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Nobel laureate economist Richard Thaler caused a sensation on Thursday Brookings Institution, slamming 401 (k) s and promoting social security. It was a bit surprising given Thaler's conservative trend. He proposed that the Social Security Administration embarks on the annuity business by allowing retirees to allocate a portion of their retirement savings to their social security balance in order to strengthen their monthly payments.
Thaler wants to solve a problem that all Americans face with the 401 (k) and IRA plan balances. How do you take $ 92,000 – the median level of holdings for workers approaching the age of retirement and make it last a lifetime? How to avoid surviving your money? This is not a problem for social security or a defined benefit plan because they are paid in lifetime earnings – they are annuities.
Annuities are useful. They allow families to convert lump sums into lifetime earnings. Yet, as an economist at the new school, Anthony Webb supports, while annuities are attractive in theory – people like their social security and defined benefit plans– few households actually buy annuities. One reason is that people think that they will die sooner than expected by the actuarial tables. But this behavioral bias is less important than the simple fact that voluntary and private annuities are not good business.
Annuities are a bad deal, not because of the rapacious profits of insurance companies – that's part of the problem – but because people who volunteer to buy annuities run a higher risk of living a long time. Insurance companies know that only healthy retirees are likely to buy annuities. They must therefore apply prices reflecting the low mortality rate of those who actually buy their product. The exorbitant prices of annuities and other insurance products – think of individual health plans – are the result of what the industry calls Opposing selection.
Thaler & nbsp; wants to address this problem by allowing pensioners to buy mainly annuities through Social Security. It suggests that savers could spend between $ 100,000 and $ 250,000 of their 401 (k) wealth or ARI on government annuities, whose prices would reflect a fairer actuarial value – not the lower mortality of people who are currently buying annuities, but the higher mortality rate of the population as a whole.
Like Thaler has explained& nbsp; Thursday"I'd much rather do that than let the Mississippi insurance company come up with a private version of the same thing."
Thaler's proposal poses three problems, which are fatal. First, we think this proposal would do little to encourage rent-to-income transformation. Secondly, it would weaken the trust fund of social security. Finally, it would favor high-income people at the expense of low wages.
To answer the first point, Thaler's proposal would have very little effect on behavioral biases against annuity conversion. All that could happen is that people who are currently buying annuities from insurance companies would buy them now at the Social Security Administration.
But, as insurance companies have found over the years, the death rate of annuity buyers is below average. Thus, the Social Security Administration would suffer a loss if it fixed these annuities according to the average mortality of the population. The loss resulting from the adverse selection would ultimately be borne by the trust fund. The winners would be the rich who are currently buying annuities from insurance companies and would get better prices from the Social Security Administration in the future.
At the New School for Social Research Retirement Equity Lab, we have a better way to increase lifetime income during retirement: Social security catch-up contributions. This plan would not harm the finances of social security and its benefits would not primarily benefit the rich. The catch-up plan represents a better way to get more social security pensions.
Here's an overview of the plan: At age 50, workers would be paid catch-up contributions of 3.1% of salary, a 50% increase in current employee contributions. Participants would receive a 50% bonus in their contribution file, so that a worker earning $ 50,000 would be credited with a $ 75,000 contribution.
The catch-up plan has two good results. First, the proposal uses the power of default values to get widespread participation – more a jostling than a & nbsp;nudge. It also uses the progressivity of the social security benefit formula to protect against adverse selection. Although our calculations show that catch-up contributions would be attractive for high earners, & nbsp; the rich would benefit from a lower rate of return on contributions than low income because of the progressive nature of the Social Security formula.
We hope that Richard Thaler will be able to formalize his idea and accept the catch-up proposal. On one crucial point, at least, we are on the same page: strengthening and expanding the popular and effective social security system.
–
* High-income families have lower mortality rates than lower-income groups. Therefore, adverse selection on the basis of mortality will be offset by lower returns from the higher income incomes of the companies that will receive the contribution.
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Nobel laureate economist Richard Thaler caused a sensation on Thursday Brookings Institution, slamming 401 (k) s and promoting social security. It was a bit surprising given Thaler's conservative trend. He proposed that the Social Security Administration launch into the annuity business by allowing retirees to use some of their retirement savings in their Social Security balances to increase their monthly payments.
Thaler wants to solve a problem that all Americans face with the 401 (k) and IRA plan balances. How do you take $ 92,000 – the median level of holdings for workers approaching the age of retirement and make it last a lifetime? How to avoid surviving your money? This is not a problem for social security or a defined benefit plan because they are paid in lifetime earnings – they are annuities.
Annuities are useful. They allow families to convert lump sums into lifetime earnings. Yet, as an economist at the new school, Anthony Webb supports, while annuities are attractive in theory – people like their social security and defined benefit plans– few households actually buy annuities. One reason is that people think that they will die sooner than expected by the actuarial tables. But this behavioral bias is less important than the simple fact that voluntary and private annuities are not good business.
Annuities are a bad deal, not because of the rapacious profits of insurance companies – that's part of the problem – but because people who volunteer to buy annuities run a higher risk of living a long time. Insurance companies know that only healthy retirees are likely to buy annuities. They must therefore apply prices reflecting the low mortality rate of those who actually buy their product. The exorbitant prices of annuities and other insurance products – think of individual health plans – are the result of what the industry calls Opposing selection.
Thaler wants to address this problem by allowing retirees to essentially buy annuities through Social Security. It suggests that savers could spend between $ 100,000 and $ 250,000 of their 401 (k) wealth or ARI on government annuities, whose prices would reflect a fairer actuarial value – not the lower mortality of people who are currently buying annuities, but the higher mortality rate of the population as a whole.
Like Thaler explained on Thursday"I'd much rather do that than let the Mississippi insurance company come up with a private version of the same thing."
Thaler's proposal poses three problems, which are fatal. First, we think this proposal would do little to encourage rent-to-income transformation. Secondly, it would weaken the trust fund of social security. Finally, it would favor high-income people at the expense of low wages.
To answer the first point, Thaler's proposal would have very little effect on behavioral biases against annuity conversion. All that could happen is that people who are currently buying annuities from insurance companies would buy them now at the Social Security Administration.
But, as insurance companies have found over the years, the death rate of annuity buyers is below average. The Social Security Administration would therefore suffer a loss if it fixed these annuities according to the average mortality of the population. The loss resulting from the adverse selection would ultimately be borne by the trust fund. The winners would be the rich who are currently buying annuities from insurance companies and would get better prices from the Social Security Administration in the future.
At the New School for Social Research Retirement Equity Lab, we have a better way to increase lifetime income during retirement: Social security catch-up contributions. This plan would not harm the finances of social security and its benefits would not primarily benefit the rich. The catch-up plan represents a better way to get more social security pensions.
Here's an overview of the plan: At age 50, workers would be paid catch-up contributions of 3.1% of salary, a 50% increase in current employee contributions. Participants would receive a 50% bonus in their contribution file, so that a worker earning $ 50,000 would be credited with a $ 75,000 contribution.
The catch-up plan has two good results. First, the proposal uses the power of default values to get extended participation – more a boost than a boost. It also uses the progressivity of the social security benefit formula to protect against adverse selection. Although our calculations show that catch-up contributions would be attractive to high earners, the rich would benefit from a lower rate of return on contributions than low income because of the progressive nature of the formula for calculating pension benefits. social Security *.
We hope that Richard Thaler will be able to formalize his idea and accept the catch-up proposal. On one crucial point, at least, we are on the same page: strengthening and expanding the popular and effective social security system.
–
* High-income families have lower mortality rates than lower-income groups. Therefore, adverse selection on the basis of mortality will be offset by lower returns from the higher income incomes of the companies that will receive the contribution.
