By James W. Russell

Democrats, looking forward to possible Congressional and White House victories in 2020, have embraced expanding Social Security after years of defensively fending off privatization and cutback threats. The Social Security 2100 Act, with 209 co-sponsors, is waiting in the wings. It would make needed revenue increases, including raising the cap on labor income taxed, to stabilize Social Security’s finances for seventy-five years. It would also mildly expand benefits.

On the campaign trail, all of the Democratic Party candidates have addressed Social Security. Elizabeth Warren has proposed going beyond the Social Security 2100 bill by adding a tax to investment income, which is a bigger portion of the income of the rich than labor income.

What’s missing, though, from the Democratic proposals is a way for people to use their 401(k), IRA, and other retirement savings to increase their Social Security benefits.

The rule of thumb among retirement experts is that retirees need seventy percent of their final preretirement income to maintain their standards of living. Social Security, everyone agrees, comes nowhere near replacing that amount for the vast majority. Social Security studies tell us that it replaces forty-one percent of the average person’s income.

But note well: this is replacement of the average career, not final earnings. Social Security calculates average earnings, factoring in inflation, over the highest thirty-five earning years and bases retirement incomes on that average.

For many people—but not all—average career incomes approximate their final earnings. If you’ve always been a low or medium or high earner, the two are close.

But what if your work career started out with minimum wage jobs and then you worked your way up to average- or high-income salaries? All of those low earning years will pull down your career average earnings to much lower than your final earning. If you make it up to an average salary in your final year, instead of having forty-one percent of it replaced, you will have just thirty-one percent replaced. If you make it up to high income, instead of thirty-four percent, only twenty-five percent will be replaced.

Meanwhile, you probably saved money in your higher earning years through 401(k), IRAs, and other retirement savings plans. Can you use those savings to compensate for your lowered Social Security benefit?

Yes, sort of. You could use them to purchase a commercial annuity or continue to invest them while making periodic withdrawals. But commercial annuities are very expensive, and investing always carries risks that you might not want to have to manage and bear during your elderly years.

What if there were a way, instead, to voluntarily roll over some or all of your savings to Social Security to purchase earnings credits to compensate for your low earnings years? Consider the person who starts at a minimum-wage job and ends with an average high-paying job. Using the way that Social Security calculates retirement benefits, for a cost of $130,970 in savings rolled over to Social Security, she could increase her initial yearly benefit from $20,328 to $28,147, a benefit that would rise each year with cost-of-living adjustments. That investment would have a yearly payout of 6.0 percent, compared to the average commercial annuity payout of 4.6 percent for men and 4.3 percent for women—who receive less because they live longer on average. Social Security pays men and women with the same earnings histories the same.

This is only the beginning of possibilities if people were allowed to use Social Security to transform their retirement savings into increased life incomes. Another possibility would be to purchase life annuities from Social Security. That was in the original 1934 draft legislation and has been endorsed by Nobel Prize economist James Thaler. They could also use their savings to defer taking their Social Security benefits to older years when they would be higher.

Right now, most people approaching retirement have savings from token to substantial amounts. What they don’t have are very good ways to use those savings to finance their retirement years. Social Security could resolve that problem if were opened up to voluntary rollovers of part or all of those savings in return for higher benefits.

About the Author 

James W. Russell is the author of Social Insecurity: 401(k)s and the Retirement Crisis. An authority on retirement policy in the United States, Europe, and Latin America, he led one of the first employee movements to successfully challenge the dominant trend and replace a 401(k)-like plan with a more secure traditional pension plan. He has taught at universities in the United States and as a Fulbright professor in Mexico and the Czech Republic. He currently teaches Public Policy at Portland State University.