The United States is staring down the barrel of a retirement crisis, and there doesn’t seem to be any way to dodge it.
The good news is that in a time of extreme political division, Congress is uniting to take bipartisan action to boost and encourage retirement savings. Comprehensive legislation is sailing through both chambers with an array of provisions changing everything from annuities to pensions, which may prepare more young people for retirement in the future.
But the bad news is that the measures — the Secure Act and the Social Security 2100 Act — do not adequately address the crisis, which could soon plunge substantial numbers of seniors into poverty.
Proposals Don’t Go Far Enough
Some advocates, including the National Association of Plan Advisors, call the Setting Every Community Up for Retirement Act, known as the Secure Act, “one of the most consequential pieces of retirement security legislation in more than a decade.” And lawmakers seem enthusiastic. The bill recently passed the House of Representatives by a 417–3 vote.
But a writer for Forbes described it as a “mix of incremental improvements in 401(k) plans plus miscellaneous special interest provisions.” Nothing in it, she wrote, is “monumentally earth-shattering.”
And while there are provisions in the Secure Act to help workers save and encourage employers to offer various savings plans, the legislation does virtually nothing to compensate for the abysmal retirement savings of millions of Americans who are now and will soon be reaching retirement age. The Secure Act’s companion in the Senate is known as the Retirement Enhancement and Savings Act, or RESA.
Social Security Crucial and Endangered
AARP Board Chair Joan Ruff testified at a recent Senate Finance Committee hearing that retirees are increasingly reliant on Social Security.
For five decades, she noted, most Americans have relied on the so-called “three-legged” stool — employer-provided defined-benefit pension plans, personal savings, and Social Security — for financial stability in retirement.
“Unfortunately, diminishing pensions and inadequate retirement savings — coupled with longer life expectancies and higher health costs — endangers the dream of a secure retirement for millions of Americans and requires Social Security to play an even greater role in the lives of older Americans,” Ruff said.
She noted that in 1983, about 60 percent of workers with employer-sponsored retirement plans had pensions. By 2016, that number was just 17 percent.
At the same time, defined contribution plans, such as 401(k)s, have exploded. But these plans are not sufficient to compensate for the loss of defined-benefit pension plans. In addition, more than half of workers have jobs with no retirement plans at all, Ruff said.
Meanwhile, the proportion of preretirement earnings that Social Security replaces has fallen since the 1980s because Medicare premiums have increased, while benefits have been cut. And with President Trump’s 2020 budget cuts to Social Security, Medicare and Medicaid, the future of Social Security is clouded.
By 2035, Social Security won’t be able to pay Americans full benefits. “After that, retirees would be hit with a 20 percent cut,” Democratic Sen. Ron Wyden said at the Finance Committee hearing. “That means a 50-year-old worker who’s paid into Social Security out of every paycheck faces the prospect of not receiving the full benefits that she has earned.”
Social Security Needs More Than Rescuing
But even preserving the program as it now exists may not be enough, according to some experts.
Forbes contributor Teresa Ghilarducci, an economics professor with The New School, wrote that if Social Security is fully funded but not supplemented, the country will see a 25 percent rise in older Americans living near or below the poverty line by 2045.
Ghilarducci recommended the Social Security 2100 Act, legislation being sponsored in the House by Democratic Rep. John Larson. The bill, which is cosponsored by 207 Democrats and no Republicans, would enact several measures to make Social Security more solvent.
The bill would increase benefits for retirees by roughly 2 percent across the board and improve the annual cost-of-living adjustment formula to better reflect the costs faced by seniors who spend a greater portion of their income on health care. It would also protect low-income workers by making the new minimum benefit 25 percent above the poverty line.
The Social Security 2100 Act has not yet had any committee hearings, but it does have a companion in the Senate sponsored by Democratic Sen. Richard Blumenthal, with one Democratic cosponsor. Whether it will catch on with Republicans remains to be seen.
The legislation would decrease income taxes on Social Security beneficiaries and require Social Security taxes on higher levels of income. Currently, Social Security payroll taxes are not levied against wages over $132,900. The bill would apply the payroll tax to wages above $400,000.
Beginning in 2020, it would also gradually phase in an increase in the contribution rate, so that by 2043 workers and employers would pay 7.4 percent, rather than the current 6.2 percent.
Burden Falls on Those Who Have Not Saved
Another bipartisan bill in the Senate — the Retirement Security and Savings Act of 2019 — would allow people who have saved too little to save more. Still, the onus here is primarily on people who have already not saved enough money to somehow find more to set aside. For example, it increases the “catch-up” contribution limits from $6,000 to $10,000 for people over 60 years old with 401(k) plans.
This is in response to a 2019 Government Accountability Office report that found that nearly half of all households aged 55 and older have no retirement savings at all. But there are no proposals to substantially fill that gap.
The Senate bill would make it easier for small businesses to offer 401(k) plans and expand access to retirement savings plans for people without coverage. It would also encourage the use of annuities, which provide a stream of income during retirement. Thus far, though, the bill has only two cosponsors: Republican Sen. Rob Portman, who introduced it, and Democratic Sen. Ben Cardin.
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Current Retirees Missing from Secure Act
Only a couple of provisions in the Secure Act are directed at current retirees. These involve required minimum distributions, the dollar amount that the IRS requires retirement account holders to withdraw annually once they reach 70 ½ years old. The provisions would raise that age to 72 and allow older workers to continue to contribute to their IRA accounts.
The Senate legislation would also increase the RMD age to 72 in 2023 and 75 by 2030. Sponsors say that will allow people to work later to keep saving for retirement. It would also waive RMDs when an individual has less than $100,000 in retirement savings and allow them to continue saving for retirement at any age. Additionally, it reduces the penalty for those who fail to take the RMD.
Under the Senate proposal, certain annuities with accelerating payments would be able to meet RMD requirements.
Finally, it encourages expanded use of qualified longevity annuity contracts, which are deferred annuities held inside qualified retirement plans. The Senate bill would increase the allowable amount for investment in a QLAC from $130,000 to $200,000.
But for those facing retirement with inadequate or nonexistent retirement savings, the legislation offers no financial assistance. For those who will be forced to impoverish themselves to become eligible for Medicaid’s long-term care and medical coverage, the legislation has nothing.
Provisions in the Secure Act Passed by the House
When it passed the House in May and headed to the Senate, the Secure Act contained a variety of provisions to encourage and expand 401(k) plans.
In its current version, the legislation would allow employers to automatically increase their employees’ contributions by up to 15 percent of their pay. The present-day limit is 10 percent. It would also provide tax credits to encourage small employers to have 401(k) plans with automatic enrollment.
Long-term part-time workers would also be eligible to participate in 401(k) plans. This is especially beneficial to women, who are more likely than men to work part time. Part-time employees’ eligibility would be based on meeting one of two requirements: one year of employment with at least 1,000 hours of work or three consecutive years of service with at least 500 hours in those years.
Other key provisions in the legislation would:
- Allow the direct transfer of retirement savings and retirement-plan lifetime income features to a different qualified retirement plan or qualified annuity, thus avoiding surrender charges and fees.
- Require plan benefit statements to inform participants at least once a year the monthly income payment amounts if the total account balance was used to fund an annuity that would provide lifetime income streams.
- Protect employers from liability when choosing annuity providers to support lifetime income stream options in 401(k) plans.
- Increase credit for start-up costs for pension plans sponsored by small employers.
- Repeal the prohibition on contributing to an IRA by people who are 70 ½ years old or older.
- Prohibit employer-sponsored qualified retirement savings plans from making loans through credit cards or similar arrangements in order to preserve retirement savings.
- Permit penalty-free retirement withdrawals of up to $5,000 to fund the birth or adoption of a child.
If the Secure Act passes the Senate and is signed into law, it will be the first comprehensive retirement legislation since 2006. For more details, you can read the final version of the bill that passed the House on Congress.gov.