Congress Wants To Help You Save For Retirement. Will It Work?

Congress Wants To Help You Save For Retirement. Will It Work? – Forbes Advisor

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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.

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“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.

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