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."