It’s the latest iteration of the auto revolution (enrollment, escalation, portability). While not directly related to 401(k)s, an idea for automatic adjustments involves retirement income—specifically, Social Security.
Alicia Munnell and William Arnone, two familiar names in retirement plan research and policy, recently appeared in the Boston Globe to pitch yet another fix to the popular government programs’ ongoing solvency issues.
It would involve removing the human element, putting the funding increase on autopilot with a legislative “backstop” that kicks in to avoid the uncertainty that comes with 11th-hour partisan political fights.
Munnell, with the Center for Retirement Research, and Arnone, with the National Academy of Social Insurance, noted that it’s an election year, so Social Security’s future should make the list of debate topics.
“The current approach of waiting until the last minute [to address] has serious consequences,” they wrote. “It means that the eventual changes to revenues or benefits adopted will be more abrupt, with fewer generations participating in the fix, and it undermines Americans’ faith in the program. Younger people in particular often ask, ‘Will Social Security be there for me?’”
Munnell and Arnone argue that the key is to adopt a “mechanism that automatically adjusts revenues or benefits if shortfalls emerge due to demographic and economic changes.”
As an example, they argued that benefit levels are dynamic and increase to match inflation and wage increases. Revenue levels are less so, leading to funding shortfalls.
“While the wage base on which contributions are made is adjusted each year, the contribution rate itself is fixed at 6.2 percent. Many countries have automatic balancing mechanisms explicitly designed to ensure that their retirement plans are fully financed.”
They described Canada’s “Automatic Balancing Mechanism.” Every three years, the country’s Chief Actuary estimates the minimum contribution rate required to finance benefits over 75 years.
“If this required rate exceeds the current rate — and if policymakers cannot agree on a fix — the backstop kicks in,” they explained. “Contribution rates are then automatically increased by 50 percent of the difference between the legislated and the required rate; and current benefit payouts are frozen until the next actuarial report.”
It gives lawmakers a chance to solve potential insolvency issues but acts as a fallback if they fail to do so on a timely basis.
“The United States doesn’t have to adopt the specifics of the Canadian backstop mechanism, but including some automatic adjustment in the face of inaction would improve confidence in the long-term stability of our Social Security program,” Munnell and Arnone concluded.
Munnell has long trumpeted ideas to shore up Social Security’s long-term viability but admits they’re not always realistic politically.
She recently suggested the government eliminate tax incentives in employer-sponsored defined contribution retirement plans to address funding shortfalls.
