Hiltzik: Good news for pension savers

The average American’s journey to retirement has long been a steep climb. The omnibus spending bill President Biden passed on 12/29 will make the journey easier.

The $1.7 billion bill will give workers who haven’t had many options access to workplace retirement plans and increase their incentives to fund workplace accounts, including through an unprecedented tax benefit.

The omnibus bill is far from perfect; Many of its positive provisions fell short of the hopes and expectations of proponents.

Mega IRAs… are a problem caused primarily by laws that grant excessive tax benefits to high-income individuals.

— Daniel Hemel Duck

For example, the measure includes a $785 million increase in the Social Security Administration’s operating budget — but that’s “just enough for the SSA to tread water,” according to Max Richtman, chief executive of the National Committee to Preserve Social Security and Medicare. said. put it

The funds will not allow the Social Security administration to significantly reduce a huge backlog of disability claims and decisions or “significantly improve diminished customer service,” Richtman noted.

The same mixture of jubilation and disappointment surrounds Secure 2.0, the individual provision package in the omnibus package.

Inasmuch as they improve access and tax benefits for middle- and low-income workers, these provisions are important because federal pension laws and tax breaks have traditionally been heavily biased towards the wealthy.

Higher-income workers generally have far more disposable income than average Americans to invest in retirement accounts, and their higher incomes add value to the tax benefits that come with individual retirement accounts and defined contribution plans like 401(k) accounts.

This is according to government statistics. According to the Congressional Budget Office, about 77% of households in the top quintile of the income ladder benefited from tax breaks on retirement and retirement accounts, primarily deductions for contributions and tax-free investment growth; only 19% of households in the bottom quintile did so.

(In 2019, the top quintile consisted of households with annual incomes greater than $142,500, with the average within the segment raising more than $254,000. The bottom quintile comprised households with incomes less than $28,084, for an average of 15,286 equivalent to USD.)

Politicians consistently portray tax-advantaged pension plans as a boon for the middle and working classes, but reality belies that, as NYU Law School’s Daniel Hemel pointed out last year after Congress’s Joint Committee on Taxation revealed that nearly 29,000 US taxpayers had accumulated retirement accounts worth $5 million or more.

That would be almost impossible unless one could exhaust his or her tax-deferred contributions over a career of 30 years or more. “Mega-IRAs,” noted Hemel and Steve Rosenthal of the Tax Policy Center, “are a problem caused primarily by laws that grant excessive tax benefits to high-income individuals.”

Of the three traditional pillars of the retirement chair, conventional pensions have disappeared, and it is becoming increasingly difficult for the average American to save for retirement alone. Social Security has retained its importance for millions of households in or about to retire, but it was never expected to be the only support for seniors.

This underscores the value of some provisions of Secure 2.0.

Initially, Secure 2.0 will require employers who already offer defined contribution plans, such as 401(k) and 403(b) plans, to automatically enroll new employees in the plans, starting at 3% of employee wages in 2025 and increasing by one percentage point per year until it reaches 10%.

This changes the default choice for new hires to an opt-out instead of an opt-in decision. Studies have consistently found that opt-in rules increase the proportion of new workers opening and funding their accounts. Secure 2.0 makes employee participation completely voluntary – they can refuse a contribution, reduce it or close their account at any time.

Previous versions of the Secure Act, including a version in Biden’s 2021 “Build Back Better” program, would have required almost all employers to offer employees defined contribution plans, but that was dropped in favor of imposing the opt-out standard and minimum contribution to new ones Plans or new employees joining employers with existing plans.

Another provision concerns the contribution adjustment that many employers make for employees who participate in their defined contribution plans – typically up to 4% or 6% of the employees’ pay rates.

Under Secure 2.0, employers can choose to double employee student loan payments beginning in 2024. This would subsidize loan payments by allowing workers to set up a retirement savings fund while paying off their student debt. (Employers receive a tax credit for corresponding contributions.)

Secure 2.0 also enhances a tax credit offered to low-income participants in retirement plans, including IRAs and 401(k) plans. Current balance is 50% of saver contribution, up to $1,000; It expires this year and has a maximum income of about $36,500 for singles and $73,000 for married couples applying together. However, the savings loan is “non-refundable,” meaning it cannot exceed a taxpayer’s federal income tax.

Secure 2.0 makes the loan refundable beginning in 2027, meaning it will be paid out even if the worker does not owe federal income tax.

The savings loan and other provisions of the new law are good for residents of states with their own mandatory retirement programs for low-income workers, including California and Illinois. In California, beginning in 2022, employers with more than five employees were required to either offer a qualifying retirement plan or enroll their employees in CalSavers, a state-sponsored program with a 5% attrition rate.

Employees can change their savings rate or leave the program at any time; Investments available include target funds that allocate investments based on the participant’s age and expected retirement date, general pension or equity funds, green mutual funds, or a money market fund.

A sin of omission in Secure 2.0 is the lack of a way for savers to invest their money in the Savings Savings Plan, a low-cost program open only to federal employees and members of the armed forces and reserves. The Thrift plan has six fund options, all with rock-bottom fees.

Instead, investors are left with options offered by Wall Street money managers, which economist Dean Baker of the Center for Economic and Policy Research estimates can carry fees up to 20 times the thrift average.

“While it’s great that workers have more savings for retirement,” Baker noted after the omnibus measure was passed, “this bill can mean big bucks for the financial industry.”

Another aspect of the omnibus bill is largely a handout for professional money managers. These are changes in the rules for required minimum distributions or RMDs from tax-advantaged retirement accounts.

Previous rules required holders of these accounts to withdraw money from their accounts no later than age 72, with mandatory withdrawals based on the size of the accounts and the life expectancy of the holder.

The new rules push the entry age to 73 this year and to 75 from 2033. That means the money could stay with private wealth managers for longer, which is obviously good for companies.

The change also primarily benefits wealthier retirees who can afford to keep their money in investment accounts longer, rather than taking it out on living expenses.

However, there is a key qualification for this benefit: some retirees may prefer to keep their funds invested for a longer period of time, since withdrawals are treated as income for the purpose of calculating annual Medicare premiums — the higher the income, the higher the Bonus.

It’s likely that allowing the private financial services industry to remain deeply entrenched in our pension system was necessary in order to push through Secure 2.0, given its lobbying influence in Washington – in the same sense that it was the health insurance industry at the center of our healthcare system to hold a key to passing the Affordable Care Act in 2010.

Taking the retirement plans of most working Americans out of Wall Street’s grip won’t be easy. Congress and the Biden White House may have achieved the next best thing by giving these workers a better chance of building a retirement nest egg. You still won’t have all the benefits of the rich, but at least more than you did a year ago.

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