Last April, Nobel laureate Richard Thaler, a behavioral economist at the University of Chicago, suggested that workers should be allowed to trade a portion of their tax-deferred savings for an annuity from Social Security. Essentially, the Social Security Administration should get into the annuities business as a vendor.
It shouldn’t be terribly hard to picture this scenario given that Social Security already offers a similar concept: workers can swap benefit checks until the age of 70 for bigger monthly checks once they retire. In that exchange the retiree gets fewer but larger checks for the remainder of his or her life.
While that might sound like a good idea, this feature has evolved into a money-loser for the cash-strapped program with rules that befuddle seniors and advisers alike. In the nearly four decades since this feature was last changed, Congress has allowed this aspect of Social Security to drift far from its stated purpose. It is time either to fix it, or end it.
Deferred benefit claiming was added in the early 1970s in response to the penalties imposed by the retirement earnings test (“RET”) on those workers who continued to work after filing for benefits. Lawmakers decided that seniors who postponed collecting benefits should get modestly higher checks once benefits started to flow. (The RET no longer applies to people who have reached normal retirement age.)
According to the Social Security Administration, the decision on claiming is “actuarially fair”, meaning that it makes no difference to lifetime benefits for most people whether the retiree starts benefits at 62, 66 or 70 (or somewhere in between). In the best of all worlds, the Social Security system as a whole would retain the money of foregone checks in the Social Security Trust Fund where in theory it should earn enough interest to offset the larger checks that follow. In other words, the transaction is intended to be a zero-sum game.