Thaler pushing retirement income idea

Sometimes the best way to get at a big problem is to start small.

That was Nobel laureate Richard H. Thaler's thinking when he proposed letting workers send a portion of their retirement savings to the Social Security Administration to have the money annuitized and then added to their monthly benefit.

The "one little step" could go a long way toward helping retirees solve the problem of how to make sure they don't outlive their savings, Mr. Thaler, a professor of behavioral science and economics at the University of Chicago's Booth School of Business, said in a telephone interview.

As Mr. Thaler envisions it, workers upon retirement or at any point up to age 70 would have the option of sending their 401(k) savings up to a cap of, say, $100,000 to $150,000 to the Social Security Administration for annuitization.

"It's not aimed to be a solution to all the retirement income problems," he said. "It's meant to be something that we could easily do without constructing any new securities or any new bureaucracies."

The idea has reverberated throughout the retirement plan industry, drawing enthusiastic support in some circles and derision in others. Fans of the plan say it's simple and straightforward and would help and protect the people most in need of a guaranteed income. Skeptics of the plan, on the other hand, contend that because it's optional, it wouldn't accomplish much as workers are unlikely to buy an annuity no matter where it's from. Critics also point to Social Security's financial woes, questioning the agency's ability to honor future annuity payments.

When introducing his idea at a Brookings Institution event this month in Washington, Mr. Thaler emphasized the strengths of using Social Security to annuitize workers' savings. One of the advantages is that retirees would receive price-adjusted indexed annuities guaranteed by the federal government at what economists call "fair actuarial value." In other words, retirees would get a good deal, better than anything they would get in the marketplace.

"I would much rather do this than have the fly-by-night insurance company in Mississippi offering some private version of the same thing," Mr. Thaler said at the Brookings Institution event.

Another advantage of the plan is that administrative costs would be quite small as the Social Security Administration has all the infrastructure in place. The agency would continue to send or deposit monthly checks without having to collect additional bank account and other information.

"It could all be done pretty simply," Mr. Thaler said.

Alicia Munnell, director for the Center of Retirement Research at Boston College, applauded the idea, saying it makes sense to have a government agency provide these annuities. "This would allow people to get inflation-adjusted annuities at a fair price and they wouldn't have to worry about the safety of the insurance company," she said.

Hamilton E. "Tony" James, executive vice chairman at The Blackstone Group LP in New York, was also supportive. In 2016, he co-authored a book in which he proposed a similar idea. Both he and his co-author — Teresa Ghilarducci, an economist and director of The Schwartz Center for Economic Policy Analysis at the New School for Social Research in New York — suggested using Social Security to annuitize retirement savings, but unlike Mr. Thaler, they recommended requiring everyone to annuitize a minimum of 75% of their account balances.

"I'm all for it and it's consistent with the plan we have out there," Mr. James said of Mr. Thaler's plan.

Mr. Thaler said he opted for a low cap on the purchase of annuities through Social Security to assure annuity providers that this "isn't a government takeover." His plan "would still allow the insurance industry to sell larger annuities that offer some possibility of a profit margin," Mr. Thaler said.

Ms. Ghilarducci, in contrast to her co-author, opposes Mr. Thaler's plan, saying that it would do little to encourage annuitization. People don't generally like annuities and would likely not purchase them even through Social Security, she said.

The proposal also fails to address the problem that economists refer to as adverse selection. People who do buy annuities are those who are most likely to live long, a fact that insurance companies factor into their pricing. Knowing that healthy older workers are likely to buy annuities, they charge prices that reflect the low mortality rates of those who actually buy their product and not the higher mortality rate of the population as a whole, Ms. Ghilarducci said.

If Social Security were to provide annuities at their fair actuarial value, meaning they would reflect the higher mortality of the general population, it would lose money and that loss would ultimately be borne by the Social Security Trust Fund, according to Ms. Ghilarducci.

"I think it's an unintended consequence of Thaler's plan that it would raise costs for Social Security," she said.

Several industry observers voiced concerns about the future solvency of Social Security, arguing it could put workers' annuities at risk of getting a haircut. Olivia Mitchell, a professor of business economics and public policy and executive director of the Pension Research Council at the University of Pennsylvania's Wharton School in Philadelphia, for example, worried about recent projections showing that Social Security trust funds would run out of money in 2035 unless Congress acted to shore up the funds.

"Would you like to put $100,000 of your money into an institution that's $43 trillion underfunded? I think that a lot of people would have severe concerns about that," Ms. Mitchell said.

James B. Lockhart, III, a senior fellow at the Bipartisan Policy Center in Washington, D.C., was concerned about more than potential cuts to Social Security. He also questioned whether Social Security had sufficient investment know-how, saying that the agency's expertise was limited to Treasury bonds.

"It may not be the best long-term solution for some people given that Treasuries are still very low interest rates," he said.

While Mr. Lockhart liked the idea of people buying annuities, he wasn't sure "whether Social Security is the right vehicle or not."

The insurance industry was especially critical of Mr. Thaler's plan. Jack Dolan, a spokesman for the trade group American Council of Life Insurers, said that annuities provided by life insurers in the private sector are "backed by guarantees supported by company reserves and required by a strictly regulated state-based system."

"It is a highly preferable arrangement than asking workers to invest their hard-earned retirement savings into the financially strapped Social Security system, a pay-as-you-go program slated for insolvency in 2035," he said in an email.

Others took an opposite view of Social Security, arguing that its funding issues can be fixed.

"I think it's a mistake to conflate this with Social Security itself," said Blackstone's Mr. James. "The funding for Social Security may run out, but it's a very, very popular program in America, so I think Congress will find a way to keep the funding there."

Mr. Thaler agreed, saying that Social Security is a "solvable problem" with known fixes.

"We are not going to let Social Security go belly up," he said. "Congress never passes any laws that could adversely affect Congress people."