With the report last week that the Social Security Administration’s Old-Age and Survivors Insurance Trust Fund will become insolvent in 2033, a year earlier than projected last year, a few notable reforms to the social insurance program have been proposed this Congress to try to address the problem.
The Social Security Expansion Act, sponsored by Senators Bernie Sanders, I-Vermont, and Elizabeth Warren, D-Massachusetts, would create a special investment tax of 12.4% for individuals with $200,000 or more in income and tie Social Security to the Consumer Price Index -E, a measure of inflation that is weighted for the spending habits of the elderly. Lastly, it would increase the Special Minimum Benefit to 125% of the poverty line. The chief actuary for the trust fund estimates this would keep Social Security solvent until 2096.
A second bill, proposed by Senators Susan Collins, R-Maine, and Sherrod Brown, D-Ohio, called the Social Security Fairness Act, would repeal the Government Pension Offset and the Windfall Elimination Provision, provisions passed in 1979 and 1983, respectively, which reduce Social Security benefits for some workers receiving a public sector pension.
Social Security solvency decreased last year primarily due to inflation, which was higher than expected, and caused an 8.7% CPI adjustment to benefits, when only a 3.8% adjustment had been projected.
Andrew Biggs, a senior fellow at the American Enterprise Institute, remarked that the reforms made to Social Security in 1983 are minor compared to the ones that would need to be made today and also said many of the “easier options” have already been taken, when speaking at a panel hosted by the Committee for a Responsible Federal Budget on Tuesday.
The 1983 reforms included the windfall provision (which the Social Security Fairness Act would repeal), making some Social Security benefits taxable income and increasing the full retirement age from 65 to its present level of 67 over a 22-year period.
Going beyond the proposed bills, Biggs recommends capping the maximum benefit, now approximately $43,000. He says this is not “a real fix” but would help plug the gap without compromising retirement security.
Biggs also cautioned against various means-testing fixes, like removing the cap on income subject to Social Security payroll taxes, without also increasing program benefits to high earners. He said that because those changes could cause Social Security to be perceived as unfairly favoring people with fewer resources, or as a “welfare” program, which could reduce political support for it.
The CRFB offers an online calculator that allows people to plug in various possible Social Security reforms to try to fix the program. Some of these reforms include more common proposals such as raising taxes, reducing benefits on high earners and increasing the retirement age. It also includes some more esoteric ones, such as indexing the retirement age to longevity and reducing CPI calculations.
As things currently stand, after the OASI becomes insolvent, benefits will be paid out on a cash-flow basis and would be reduced to approximately 77% of what they would be if the fund were solvent. Those who are currently 57 would be at full retirement age just as this happens, and this would significantly decrease the retirement security and complicate the retirement planning for many.
Additionally, since Social Security benefit payments would be directly tied to cash inflows, a recession or other increase in unemployment could trigger a sudden further decrease in payments. This could have the effect of further reducing consumer spending by Social Security recipients as their income drops, which could deepen and prolong a recession occurring after Social Security became insolvent.
The Social Security Trust Fund Report strongly recommended that any reforms to Social Security be made sooner rather than later. The report noted that any large changes would take time for the trustees to implement and for recipients to learn about and adjust to. It also explained that increases to taxes and/or reductions in benefits would be less painful if done quickly, because those revenue-balance changes would be in place for longer. Put another way, changes made closer to the insolvency date would have to be more dramatic than any changes that can be made today.
The Maryland Small Business Retirement Savings Program, commonly known as MarylandSaves, is Maryland’s state-managed IRA program which launched in September 2022. The program offers a simple retirement option for small businesses that might be deterred by the cost of creating a 401(k) plan for their employees.
Signing up is supposed to be as easy as possible, “a 15-minute deal”, says Josh Gotbaum, the chair of the Maryland Small Business Retirement Savings Board and a guest scholar at the Brookings Institution, and lot of effort went into making that so. Employers share their payroll information with MarylandSaves, which handles the rest.
Glenn Simmons, CEO and executive director of MarylandSaves, explains that the plan is very similar to a Roth IRA. Annual contributions are limited to $6,500 per year, and the contributions are made after taxes.
Simmons says he and his staff are concerned about this relatively small annual savings limit but notes that many of the participants are lower-income and are thus unlikely to be encumbered by the limit. He also says that the goal was to “start with what we can,” and it was essential to prioritize getting the program launched, enroll participants quickly, and then figure out items like contribution limits later.
How It Works
After an employer registers, MarylandSaves contacts the employee “at least three times” over the course of the next 30 days and automatically enrolls the employee in the plan, contributing 5% of salary if they do not respond. Participants can opt out or change their contributions at any time.
Gotbaum explains that MarylandSaves takes sponsorship responsibilities away from the employer. Instead, employers give Maryland their payroll information and, assuming the employee does not opt out, the state processes the payroll deduction. According to Kathleen Kennedy Townsend, an adviser to the U.S. Secretary of Labor, former board member of MarylandSaves and former Maryland lieutenant governor, employers are not allowed to offer a match on these contributions.
Townsend explains that small businesses often struggle more than larger companies to offer a retirement plan and suffer economically for it, because it makes it harder to hire and retain talented employees.
Of all the states that currently have an auto-IRA program, Maryland is the only one that uses an incentive, rather than a penalty, to encourage enrollment. Maryland has a $300 annual business report filing fee, but if an employer already has a sponsored retirement plan or joins MarylandSaves, the fee is waived. Only businesses that have existed for two years are longer are subject to this requirement.
This feature of MarylandSaves comes from the unique political circumstances in which the related legislation was passed. Gotbaum explains that the early stages of MarylandSaves were negotiated when Martin O’Malley, a Democrat, was governor, with both legislative houses controlled by Democrats.
How It Started
When Larry Hogan, a Republican, became governor in 2015, the negotiations to establish MarylandSaves changed because in Maryland, as in many states, an auto-IRA is much more popular with Democrats than with Republicans. Waiving the filing fee, which Hogan had wanted to remove in any case, was one concession made to Republicans who opposed a mandate or a penalty.
Gotbaum also explains that financial advisers have opposed state programs of this kind because of the concern they might lose out on potential clients, “even though this was business that nobody had yet.”
One such skeptic was Andy Serafini, a Maryland state senator from 2015 to 2020 and the highest-ranking Republican on the Maryland Budget and Taxation Committee at the time. He is now a senior vice president and financial adviser at Wealth Enhancement Group.
Serafini explains that he initially opposed the legislation that would create MarylandSaves. He insisted that the incentive to join the program be a “carrot” instead of a “stick” and was averse to placing a mandate on small businesses. Waiving the $300 filing fee became the answer to that objection.
Townsend and Gotbaum are not sure if waiving the fee will be as effective penalizing employers that do not offer retirement savings options. Maryland is the only state with an IRA program that incentivizes participation in this way, so its results could impact future policies in other states.
Serafini said that financial advisers and the insurance industry strongly opposed the program, but he understood that something like it would pass eventually and that it could help Maryland’s retirement security. He also noted it could help address the employee recruitment-and-retention issues that small businesses in the state have as a consequence of not having a retirement plan.
He proposed that the program should have investment options other than a default target-date fund so that advisers could still advise clients on how to invest, potentially bringing them some advisory business. MarylandSaves now offers a standard investment option, with an emergency savings fund for up the first $1,000 of contributions and a target-date fund for further contributions, and a self-directed option that includes the standard options, plus a bond index fund and a global growth stock fund option.
Serafini’s main negotiating partner was a Democrat on the Budget and Taxation Committee at the same time, State Senator Jim Rosapepe, who is also a member of MarylandSaves’ Board. Gotbaum goes so far as to say the bill was primarily negotiated between the two.
Rosapepe confirms that “some of the private pension folks did not want competition.” The initial proposal also had a penalty for non-compliance which was opposed by many Republicans. The compromise was to remove the $300 filing fee, and 2023 is the first year in which covered businesses will be exempt.
Serafini also objected to the government picking investments itself. As a result, according to Gotbaum, MarylandSaves was set up as a nonprofit governed by the Maryland Small Business Retirement Savings Board, which is a fiduciary. The investments are selected by the board of financial professionals that includes Gotbaum, a former head of the U.S. Pension Benefit Guaranty Corp., and Phyllis C. Borzi, who was the assistant U.S. secretary of labor of the Employee Benefits Security Administration until 2017.
The program is chaired by Gotbaum, and the State Treasurer Dereck E. Davis and Secretary of Labor Portia Wu serve as ex-oficio members. Nine delegates also serve on the board, three appointed by each of the governor, the Maryland House of Delegates and the Maryland Senate.
The legislation that created the Maryland Small Business Retirement Savings Program passed the Maryland Senate unanimously in 2016, and Hogan agreed to fund the program’s startup costs.
How It’s Going
According to Simmons, MarylandSaves had about 1,700 registered employers participating and about 2,400 savers, as of March 28. The average monthly contribution is $167, and the average account balance is $392. Simmons says the program should cross $1 million in assets under management by mid-April.
Simmons says the primary obstacle to enrollment is a lack of awareness of the program. Many small businesses, and even other government institutions in Maryland, do not yet know about the program. Funding for marketing will be an important priority going forward, according to Simmons.
MarylandSaves also permits gig workers and the self-employed to enroll. Simmons explains that an Uber driver can connect their checking account to MarylandSaves and set up automatic payments with a minimum contribution of $5 a month.
Investment Options
MarylandSaves wanted to keep investment options simple, says Simmons, and therefore opted to keep options few. For emergency savings, the program uses an insurance product from Lincoln National Life Insurance Co. that has a guaranteed return of 1%.
The first $1,000 a participant puts into the plan is put into an emergency savings account. Townsend explains that the IRA does not have an early withdrawal penalty, so the from the IRA itself. The ESA is “for” emergencies, but the IRA is “for” retirement, even though either could be used for both.
MarylandSaves uses the Blackrock TDF suite as its default investment, but participants can elect to shift contributions to the State Street Aggregate Bond Index Fund and/or the T. Rowe Price Global Growth Stock Fund.
Next Step: A Social Security Bridge
Simmons says the agency did consider providing annuities as part of the plan but says Townsend recommended helping participants get the most value out of “the annuity they already have,” referring to Social Security.
MarylandSaves is working to structure payments to retirees such that they are more likely to be able to postpone claiming their Social Security benefits until age 70 instead of claiming at 62, so retirees can maximize the value they receive. MarylandSaves also intends to include education and warnings to participants to inform them of their potential losses if they claim Social Security early.
Simmons emphasizes that nothing is finalized yet related to the Social Security bridge, but it is a feature at which they are looking closely and hope to implement soon.
Townsend was widely credited for pitching this idea to MarylandSaves, but she gives credit to Alicia Munnell of Boston College, who proposed the idea at a speech on state retirement programs that Townsend attended. Townsend says the Social Security bridge will be essential in helping lower-income retirees maximize their Social Security benefits, but the precise mechanics still need to be worked out.
