Expert advocates using 401(k) savings to fatten Social Security checks

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Nobel laureate Richard Thaler has put forward a new idea to allow individuals to use their 401(k) savings to increase their Social Security benefits.

Thaler, a behavioral economist and professor at the University of Chicago Booth School of Business, discussed the idea at an event hosted by the Brookings Institution, a non-profit public policy organization, last week.

According to Thaler, retirement savers face two problems when it comes to managing their money: how to effectively save for their golden years, and then how to make that pot of money last for the rest of their lives.

“You have to worry about getting unlucky and living to 100,” Thaler said.

That retirement income problem is amplified by a cultural change for today’s retirees. While previous generations entered retirement with their mortgages paid off, today’s retirees typically have high debts and insufficient savings, Thaler said.

That’s where Thaler said his new idea regarding Social Security benefits would come in.

The plan would let you take a portion of your 401(k) benefits — say, $100,000 or up to $250,000 — and send it to the Social Security Administration.

What you would get in return would be the only indexed annuity that’s guaranteed by the federal government at a fair actuarial value, Thaler said.

“This may seem like a wild and crazy idea, but actually all the math has already been done by the Social Security Administration,” Thaler said.

That is because the system already adjusts your benefits for your age, for each year you work and the income you take in while receiving benefits, he said.

But Social Security experts do not necessarily think the plan is that simple.

Boston University economics professor Laurence Kotlikoff said he thinks Thaler’s plan is “dicey” and worries how it would impact the future of Social Security.

As it stands, Social Security will only be able fund about 80% of promised benefits by 2035, provided Congress does not intervene, it was announced on Monday.

Adding such a plan to the system could further strain it, said Kotlikoff, who also provides Social Security and retirement planning tools through his company, Economic Security Planning.

That is because people who know they are healthy and likely to live a long time would be more likely to opt in, which would be more costly.

“In general, the Achilles’ heel of social insurance programs is once you get everyone in on the same boat, you get problems,” Kotlikoff said.

But there is room for a solution, Kotlikoff said. “But it has to be done carefully so Social Security doesn’t lose money,” he said.

By forcing everyone to put $50,000 to $100,000 of their 401(k) funds in a Social Security annuity that’s actuarially fair, that would avoid adverse selection and get everyone in the same pool, Kotlikoff said.

“With that caveat, I do like this plan,” Kotlikoff said. “It has to be compulsory and everybody has to be bought in.”

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Joe Elsasser, president and founder of Covisum, a provider of Social Security claiming software, also said the plan needs to account for longer life spans and adverse selection. Otherwise, “it could easily end up being the thing that accelerates Social Security benefit cuts or political backlash,” Elsasser said.

One important point for individuals to remember: You can already use your retirement funds to increase your Social Security benefits.

“The easy way to ‘buy more’ Social Security today is to use one’s own IRA money to finance your retirement while delaying Social Security benefits,” Elsasser said.

By doing that, you can dramatically boost the size of your benefits.

At full retirement age — 66 or 67 for most, depending on the year of your birth — you can get 100% of your retirement benefit. But by waiting until age 70, you can get a 32% bigger check.

Yet, fewer than 10% of people delay claiming beyond full retirement age, Elsasser said. Most opt to start receiving checks as early as possible — either at 62 or when the earnings test is no longer relevant, he said.

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