Criticism of Richard Thaler proposal must not prevent discussion

The idea recently put forward by Nobel laureate Richard Thaler to allow Americans to contribute a portion of their 401(k) balances to the Social Security Administration in return for a higher income stream has been criticized from some in the financial advice business.

The concept proposed by the University of Chicago professor, who won the Nobel Prize in 2017 for his work in behavioral finance, would allow retirees to send up to about $250,000 to the government from their workplace retirement plan. In return, they would receive a guaranteed, inflation-adjusted annuity that would increase the size of their monthly Social Security checks. Retirees effectively would be adding more of their own money to the pot that Social Security uses to provide benefits.

Mr. Thaler said the idea would simplify the complexity of drawing down retirement assets and generate more retirement income because the annuity provided by the government would cost less than what one could purchase in the private sector.

As InvestmentNews reporter Greg Iacurci recently discovered, the idea has drawn fire from several quarters.

One criticism focuses on a technical issue. The Federal Insurance Contributions Act payroll taxes levied on both employees and employers are not deposits or investments in an account over which an individual participant has rights; essentially, they are a tax to pay for benefits in the future over which the government has control. In that way, the current Social Security system is different from 401(k) plans, for instance, where participants have rights to the assets in their accounts. That difference perhaps could be changed through legislation or addressed in how the contribution of 401(k) assets to Social Security is treated.

Other criticism comes from those who believe Social Security’s looming financial problems are so great that expanding the program before those issues are addressed is a nonstarter. Underscoring those funding problems was a report last week by the Social Security Board of Trustees noting that the total annual cost of the program is projected to exceed total annual income in 2020 for the first time in nearly four decades.

The Thaler proposal, and any other proposals that would have the government offer a product that competes with the private sector, would doubtless spark pushback from the insurance industry, whose smaller pools of insured individuals than in the massive Social Security system and higher costs for marketing and administration would mean an inability to compete and still earn a profit.

Despite its possible holes, however, Mr. Thaler’s idea is worthy of consideration by think tanks, academia and the government. As a social scientist whose work thus far appears to be based on a dispassionate search for truth, it would seem fair to assume Mr. Thaler’s proposal has no hidden political agenda, but rather is based on a sincere belief that the idea could benefit large numbers of people while still making sense economically.

Taking Mr. Thaler’s proposal seriously and discussing it in public forums also may encourage ideas from other serious thinkers about retirement and lead to creative ways to improve the nation’s retirement-income picture — which currently is bleak.

An analysis by the Government Accountability Office in late 2017 found that the median retirement savings for Americans between 55 and 64 was $107,000. And recent research by the Employee Benefit Research Institute found that 40.6% of U.S. households where the head of household is between 35 and 64 years old are projected to run short of money in retirement.

With the future of millions of Americans at stake, and with divided and deeply partisan lawmakers unlikely to touch an issue with so many political consequences, having leading retirement thinkers instigate policy discussions on boosting retirement income could be our best hope to spark positive change.