Congress’s Proposed Effort to Encourage Retirement Savings Ignores Larger Threats to Retirement Security
Late last month, the US House of Representatives overwhelmingly passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the most ambitious attempt to improve retirement security in more than a decade.
If passed by the Senate and signed into law by President Trump, the SECURE Act would encourage small employers to provide retirement plans to their workers, ensure that many part-time workers can participate, and prod participants to save more. The act would also make it easier for workers to convert their retirement account balances into lifetime income.
Even though the SECURE Act is a step in the right direction, it likely won’t significantly improve retirement security because it doesn’t address the most pressing challenges facing retirees today and in the future.
What would the act do?
Several provisions of the SECURE Act aim to boost access to employer retirement plans, where most retirement saving outside of Social Security takes place.
- The legislation would make it easier for small employers to jointly offer retirement accounts to their employees through multiple employer plans (MEPs). By allowing employers to work together, MEPs can reduce the start-up, administrative, and compliance costs of an employer-sponsored plan, especially for small businesses, likely boosting employee coverage rates. In 2017, only 48 percent of private-sector workers at establishments with fewer than 50 employees had access to an employer retirement plan, compared with 89 percent at establishments with at least 500 employees.
- The bill would provide employers with up to $5,000 in tax credits to defray the cost of establishing a retirement plan.
- The pending bill would require employers to allow employees who work as few as 500 hours a year for three consecutive years to participate. Current law allows employers with a retirement plan to exclude employees who work fewer than 1,000 hours each year. Consequently, only 37 percent of part-time workers in the private sector had access to an employer retirement plan in 2017.
The SECURE Act would also encourage retirement plan participants to save more through the power of defaults. Increasingly, employer plans are automatically enrolling workers, which significantly increases participation rates (PDF), and depositing a portion of their pay into retirement accounts. Automatically escalating the share of pay that is deposited over time can substantially raise account balances. The legislation would allow plans to increase automatic deductions to as much as 15 percent of pay, up from the 10 percent cap under current law.
Retirees with an employer retirement account must figure out how much of their savings to spend each year to avoid running out of money at older ages. An obvious solution is to convert part of the account balance to an annuity that pays a fixed amount each year until death. The SECURE Act makes it easier for employer plans to offer annuities as an investment option. The bill would also help workers prepare for retirement by requiring plans to annually calculate the monthly payments that participants would receive if they converted their account balances to a lifetime income stream.
Finally, the SECURE Act would update retirement rules to reflect increases in life expectancy. Current law generally requires people to begin withdrawing from their retirement accounts six months after their 70th birthday. The bill would raise that age to 72. It would also eliminate the age limit on contributions to traditional individual retirement accounts, currently set at six months after a person’s 70th birthday.
What’s left undone?
Although the SECURE Act would encourage more Americans to save for retirement, it won’t provide much reassurance to the many Americans worried about their retirement prospects (PDF) because it ignores these critical challenges:
- Social Security is running out of money. Many retirees, especially those with limited resources, rely on Social Security (PDF) for the bulk of their income. Yet the program now pays more benefits than it collects in taxes. A trust fund built up over the past three decades now makes up the shortfall, but Social Security’s trustees project that the trust fund will run out in about 15 years. Once that happens, the program will be able to pay only about four-fifths of promised benefits. Fixing Social Security’s financing problems should be a top priority for policymakers so workers can better plan for retirement.
- The prospect of becoming frail and needing expensive care is the most significant financial risk confronting most retirees. Long-term services and supports for older adults are costly, Medicare doesn’t generally cover them, and only about 1 in 10 adults ages 65 and older have private insurance that would cover care. Consequently, many older adults, especially those with significant disabilities, can’t afford long-term services and supports. Policymakers should consider alternative ways for financing such care, such as the public insurance program recently created by Washington state.
- The pending legislation doesn’t provide much help to retirees who earned relatively little over their lifetimes, many of whom struggle financially. Making Social Security benefits more progressive, raising the program’s minimum benefits, providing tax credits for retirement savings, and bolstering the Supplemental Security Income program could help the most disadvantaged older adults.
The SECURE Act is only the first in a long line of steps needed to ensure a more secure financial future for America’s retirees.
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