Top-Up Contributions to Social Security

Abstract

Different approaches have been studied for dealing with the life cycle problem of paying for retirement consumption. Two key aspects of this problem are saving enough for retirement during the pre-retirement period and managing the spend down of assets during the retirement period. The proposal in this article addresses both issues. This article presents a proposal for voluntary top-up contributions to Social Security. With these contributions, workers could purchase earnings credits. These purchased earnings credits would enter the calculation of Social Security benefits in exactly the same way as actual earnings credits. When workers file their federal income taxes, they could purchase earnings credits for that tax year up to the Social Security taxable maximum earnings. This approach to voluntarily increasing Social Security benefits is less susceptible to problems of adverse selection than some other approaches that have been proposed. TOPICS:Wealth management, retirement, social security Key Findings • Voluntary add-on contributions to Social Security would delay the date of insolvency by bringing new revenue into the system. • Voluntary add-on contributions to Social Security would be possible for workers earning less than the Social Security taxable maximum, who could purchase additional earnings credits. • The calculation of the person’s increase in benefits would be done using the progressive structure of the Social Security benefit formula.