Retirement Policy Wonks Pitch New Pre-Social Security Accounts

Proposed pre-Social Security accounts would aim to help those retiring early. (Photo: Shutterstock)

A new proposal from three prominent retirement economists would mandate contributions to new savings accounts to offset the impact of filing early for Social Security benefits.

Supplemental Transition Accounts for Retirement would impose a 2 percent payroll tax increase to fund add-on savings accounts that would have to be exhausted before workers can file for Social Security.

Under existing filing options, the most popular age for drawing Social Security benefits is 62—the earliest possible filing age. Data from the Center for Retirement Research at Boston College shows 42 percent of men and 48 percent of women file at age 62. Only 2 percent of men and 4 percent of women maximize monthly benefits by waiting until age 70 to file.

That trend has a considerable impact on monthly checks from Social Security. Workers born before 1954, who have a full retirement age of 66, see their benefits reduced by 25 percent a month when they file early at age 62, according to the Social Security Administration. Workers with a full retirement age after 66 see their benefits reduced up to 30 percent when they file at 62.

Under the proposed START accounts, beneficiaries would have the option of drawing down the accounts at the earliest eligibility age for Social Security. Benefits would be based on what they would have otherwise received under current claiming rules.

“STARTs would mitigate the effects of actuarial reductions for claiming early and could allow workers to gain additional monthly Social Security benefits through delayed retirement credits,” according to a paper published from economists at the AARP, Mercatus Center at George Mason University, and the Brookings Institute.

The 2 percent increase in payroll taxes would be split between employers and workers, while the self-employed would fund the full amount. The cap on the tax would be $127,000, the same as the current cap on Social Security’s payroll tax. Employees’ share would be made on and after-tax basis; employer contributions would be made pretax.

Potential windfall for private sector money managers

Under the program, the government would pitch in another 1 percent for low-income workers.

That cost would be more than offset by taxes on distributions from START accounts, according to modeling by the Urban Institute. The rest of the new revenue would be credited to Social Security’s trust funds, reducing the programs’ long-term deficit by 12 percent.