The average middle class earner will get about $20,000 from Social Security — not a lot to live on.
But it could be better. Martin Feldstein:
…The leading Medicare reform plan is a bipartisan initiative proposed initially by House Budget Committee Chairman Paul Ryan (R., Wis.) and Alice Rivlin, a leading Democrat and former head of the Congressional Budget Office. The Rivlin-Ryan plan would change Medicare to a system in which future seniors would receive a voucher with which to buy private health insurance. The value of the voucher would rise over time more slowly than the currently projected Medicare cost per enrollee, implying that many seniors would want to pay extra to buy more comprehensive insurance than the vouchers would finance.
Mr. Ryan included this plan in his House Budget Resolution last month. A recent New York Times survey found that more Americans approve of it than disapprove. Mr. Obama opposes this approach. He proposes instead that future Medicare costs should be reduced by administrative controls, effectively limiting what Medicare will pay for in the future. Either way, future retirees will want more income to pay for additional health-care spending.
The challenge is how to assure that future retirees have accumulated adequate investment-based accounts to supplement Social Security and Medicare. Experience in a wide range of companies shows that a voluntary system can work if employees are automatically enrolled to have payroll deductions deposited into such accounts. Even though employees have the option to stop depositing, they do not do so. Inertia is a powerful force.
Applying this to the entire population requires a method of dealing with individuals who work in small firms, who change jobs frequently, who have multiple jobs, or who are self-employed. An employer-based plan is therefore less practical than one based on the individual.
Here’s how such a system might work. Each individual would designate a broad-based mutual fund from a large list of funds approved by the government. The designation could be done on the individual’s annual tax return and could be changed once a year. Employers and the self-employed would send an additional few percent of wages to the Social Security Administration each month in addition to the current payroll tax. The Social Security Administration would then forward those dollars to the mutual fund chosen by the individual. The returns on those funds would be untaxed just as they are in an IRA or 401(k).
With a 3% payroll deduction, someone with $50,000 of real annual earnings during his working years could accumulate enough to fund an annual payout of about $22,000 after age 67, essentially doubling the current Social Security benefit. That assumes a real rate of return of 5.5%, less than the historic average return on a balanced portfolio of stock and bond mutual funds. Someone who was extremely risk averse could instead choose to put all of his personal retirement account into Treasury Inflation Protected Securities, accumulating enough with a 5% savings rate for an annual payout of about $13,000. Different combinations of savings rates and investment strategies would produce different expected benefits in retirement.
The automatic extra payroll deduction could start with a less disruptive 1% or 2% and grow as high as 5%. Since every individual would have the option of requesting a refund of that payroll deduction on the following year’s income-tax form, the extra saving is strictly voluntary. It is not a tax. And the good news is that experience shows that individuals who are automatically enrolled in such savings plans do not withdraw their funds but leave them to grow.