.

Nonetheless, poverty rates among future retirees would be reduced "significantly," according to the analysis.

By 2045, poverty rates among retirees would be reduced up to 10.4 percent; by 2065, poverty rates would be reduced up to 8.1 percent. Under current law, one in 10 Americans age 62 and older are projected to be living at the poverty level in 2045.

Future retirees with the lowest lifetime earnings would see income from Social Security increase by 10 percent on average. Millennials would see the greatest increase in Social Security income, given their prospective participation in the accounts over the course of their earning years. Top earners would see a modest increase in benefits—1.7 percent—by 2065.

"Supplemental Transition Accounts for Retirement would provide the necessary bridge to allow individuals to delay claiming Social Security benefits. And it would do so without limiting access to essential income at early retirement ages," the economists say.

— Check out Widows Got Bad Social Security Claiming Advice From SSA: IG Report on ThinkAdvisor.