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Defined Contribution

Thaler proposes workers direct some 401(k) dollars to Social Security

Nobel laureate Richard Thaler

Nobel laureate Richard Thaler has proposed a plan for helping workers draw down retirement savings: Give a portion of their 401(k) balances to the Social Security Administration and have the agency recalculate their monthly benefits.

"All the math has already been done," he said Thursday at a conference sponsored by the Brookings Institution.

Mr. Thaler, a professor of behavioral science and economics at the University of Chicago's Booth School of Business, explained that actuaries at the Social Security Administration have calculated how to adjust workers' benefits based on the age they file for benefits and could easily make additional adjustments.

He proposes that workers upon retirement be allowed to send the Social Security Administration their 401(k) savings up to a cap of $100,000 to $250,000.

"$100,000 actually would do a lot," he said.

Mr. Thaler, winner of the 2017 Nobel Prize for his contributions to behavioral economics, said that workers, in effect, would get a price-adjusted indexed annuity that's guaranteed by the federal government.

"No one in the private sector is prepared to do either of those things," he said. "As far as I know, there are no indexed annuities and certainly none guaranteed by the government."

Mr. Thaler recommends that employers set up a default that would take a percentage of participants' accumulated assets and deposit it into the Social Security Administration.

Mr. Thaler was particularly concerned about middle-income Americans making $50,000 to $100,000 who, while "not at the bottom" of the economic scale, "haven't accumulated a big nest egg."

The Brookings conference addressed the problem of how to help workers figure out how to spend down retirement savings without knowing how long they will live.

"No one knows that they are at high risk to live to 100," Mr. Thaler said. "You have to worry about getting unlucky and living to 100."

The risk of living long would hurt insurers, too. If life expectancies were to increase by five years as the result of finding a cure for cancer or heart disease, all insurance companies selling annuities would "go broke," Mr. Thaler said.

In comments from other speakers, Phyllis Borzi, former assistant secretary for the Department of Labor's Employee Benefits Security Administration, used the forum to criticize the safe harbor that Congress is considering to protect plan sponsors were they to offer annuities in defined contribution plans.

Both the Setting Every Community up for Retirement Enhancement Act of 2019 and the Retirement Enhancement Savings Act contain safe harbors.

"I wouldn't call it a safe harbor," she said. "I would just call it a ratification for any insurance company or any insurance product that isn't a bottom dweller in the marketplace."

Ms. Borzi said the safe harbor allows plan sponsors to offer "almost anything unless the insurance company is under investigation by the state insurance department."

While Ms. Borzi agreed that plan sponsors need a safe harbor, she said the current legislation needs to focus more on the financial solvency of annuity providers.

"We need some sort of financial strength test," she said. The safe harbor needs to incorporate metrics of financial solvency that are publicly available, so it "doesn't take the plan sponsor a lot of time and effort and money to be able to identify the strongest companies in the marketplace," she said.

"The point of the safe harbor is to narrow down the due diligence decision," Ms. Borzi said, "not to let every product in the marketplace through the safe harbor."