New Legislation on Retirement Security Introduced

The Congressmen who introduced a bill today to help workers achieve retirement security is a nip and tuck job and does very little to help the over 80 million workers who have no meaningful retirement plan at work to attain saving for retirement.

There are humanitarian nips and tucks in the bill — retirees who are accidently overpaid don’t face draconian penalties — but the bill mainly relies on a costly and regressive array of individual and business tax incentives that, have over time, shown not to be effective.

The new legislation, nick-named Strengthening American’s Retirement Security (in any other year SARS would be a perfectly good abbreviation), is aimed at increasing Americans’ retirement savings. It does some good and some bad and on balance the legislation is not likely to increase American’s retirement savings in a meaningful way.

The bipartisan bill, sponsored by Ways and Means Chair Richard Neal a Democrat from Massachusetts and the highest ranking Republican Kevin Brady a Republican from Texas adds to a smaller effort – which has been recognized as one that benefits the insurance industry – the SECURE Act  which President Trump signed a version of in December of 2019. It is remarkable to have bipartisanship these days and commendable there is attention to one of the nation’s most pressing problems. As Christian Weller has written there are many ways the retirement crises is getting worse!

I like the part of the bill that expands the Saver’s Credit which is intended to motivate low- and middle-income individuals to save for retirement each year. However, there is a catch. The reality of stagnating wages for low and middle income people discouraging savings means all the savers credit in the world won’t overcome low wages. I fear the voluntary Saver’s Credit will not have much effect. The bill would establish a single 50 percent credit and increase the maximum credit amount to $1,500 per person from $1,000, and index the creditable contribution.

Regressive Give-Aways to Those Who Need Help the Least

The most regressive aspects of the bill are those that allow people with Individual Retirement Accounts (IRAs and types of retirement accounts like IRAs) to get more tax benefits by allowing them to accumulate up until age to 75 before taking minimum distributions. As a response to the COVID-19 recession Congress gave an unnecessary gift to the rich by raising the age of minimum distribution. COVID 19 has caused job loss among many desperate older people forcing them to claim Social Security earlier and withdraw retirement assets at a depressed valuation. Many of the lowest-educated older people will lose their jobs permanently. At the same time, Congress has suspended, and, now this bill, proposes to extend the age of the required minimum distribution or RMD which essentially cuts taxes for the top 2%* of older households. The April the age increase from 70 to 72  was a bad idea then and raising it to 75 is even worse.

(For most people the RMD is irrelevant. Most elderly live primarily on Social Security and the median retirement balance for people nearing retirement is $15,000. So the minimum you need to withdraw out of your tax –free retirement account at 70 to avoid taxes is a non-issue.)

But for some, the RMD takes away a tax break well-off people would prefer not to pay – the top 2%. New research shows that by the time people are age 70 at best 7% of the highest income older households have over $400,000 in their IRA or 401(k)- type plan. 2 % have more than $800,000. These are the folks that use their IRA’s for inheritance and other things, not retirement security.

The legislation would also let people more flexibly use their IRA savings to donate to charity. See above about why this is a give away to the rich.

Hope for More Coverage

The biggest hope for increasing retirement savings substantially is that the bill would require plans to automatically enroll workers in 401(k)-type plans so that employees could opt-out rather than opt-in. The opt-out provision does get people in the plan passively, so it does raise participation, which is good. But the bill excludes small businesses with 10 or fewer employees so this means where people mostly don’t have coverage isn’t affected.

The reason small businesses don’t have plans is ignored. The legislation would increase a tax credit for small-employer pension plan startup costs and let 403(b) plans band together in multiple employer plans. But there is little evidence that the lack of tax incentives is causing small employers not to sponsor plans. They don’t have plans because small business shave on costs and they don’t have to sponsor retirement plans. I fear that the businesses who are better off and were considering sponsoring coverage anyway will get the tax benefit, leaving the firms that need the most help without help and rendering government policy more regressive.

Public policy has been relying on tax incentives for 40 years and the range of workers not participating range from 40-60%. Almost half of workers do not participate in retirement plans so this provision does very little. Pensions should be mandatory; it is a great thing that Social Security is not voluntary.

As Politico reports “Representatives for the financial services industry, which stands to benefit from the measure’s myriad provisions, lauded the bill’s introduction.”