As a way to overcome lifetime retirement income shortfalls, Nobel Prize winning economist Richard Thaler recently described an idea to allow people to take a portion of their 401(k) benefits to purchase more Social Security benefits.
Thaler, currently the Charles R. Walgreen Distinguished Service Professor at the University of Chicago Booth School of Business, spoke April 18 at a Washington, DC conference hosted by the Retirement Security Project at the Brookings Institution to explore ways to create lifetime income for participants in DC plans.
Highlighting his previous work with Schlomo Benartzi and their “Save More Tomorrow” campaign, Thaler noted, among other things, that the use of behavioral economics has concentrated on the “front end” accumulation of retirement assets, making it easier to navigate savings in 401(k) plans through various default mechanisms, but an increasing challenge is on the decumulation phase of retirement.
Unlucky to Live to 100?
To that end, he explained that it’s hard of enough for people to figure out how much to save during their working years – and that’s where automation has helped. But he contended that it’s even harder to figure out how to make money last in retirement.
The decumulation problem and how you draw down your retirement assets, Thaler explained, is that “no one knows that they are a high risk to live to 100. You have to worry about getting unlucky and living to 100. What do you do for the unlucky people that get to live for a long time?”
Moreover, he explained that the decumulation problem has been further exacerbated by a change in social norms. Thirty years ago, people in their 60s who were getting ready to retire had mostly paid off their mortgages and had very little other debt, whereas now, people in their 60s still have mortgages, as well as auto loans and credit card debt, on top of not having sufficiently saved in their 401(k), Thaler observed.
Pet Idea
As one possible solution among the various lifetime income policy ideas, Thaler offered up his 401(k)-Social Security buy-in proposal as a “pet idea.” He acknowledges that it may seem “wild and crazy,” but he contends that all of the math has been done by the Social Security Administration and it would be an easy fix.
He explained that benefits would be actuarially adjusted based on when you claim benefits, just like the SSA now does, and the amount that could be contributed would be capped, possibly at $250,000. But he notes that even $100,000 would buy a fair amount of longevity insurance.
Thaler clarified that his proposal is not targeted at the people who have accumulated seven-figure assets, but at those who are making $50,000 to $100,000 a year — noting that, while they’re not at the bottom of the income ladder, they haven’t accumulated a big nest egg either.
“It would get you the only indexed annuity that’s price adjusted, that’s guaranteed by the federal government and it would get you that at fair actuarial value. No one in the private sector is prepared to do either of those things. As far as I know, there are no indexed annuities and none guaranteed by the federal government,” Thaler argues.
What’s more, he observed that there are a lot of guaranteed lifetime proposals and concern over what private sector companies are going to take such risks for such small amounts. As such, he inquired, why not let the Social Security Administration take care of it?
“We don’t need any new bureaucracy, people are already getting a Social Security check. It would just be a little bit bigger and most people’s account balances are below $100,000, which would cover most people,” Thaler reasoned. “I would much rather do this, than have the fly-by-night insurance company in Mississippi offering some private version of the same thing. The government should be the natural person to bear the risk of a calamitous risk of increased life expectancy. I don’t know who else is going to do it,” he concluded facetiously.
Additional Panelists
The forum featured two additional panel discussions, with each session moderated by William Gale of Brookings. “Lifetime Income Without Annuities” featured David John of AARP; Professor Moshe Milevsky of York University in Canada; and Michael Davis of T. Rowe Price, who discussed ideas ranging from automatic retirement income solutions to modernized versions of tontines.
Brookings’ Nonresident Senior Fellow Mark Iwry; former Department of Labor Assistant Secretary for the Employee Benefits Security Administration Phyllis Borzi; and Kelli Hueler of Hueler Income Solutions comprised the final panel, which addressed the pros and cons of annuities in DC plans and efforts to reduce key regulatory barriers to offering annuities, as well as changes to the required minimum distribution rules.
For a deeper dive on these discussions, video replays of each of the panels, as well as the presenter handouts, can be viewed here.
