‘False’ Start?

There’s a new proposal being floated that proponents say would “increase retirement income security and reform Social Security.” And yes, a mandate is involved.

The proposal involves something tagged “Supplemental Transition Accounts for Retirement” (a.k.a. “START”), and it’s being touted by AARP. The proposal is the work of Jason Fichtner of George Mason University, Bill Gale of the Brookings Institute and Gary Koening of AARP’s Public Policy Institute. The basic concept is to help people postpone claiming Social Security benefits (the most common age to start claiming remains 62) since – as an executive summary of the proposal indicates – between the ages of 62 and 70, monthly Social Security benefits increase by about 7% to 8% for each one-year delay in claiming.

This is accomplished by creating the aforementioned START accounts, which are funded by a new layer of mandated withholding: 1% each from workers and employers (2% combined) up to the annual maximum subject to Social Security payroll tax (self-employed individuals pay both parts, as they currently do with Social Security). Worker contributions are post-tax and employer contributions are pre-tax – oh, and there is a federal government contribution for lower income workers (up to 1% for married filing jointly with adjusted gross income less than $40,000) as well.

Individuals wouldn’t be directing these investments. Rather, they would be “professionally managed in a pooled account with an emphasis on keeping administrative fees as low as possible,” with the oversight of an “independent board” that would “select the private investment firm(s) responsible for managing START assets” and setting the investment guidelines.

So, what would this mean for retirement security? Well, START’s proponents claim that the proposal would “reduce poverty significantly for people ages 62 and over “under current law’s scheduled benefits,” raising the net per-capita cash income the most for older Americans with the lowest lifetime earnings by 10% on average and 15% at the median in 2065 compared to scheduled benefits under current law.

Now, it’s not hard to imagine that an additional 2% mandated savings would improve outcomes – certainly postponing drawing on Social Security benefits alone would serve to increase the monthly benefits by some factor (though actuarially speaking, it shouldn’t have much impact on the fund itself). Not to mention those who aren’t currently saving at all (we’ll just assume they can come up with the 1% mandate) – and there’s that additional government “match” for lower income workers to add to the outcome mix.

And yet, the proposal’s authors would appear to claim more. While they make their comparison to “scheduled benefits under current law,” which would seem to infer a comparison of the additional mandate and timing to that available under Social Security, the executive summary of the proposal notes that the Urban Institute analyzed the proposal based on assumptions ranging from one where employees reduce their contribution either to zero or by the amount of the START contributions, whichever is smaller.

Said another way, the analysis – and those rosy outcomes – assumes that workers confronted with the mandate will not reduce their workplace contributions by an amount larger than the mandate. Nor is it clear from the report that the analysis makes any allowance for the reduction in employer matching contributions that might accompany reductions by workers in their 401(k) savings – not to mention employers who might well see a need to reduce their workplace savings plan match because they are now required to put an additional 1% into these new mandatory accounts.

As retirement income security projections go, that doesn’t seem like a very good place to… start.

- Nevin E. Adams, JD