The more I read about the quality of consumer investment decisions, the more tempting it is to consider automatic retirement funds that require no decisions. Poll after poll shows that consumers don't understand even basic investment and tax rules, and invariably make poor choices. If I was running the U.S. government asylum, I'd want to check off a box that allowed me to "super size" Social Security. McDonald's could market the program.
[See 6 Money Lessons of the Great Recession.] It could work like this: Each fall, I would get a reminder from Uncle Sam to sign up for next year's Social Security voluntary contributions. I would access my Social Security account on the Web, much as I can today. Right now, employees pay 6.2 percent of their wages (up to a maximum wage base of $106,800 in 2009), and this amount is matched by employers. Self-employed people pay both shares—12.4 percent. There is a separate payment of 1.45 percent for Medicare hospital insurance with no cap on covered wages (2.9 percent for the self-employed). We're interested here only in what's called the Social Security OASDI program (Old Age, Survivors, and Disability Insurance).
In addition to that 6.2 percent required contribution to Social Security, I would have the option of having additional money backed out of my paycheck and provided to Social Security. Remember, it's all voluntary, and designed to add not a penny to the federal deficit or to Social Security's actuarial imbalance. In return, I would receive an enhanced retirement benefit. There would be easy-to-use calculators that would allow me to see how my retirement benefits would change under different contribution scenarios. The money I contributed in 2010 would produce predictable retirement returns that would never be taken away or reduced. In fact, there's no reason the entire amount would not qualify for annual inflation adjustments, which is the case today with normal Social Security retirement benefits.
Next fall, I'd have the option of raising, reducing or completely canceling my enhanced contribution. This would avoid putting me in a financial bind if my income declined or, on the upside, would allow me to boost contributions if I had a really good earnings year. Again, any voluntary contributions would permanently raise my lifetime Social Security payments—no surprises, no risks and firm numbers that permit me to make solid, long-term plans. You know, those are the plans that experts always say consumers should make, but we can't because there's been no certainty in our long-term retirement earnings.
As an incentive to participate, these additional contributions would be pre-tax payments and would thus lower a consumer's tax bill. Also, Social Security operates like an annuity, where my contributions are pooled together with all other Social Security participants. If I get hit by a bus next week, all the money I'd paid into Social Security gets returned to the pool (less any familysurvivorship benefits and the like). That's one reason Social Security benefits look as good as they do. Managing such a huge pool smooths out results and helps explain why program actuaries can do such an accurate job in projecting future revenues and benefits.
Is there a catch here? Yes, the private investment fund industry would lose hundreds of billions of dollars in investment fees. The 401(k) industry would catch cold and, possibly, pneumonia. And lots of other investment programs would suffer as well. And, on paper, consumers would earn less money than if they made smart use of the retirement programs currently at their disposal. (Notice, I said smart use.) That's because stocks and bonds, over time, have produced higher returns than can be promised by Social Security. As we learned in the past two years, however, stocks and bonds can, and did, suffer huge losses. Not so with Social Security. The Little Engine That Could just continued to chug away with those guaranteed payments, including what has become just an incredible feature—annual inflation-adjustment increases pegged to changes in consumer prices. The hare got burned and most of us have become tortoise supporters. For people who don't have second homes, spare cars and long vacations, a conservative and guaranteed retirement fund is a sensible choice.
[See Should You Manage Your Own Portfolio?] Isn't Social Security going bankrupt, you ask? And wouldn't this program hasten its demise and add to our fiscal irresponsibility? Well, I wouldn't support enhanced Social Security retirement benefits unless we put the program back on sound actuarial footing (not that hard or painful to do) and stopped allowing the government to use our Social Security payments to pay its bills (very hard and very painful to do). And I sure wouldn't provide increased voluntary contributions unless these funds were legally segregated in separate earnings accounts, where they could be allowed to grow modestly, and safely, until needed to pay retirement expenses.
But super-sizing Social Security would work. I'm thinking financial obesity.