Highlights from ReLab's policy note include:
- Social Security is more than a financial investment. It also provides insurance against the risk of outliving one’s wealth that is valuable to low and high earners alike.
- Although higher earners receive lower financial returns on Social Security contributions, both low and high earners would benefit from Social Security expansion through revenue neutral “Catch-Up” contributions of 3.1% of earnings, starting at age 50.
- If “Catch-Up” contributions had been introduced 16 years ago, the typical worker now retiring would have received an additional $226 a month in benefits, helping to bridge the gap between retirement needs and resources.
The AARP Policy Innovation Challenge competition chose Social Security “Catch-Up” contributions as a worthy innovation. The program is close to actuarially neutral – over a 75-year time horizon, contributions slightly exceed benefits.
A potential concern is that those most in need of additional retirement income might opt out of a default. A mandate, however, would achieve universal coverage for a program that offers benefits to workers at all earnings levels, and would be within the social insurance tradition.
A contribution rate of 3.1% falls short of the amounts we calculate would maximize financial well-being, reflecting our concern that higher contribution rates might be unaffordable for some. Policy makers should consider allowing workers to contribute at a higher rate. Another potential concern is that higher earners might be more likely than lower earners to make additional contributions, exposing Social Security to adverse selection by reason of high earners’ lower mortality. But any difference in mortality would be offset by the lower rates of return earned by higher earners by virtue of the progressivity of the Social Security benefit formula.