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Alicia Munnell: Biden’s Social Security Tax Hike Plan Falls Short

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Alicia Munnell, director of the Center for Retirement Research at Boston College, likes President Joe Biden’s proposal to fix Social Security because it doesn’t call for any benefit cuts. Overall, though, the professor gives it a grade of “incomplete.” She tells why in an interview with ThinkAdvisor.

What’s chiefly missing, she says, is that the plan would not increase Social Security payroll taxes broadly enough to pay folks full retirement benefits for the next 75 years. That is, it won’t “fully close” the shortfall the system faces since it would raise taxes only on those earning more than $400,000 a year, she argues.

While the main sticking point on how to fix Social Security has morphed from chopping benefits to adding enhancements, Munnell, professor of management sciences, thinks Biden’s proposal could do with a cutback on the enhancements side.

Earlier, Munnell served in government posts. She was on President Bill Clinton’s Council of Economic Advisers and was assistant secretary of the Treasury for economic policy from 1993 to 1995. Before that, she was senior vice president and research director at the Federal Reserve Bank of Boston.

In the interview, she forecasts, as fallout from the coronavirus pandemic, the continuing rise in workers starting their Social Security benefits early instead of waiting till full retirement age, a move that means lower payments. The same trend occurred during, and for a few years following, the Great Recession, she notes.

Co-founder and first president of the National Academy of Social Insurance, Munnell calls the financial effects of the pandemic “a splintered experience”: the booming stock market has made many investors wealthier, while lower paid young workers have been bashed economically.

But the pandemic’s impact on retirement has been slight, she contends. For a start, “there’s very little evidence” that many employees are raiding their 401(k) accounts since generally people who lost jobs have no 401(k) plans. Nor have employers reduced their contributions, she says.

ThinkAdvisor recently interviewed the professor, who was speaking by phone from the Boston area. Munnell, who has a doctorate from Harvard, holds that, as opposed to buying an annuity, deferring Social Security benefits — by relying on, for example, 401(k) assets — is “the cheapest, easiest, best way” to buy more annuitized income.

Nonetheless, she’s interested to see whether employees will be more attracted to annuities now that the Secure Act makes it easier to have one within a 401(k) account.

Here are highlights of our conversation:

THINKADVISOR: What’s your take on President Biden’s proposal for fixing Social Security?

ALICIA MUNNELL: A step in the right direction. Good ideas but incomplete. There’s nothing wrong with it. It’s just not complete. He wants to have a few benefit enhancements and to increase taxes for people earning over $400,000. But I don’t think his numbers close the full 75-year Social Security [system] shortfall.

What do you like most about his proposal?

The fact that he starts from a position of not cutting benefits. To cut back would be a mistake, given how little most people have in their 401(k) plans. But I’m not sure how hard I’d fight for enhancements.

If you were proposing a plan, what would you focus on?

I’d want to see something that restores balance for 75 years. [Biden’s proposal] needs more on the revenue side — raising taxes on the current payroll tax base to pay full benefits from now to 75 years from now — and less on the enhancements side.

Social Security reform was a highly partisan issue during the Trump administration. Do you think it will be less polarized now that we have a new president?

I would hope so. I think there won’t be as much desire to cut back as there was in the past. The whole debate has shifted. I used to be way on the progressive side by not wanting to cut Social Security. Now there are all these people on my left saying we should expand Social Security. I’m really thrilled about that because it makes my position look like a compromise.

During the pandemic, many workers started claiming Social Security early. Do you foresee more workers doing that? 

I think claiming early will [increase], as it did in the Great Recession. But the people who claim at 62 instead of at their [full] retirement age are going to have less money per year than they would have [if they waited till FRA to receive higher payments]. So they’ll be in a worse position.

What happened along these lines during the Great Recession?

The number of people claiming at 62 used to be really high, but the percent who claim their benefits immediately [upon turning 62] has been on a long-term decline. Then, in the Great Recession, it popped up, increasing from 38% to about 55%. It went up for a couple of years, held steady for a year, then started going back down.

Will that pattern be repeated because of the pandemic?

I think so. People claiming at 62 will pop up to more than 40%. Then the decline will resume. 

What are your thoughts about raising the eligibility age to start to receive full Social Security benefits?

That’s a benefit cut. People at every [claiming] age would get less. That wouldn’t be a big problem if everyone could work an additional year — [in general] I want to encourage people to work longer — but a lot of lower paid people can’t. So that would really hurt the most vulnerable.

Amid the pandemic, many investors have done extremely well in the stock market while other people have suffered financial hardship. Your thoughts?

It’s a splintered experience between those two groups. There were people really up against it. Research that we conducted [pre-pandemic] shows that 40% of households say they don’t have $400 for [an emergency]. That consists of two groups: one who really doesn’t have $400 and another 20% that think they don’t have $400 because they [have] credit card bills [and outstanding loans]. When you net out those two, you get back to the 40%. COVID has really hurt a huge group — the younger, lower paid workers.

There have been reports that during the pandemic, many people have taken money from their 401(k) accounts to live on. How widespread has that been?

Generally, the people who have 401(k)s aren’t those who have lost their jobs. There’s very little evidence that money is been pulled out of 401(k)s. I’m not saying that no one in America has pulled out money. But basically money isn’t being pulled out, even with the easier provision offered under the CARES Act. Also, there’s very little evidence that contributions by employees are down and not much evidence that employers have reduced their contributions.

Regarding retirement planning during the pandemic, have annuities played a bigger role — for those who have the money to buy them?

People would be better [off having] annuities, but they don’t buy them for a host of reasons: They don’t like giving $100,000 to the insurance company in exchange for monthly payments; they feel, “What if I get hit by a bus?”; they worry about the solvency of the insurance company. There’s been a push recently to embed annuities in 401(k) plans. It will be interesting to see if that increases the uptake.

It seems that annuity companies should come up with an approach to make people more comfortable buying annuities. Agree?

With an annuity, you’re paying $100,000 [for example]; and the insurance company is saying, “We’re going to pay you benefits for as long as you live.” So you really want to have some buffer — finding a cure for cancer and everybody starts living longer! 

What’s a good alternative to an annuity, then?

My favorite is to use your 401(k) assets to defer claiming Social Security. That’s the cheapest, easiest, best way to buy more annuitized income.

What’s your response to annuity experts who say an annuity’s strongest point is that it is  guaranteed lifetime income? 

Right. But so is Social Security. Therefore, if you can use your money to support yourself and postpone claiming Social Security, you can buy more guaranteed lifetime income.