The Impact of a Proposal for “Catch-up” Contributions

April 27, 2022

Working Paper | Social Security “Catch-Up” contributions would allow workers to contribute an additional 3.1 percent of salary, starting at age 50, in return for enhanced benefits. The program would modestly reduce defacto elderly poverty and reduce the Social Security shortfall in the short run and be approximately actuarially neutral over 75 years.

 Authors: Teresa Ghilarducci, Michael Papadopoulos, Wei Sun, and Anthony Webb

The United States faces a severe and imminent retirement savings crisis. Almost half of older middle-class workers will be de-facto poor at age 65 (Ghilarducci, Papadopoulos, and Webb, 2018) and the U.S. has among the highest elder poverty rates in the OECD (2016). The policy debate has focused on working longer, saving more, and cutting Social Security benefits to restore long-run solvency. Working longer is neither a feasible nor an equitable solution for those most at risk of downward mobility in retirement. Saving more would ease the crisis. But those most at risk often lack access to workplace retirement savings plans, and the 401(k) system, characterized by high fees, leakages, and difficulty of converting accumulated wealth into lifetime income, is ill-designed to help them.

This study evaluates a proposal for a Social Security Catch-Up program – a winner of the AARP 2016 “Innovation Challenge” contest. We conclude that for plausible beliefs and preference parameters, risk-averse households facing an uncertain lifespan will value the program at greater than the required contribution rate, and will also prefer it to purchasing a commercial annuity. The program will not solve the retirement savings crisis. But it will narrow the gap between needs and resources.

Read the working paper here.