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Imagine if social security was a hybrid system, part of which was financed by payroll taxes and another that functioned similarly to plan 401 (k).
In addition to the monthly benefit check that Americans already receive in retirement, retirees would have an additional reserve of money accumulated over the years of contributions.
In this system, the basic principles of social security would not change much. Employees and employers would still share the responsibility for payroll deduction and retirees would receive a check as early as age 62. However, under the proposed second branch of Social Security, Americans would be able to save by themselves in an additional retirement account. whether or not they have access to a 401 (k) sponsored employer account or similar account. The money would be paid in the form of payroll deductions, just as the payroll tax is levied on a paycheck to fund the system, and placed in a similar account to the tax-deferred savings plan. used by the government for federal employees.
Most Americans are underfunded for retirement, in part because some do not have access to a 401 (k) plan or other employer-sponsored plan. In fact, some of the baby boomers closest to retirement saved only $ 157,000 on their 401 (k), and the generation behind them $ 71,000, according to a report from the TransAmerica Center for Retirement Studies. The proposed hybrid system would be a first step in providing financial security for retirement, as it would be easier for US workers to set aside money for the future at levels they have determined, said Chad Parks. supporter of such a plan. He is the founder and CEO of Ubiquity Retirement + Savings, a company that offers small business pension plans. Paying in social security is already mandatory for most workers, and he is not 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 it entirely). The second component of the hybrid social security account would be funded by contributions of more than 12.4%. "Maybe even up to 20%," Parks said.
Proposals have been written around ideas like this one. Marc Goldwein, Vice-President and Senior Policy Director of the Responsible Federal Budget Committee, a non-profit, non-profit organization that educates the public on issues affecting tax policy, and his colleagues recently drafted a proposal Social security reform, including a supplementary retirement plan, said that it would allow Americans to have a nest egg to rest when they retire, in addition to a social security check.
Their proposal suggests that workers automatically start funding the supplemental account with 2% to 3% of their salary, but with the choice of not participating in the program. Studies have shown that workers are more likely to stay in a plan if they are automatically enrolled, especially if a match with an employer 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
Trust funds that feed social security should be cash-strapped by 2035. If this happens, the program will rely on current tax revenues to pay benefits. If nothing changes before that date, future retirees will still receive a benefit check, but for only 80% of what is due, according to the recent report from the trustee of the Social Security Administration.
"If we do not act, what Congress is able to do, millions of retirees will find themselves in a precarious situation," said Alan Barber, director of policy at the Congressional Caucus Center, a committee of the United States. leftist political action.
Americans are already in a crisis of retirement. According to Alicia Munnell, director of the Center for Retirement Research at Boston College, the average balance of 401 accounts (k) for all investors was about $ 104,000 in 2017, and the median was a little over $ 26,000. There are a small number of accounts with large balances (usually those of wealthy participants), which results in such a large difference between the median and the average. For comparison purposes, the average account balance for participants aged 55 to 64 – those closest to retirement – was $ 191,000 in 2017, while the median was $ 71,000.
And that's if we even offer workers a 401 (k), which most do not do. According to a report published in 2017 by two US Census Bureau researchers who reviewed W-2 tax return forms, only 14% of companies had 401 (k) plans for their employees. The companies that participated were mostly larger and only one-third of the workers with access to a 401 (k) contributed to it. States have intervened to propose, and in some cases, mandates, pension 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 with a 401 (k) plan, plus $ 6,000 if they are over the age of 50, as opposed to $ 6,000 for an IRA plus $ 1,000 of a catch-up contribution for seniors 50 years and over. And, unlike many 401 (k) plans, these programs do not allow a business match.
Only 14% of companies had 401 (k) plans for their employees in 2012. The companies that did it were for the most part larger and only one-third of workers with access to the system contributed to it.
The unequal success rate of personal savings is the reason why Social Security serves as a lifeline for many older Americans and their families. According to the Social Security Administration, one-third of retirees receive almost all of their income from their benefit checks. The average monthly check for social security benefits was about $ 1,400 in January 2019, according to the SSA.
Experts hope the program will prevent insolvency over the next 15 years. "Social security has never reached a point where it can not pay the full amount of benefits, because the Congress always ends up intervening," said Steve Goss, chief actuary of the Social Security Administration. Nancy Altman, president of Social Security Works, an organization dedicated to maintaining social security and partially funded by the public, said Nancy Altman. "It's called social security for a reason; it's supposed to give you security, a peace of mind, "she said.
Others are not so optimistic. "The most likely is that we fail," Goldwein said. "We arrive in 2034 and raise our hands to say: it's too difficult."
Social Security Type 401 (k)
There is no way to invest the funds of an additional social security account. A strategy would focus on well-diversified, low-cost funds owned by the worker. Another option might be a portfolio of stocks and bonds or a target date fund, which places young workers in higher risk investments and is gradually moving towards low risk options over the years. Proposals like Goldwein and Parks integrate the choice from a list of diversified funds among stocks and bonds. If such a plan were to be implemented, legislators should take into account many other factors, such as whether the government would make matching contributions as an additional incentive to save or how and when workers would withdraw their assets, said Melissa Favreault, senior research fellow at the Urban Institute, a think tank based in Washington, DC.
This is not the first time that an add-on is being proposed for social security, but this idea is more likely to remain true as Americans worry more and more ahead of time. a potentially insolvent system. Legislators, by and large, do not want to touch on social security legislation. "While there is considerable agreement on the automation of savings, there is a wide disagreement about what it should look like," said Goldwein, in constituencies ranging from unions to employers to corporations. financial services.
This idea lies in the middle of many other suggestions to solve the problem of social security, such as changing the method of calculating benefits and increasing the retirement age to which one would be entitled to 100% (1). the age of retirement is currently 67). persons born in 1960 or later). This is different from George W. Bush's proposal to privatize social security in 2005, which would have invested workers' equity contributions (potentially increasing their rate of return – but also their exposure to risk) instead of the government's obligations. Treasury used by the program. At the time, many Americans said that Social Security had big problems, but they were divided as to whether the privatization of the program was the right decision: 40% said it was a good idea and 55% that it was a bad idea, according to a January 2005 report. Gallup poll for CNN and USA Today.
A hybrid approach would mean that workers would have retirement savings on which they could rest if they chose to participate. "I think it would put me out of the business, but in a way, it's okay as long as we provide financial security for everyone," said Parks, of Ubiquity Retirement + Savings. Of course, in a new hybrid system, companies could still offer retirement accounts to employees, and investment firms would still have IRAs and other plans for those who wish to save even more.
Nevertheless, an additional account would not prevent social security from running out of money, and the program itself still requires immediate attention and changes in infrastructure made possible by law. "It can be a sweetener for insolvency problems, but it does not stand out," Goldwein said.
Why everything counts
Retired or retired Americans are safe for the moment, but the country as a whole is facing an imminent retirement crisis.
Decades ago, retirement income was based on three sources: a worker's pension, its own savings and social security. But most private companies have moved away from traditional pension plans. Some financial advisors tell younger clients who are suspicious about social security not to consider it in their calculations. Thus, whatever the size of the social security check received, they will be ready.
"I would rather tell investors to own their own," said Bill Van Sant, senior vice president and general manager of Girard Investment Services in Souderton, Pennsylvania, endorsing a central concept of supplemental retirement accounts. "Count 100% on what you can control."
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