Republicans and Democrats, perpetually in a horn-tossing
mood when negotiating legislation, have found a fertile piece of common ground:
retirement.
Washington lawmakers from both aisles are practically
bursting at the seams with a variety of measures and nudges they claim will
help Americans in their golden years. Among other ideas, they want to compel
employers with retirement plans to automatically enroll all eligible employees,
allow workers to receive a 401(k) match when they pay down student loans and
use tax refund dollars to buttress their savings accounts.
This coming together follows the bipartisan Secure Act,
which went into effect early last year and made several tweaks to the
retirement system, like removing age restrictions to contribute to a
traditional individual retirement account (IRA) and upping the age retirees
must begin required minimum distributions (RMDs) from 70 ½ to 72. Having tasted
success, and understanding that tens of millions of Americans remain mired in a
retirement crisis, lawmakers want to do more.
“Retirement legislation has a long history of bipartisan
collaboration,” said Catherine Collinson, chief executive of the Transamerica
Center for Retirement Studies.
Despite the bonhomie on Capitol Hill when it comes to
retirement legislation, you’ll notice one glaring omission from almost anyone’s
reform agenda: Social Security. And given how important the old age pension
payments are for retirees, that’s a pretty large oversight that will eventually
need to be addressed.
Secure Act 2.0 and Others
The reason the denizens of the District want to address
retirement security, aside from gathering good will from older voters, is that
basically half of the country isn’t saving for retirement and much of the other
half isn’t putting enough away.
There are all kinds of reasons for this ongoing crisis, some
of which will be addressed by the avalanche of bills wending through Congress:
Secure Act 2.0
Perhaps the farthest-reaching piece of legislation is the
so-called Secure Act 2.0, which would address a number of issues for both
businesses and workers. Among other things, it would delay RMDs up to age 75,
require many employers with 401(k)-type plans to automatically opt in all new
employees and offer help to those struggling with student loans by rewarding
them with 401(k) contributions.
Encouraging Americans to Save Act
The Encouraging Americans to Save Act would repurpose the
little-used, but highly effective, Saver’s Credit that rewards lower income
Americans with a tax rebate when they contribute to retirement accounts.
Currently, this is paid out with any refund someone receives when they file
their taxes, and coincidentally, the Secure Act 2.0 is looking to increase this
amount to incentivize retirement savings even more. The Encouraging Americans
to Save Act, meanwhile, wants to convert that existing credit into a government
retirement match that will be automatically deposited into a person’s
retirement account. The bill would offer a 50% match on up to $1,000
contributed to retirement accounts for individuals earning up to $32,500 (and
$65,000 for couples). The match would phase out over the next $10,000 for
singles ($20,000 for couples). Note: Each person in a married couple may each
receive a credit of up to $1,000.
Enhancing Emergency and Retirement Savings Act
The Enhancing Emergency and Retirement Savings Act takes a
different tack. The authors of this bill note that even among those who do save
in retirement plans, many will raid their 401(k)s should they need a jolt of
cash in an emergency. The problem is that not only will you forgo future
returns, but you’ll also be subject to a 10% penalty fee. Such leakage can have
serious long-lasting consequences, such as a potential 25% reduction in
retirement totals. The 10% penalty may also disincentive some savers from
putting money into an account they can’t access penalty-free for years. This
bill addresses those concerns by allowing savers to take out up to $1,000 of
their vested retirement balance in any calendar year without paying a penalty.
Savers would, however, have to replenish the distribution before they would be
able to use this provision again.
Retirement Savings Lost and Found Act
The Retirement Savings Lost and Found Act would, as its name
suggests, create a database so employees could find retirement savings accounts
held at old employers. A recent report from 401(k) rollover platform Capitalize
estimates that there are more than 24 million accounts, totaling about $1.35
trillion in assets, that employees left behind at old jobs. Additionally, it
would ease regulatory hurdles for plan sponsors to move accounts with small
balances into target-date funds and locate funds in accounts that may have been
cashed out by employers due to small balance restrictions.
Retirement Security Flexibility Act
The Retirement Security Flexibility Act would ease some of
the regulatory burden on employers who want to set up automatic enrollment for
new employees and auto-escalation that raises the percentage you contribute to
your account automatically each year.
Strengthening Financial Security Through Short-Term
Savings Accounts Act
The Strengthening Financial Security Through Short-Term
Savings Accounts Act is a different effort to help build up workers’ short-term
savings so they don’t have to raid their retirement piggy banks. In this
instance, employers could automatically deduct a percentage of their employee’s
pay (up to a balance of $10,000) to go into a savings account. The covered
worker can then access these funds at any time as well as adjust the amount
they contribute (or even if they contribute).
Refund to Rainy Day Savings Program
Aimed at helping those without a regular job, or who can’t
afford to set aside some of their pay every other week, the Refund to Rainy Day
Savings Program would take 20% of someone’s tax refund (which is typically
around $3,000) and put it in a rainy day fund established by the U.S. Treasury.
The money would be invested in short-term government bonds and returned to the
taxpayer within 180 days, though they could ask for their money back more
quickly. As part of a three-year pilot program, low-income filers may also be
eligible for a match to their rainy day contributions.
What Congress’ Plans May Mean for You
This policy smorgasbord may seem to lack coherence, and of
course there is bound to be some overlap, like how two separate bills would
handle the Saver’s Credit. But if you look hard enough, you can see what
different members of Congress are trying to do: meet American savers where they
are.
“The theme of all these ideas is matching modern savings to
the demographics of the country,” said Matt Rogers, director of financial
planning at Fidelity’s eMoney Advisor. “We’re living longer, working longer,
giving birth later and paying for college in our 50s.”
So if you’ve got $50,000 in student loans and a family to
raise, why not allow employers to provide their match in your 401(k) when you
make your student loans? If someone is able to stay in the workforce past 70,
why not let them contribute more to their retirement accounts or give them more
time before they have to draw down on their retirement? If you own a small
business, why not make it cheaper and less onerous to set up a retirement plan
for your employees?
Congress also wants to use lessons learned over the past two
decades, like auto-enrollment, to “make it easier to save,” said Rogers.
Given the success of enticing younger workers to save
earlier than their parents did by encouraging things like autoenrollment, it
stands to reason that Congress’ proposed refinements will increase people’s
retirement security as well.
Does Congressional Retirement Planning Fall Short?
The question is whether tweaks will be good enough. While
some will benefit, many others won’t.
One simple reason is that many won’t save consistently
enough. They’ll work for an employer that doesn’t offer a 401(k), or they won’t
work long enough to become eligible. Remember: About half of households don’t
have a retirement account and these pieces of legislation will do little to
change that.
The only way to solve this is to make sure everyone saves in
a retirement account no matter where they work.
“That is, pass federal automatic IRA legislation,” Alicia
Munnell, the director of Boston College’s Center for Retirement Research, told
Forbes Advisor.
If your job doesn’t offer a retirement plan, then it should
have to make sure you’re enrolled in a government-run plan, similar to Oregon’s
auto-IRA plan.
And then there’s Social Security, which is the most
important asset for the typical American household getting ready to retire. (It
also lowers wealth inequality.)
While the system isn’t going bankrupt, as some
catastrophize, there may be about a 25% benefit cut after a key trust fund is
depleted in 2033. Congress will need to figure out a solution over the next
decade, yet none of the proposed bills attempts a fix.
The parameters of the fight are pretty straightforward:
either raising taxes, cutting benefits or some combination of the two. But the
politics behind the fight are more difficult, as former President George W.
Bush found out when he tried to privatize part of the system.
Whether a future Congress has more luck in finding common
ground remains to be seen, but perhaps the bipartisan momentum created by
passing smaller retirement bills will lead to a breakthrough.
Click here for the
original article.