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Aug. 4, 2019, 11:36 a.m. EDT

This hybrid Social Security plan could help more people save enough for retirement

One part would be funded through taxes and another would be similar to a 401(k) plan

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By Alessandra Malito, MarketWatch


Illustration/Sam Island

Imagine if Social Security were a hybrid system, with one part funded through payroll taxes and another operating similarly to a 401(k) plan.

Along with the monthly benefit check that Americans already receive in retirement, retirees would have an additional pool of money to withdraw from, accumulated through years of contributions.

Under this system, the fundamentals of Social Security wouldn’t change much. Employees and employers would still split responsibility for the payroll deduction, and retirees would get a check starting as early as age 62. But, under the proposed second branch of Social Security, Americans would be able to save on their own in a supplemental retirement account, regardless of whether they have access to an employer-sponsored 401(k) or similar account. The money would be contributed through payroll deductions, just as the payroll tax is taken out of a paycheck to fund the system now, and placed in an account similar to the tax-deferred Thrift Savings Plan that the government uses for federal employees.

Most Americans are underfunded for retirement partly because some lack access to a 401(k) or other employer-sponsored plan. In fact, some of the baby boomers closest to retirement have only $157,000 saved in their 401(k), and the generation behind them, $71,000, according to a TransAmerica Center for Retirement Studies report. The proposed hybrid system would be a first step to ensuring financial security in retirement, as it would make it simple for working Americans to set aside money for the future at levels they’ve determined, said Chad Parks, an advocate of such a plan. He’s the founder and chief executive officer of Ubiquity Retirement + Savings, a company that provides retirement plans to small businesses. Paying into Social Security is already mandatory for most workers, and it isn’t attached to any company, he noted. Employees and employers share the 12.4% tax (unless the worker is self-employed, in which case he or she pays all of it). The second prong of the hybrid Social Security account would be funded with contributions in excess of that 12.4%. “Maybe even up to 20%,” Parks said.

Proposals have been written around ideas like this. Marc Goldwein, senior vice president and senior policy director for the Committee for a Responsible Federal Budget, a bipartisan nonprofit that educates the public on issues with fiscal-policy impact, and his colleagues drafted a proposal for Social Security reform recently that included incorporating an automatic supplemental retirement account, saying that doing so would ensure Americans have a nest egg to fall back on when they retire, in addition to a Social Security check.

Their proposal suggests workers automatically begin funding the supplemental account with 2% to 3% of their wages, but with a choice available to opt out of the program. Studies have shown that workers are more likely to stay in a plan if they’re automatically enrolled, especially if an employer match is included. (Companies would not be required to add or match contributions to these plans under this proposal.)

Read: How to find the best place to retire

How we got here

The trust funds that fuel Social Security are expected to run out of money by 2035, and if that occurs, the program will rely on revenue from current taxes to pay out benefits. Should nothing change before then, future retirees would still get a benefit check, but for only 80% of what they’re owed, according to the Social Security Administration’s recent trustee’s report.

“Unless we take action, which Congress has the ability to do, millions of retirees will be in a precarious situation when they retire,” said Alan Barber, policy director at the Congressional Progressive Caucus Center, a left-leaning political-action committee.

Americans are already in the midst of a retirement crisis. The average 401(k) account balance for all investors was about $104,000 in 2017, and the median was just over $26,000, according to Alicia Munnell, director of the Center for Retirement Research at Boston College. There are a small number of accounts with large balances (typically those of affluent participants), which causes such a large discrepancy between the mean and median. For comparative purposes, the average account balance for participants between 55 and 64 — those closest to retirement — was $191,000 in 2017, while the median was $71,000.

And that’s if workers are even offered a 401(k), which most are not. Only 14% of companies had 401(k) plans for their employees in 2012, according to a 2017 report by two U.S. Census Bureau researchers who reviewed W-2 tax forms. The companies that did were mostly larger, and only a third of workers with access to a 401(k) were actually contributing. States have stepped in to offer, and in some places mandate, retirement plans, in the form of individual retirement accounts that automatically enroll employees. One caveat, however, is that these and all IRAs have significantly lower contribution limits. An individual can save $19,000 a year in a 401(k) plan, plus an additional $6,000 if they’re over 50, compared with only $6,000 for an IRA, plus $1,000 in catch-up contributions for people 50 and older. And, unlike many 401(k) plans, these programs do not allow a company match.

Only 14% of companies had 401(k) plans for their employees in 2012. The companies that did were mostly larger, and only a third of workers with access were actually contributing to the plans.

The uneven success rate of personal savings is why Social Security serves as a lifeline for many older Americans and their families. One-third of retirees receive nearly all of their income from their benefit checks, according to the Social Security Administration. The average monthly Social Security benefit check was about $1,400 in January 2019, according to the SSA .

Experts are hopeful the program will avoid insolvency in the next decade and a half. “Social Security never reached a point where it couldn’t pay full benefits because Congress always eventually steps in,” said Steve Goss, chief actuary at the Social Security Administration. Although many Americans question whether they will get a benefit check in the future, they shouldn’t, said Nancy Altman, president of Social Security Works, an organization dedicated to maintaining Social Security and partially funded by the public. “It’s called Social Security for a reason; it’s supposed to give you security, a peace of mind,” she said.

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