The Impact of a Social Security Proposal for "Catch-Up" Contributions

Social Security “Catch-Up contributions would allow workers to contribute an additional 3.1 percent of salary, starting at age 50, in return for enhanced benefits. The program builds on the progressivity of the existing Social Security benefit formula. We construct an intertemporal optimization model, incorporating the interaction between retired worker, spousal, and survivor benefits, and show that for plausible rates of return on financial assets, coefficients of risk aversion, and mortality assumptions, even high lifetime earners would benefit from participation. Thus, the analysis speaks to the debate as to whether the Social Security actuarial shortfall should be bridged by benefit cuts or tax increases. We argue that in in contrast to proposals to allow workers to purchase additional Social Security benefits with 401k plan balances, the program would be unlikely to suffer from adverse selection. The program would reduce the Social Security actuarial shortfall in the short run and be approximately actuarially neutral over the long run. The program would not solve the retirement saving crisis, but would modestly reduce poverty and near poverty. Social Security “Catch-Up†contributions would allow American workers to increase their Social Security benefits starting age 50. Simulations of the program show that households at all income levels would benefit from a 3.1 percent extra contribution to Social Security. Under several simulated conditions, people would have to contribute much more to 401(k), IRAs, with or without annuitization to get the equivalent benefit. Advance-funded employer plans are still needed to get adequate replacement rates. The “Catch Up†proposal won an AARP innovation grant, could be implemented today, making all older workers better off and without making Social Security funding worse. We are encouraged by widespread popular support for Social Security.