The Labor Economist warns that the Secure 2.0 retirement law leaves “a big problem untouched”. How can these changes help?

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Participation in workplace retirement plans may soon expand, thanks to new efforts from lawmakers on Capitol Hill.

A set of pension benefits, dubbed “Secure 2.0,” is included in the government’s spending bill for fiscal year 2023.

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But with Congress rushing to push through changes before the end of the year, the legislation still falls short of addressing the core of the U.S. retirement savings gap — the lack of access to retirement savings plans, according to researchers at Schwartz. Center for Economic Policy Analysis at the New School.

Secure 2.0 will require some employers with retirement plans to automatically enroll eligible workers in those plans. This proposal would apply to new 401(k) and 403(b) plans beginning in 2025. Some businesses — those with 10 or fewer employees, those that have been open for less than three years, and church and government plans — will be exempt.

However, the proposal still leaves “a big problem as it stands,” as employers can still decide whether to offer a retirement plan, said Teresa Gilarducci, a labor economist and professor of economics and policy analysis at The New School. She noted that when they do submit plans, their designs are subject to little regulation.

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The proposed automatic enrollment expansions may have very little impact, according to Gillarducci, because they do not include mandates for employer contributions or for employers to submit plans.

“The biggest part of the problem is that low-income people need help and half of them don’t have an employer that has a plan,” Gilarducci said.

“And Secure 2.0 doesn’t do anything about those two major problems,” she said.

Low-income workers lack access to retirement plans

The statistics about preparing for retirement are grim for some residents.

In a speech in Washington, D.C., earlier this month, the US Secretary of Labor, Marty Walsh, noted that only 36% of black families ages 55-64 have any retirement savings. This number drops to 30% for Hispanic families. He said that those who have savings often have very little.

“This is a crisis that we have to address in the United States of America,” Walsh said.

A poll conducted by the Bipartisan Politics Center – Morning Consult earlier this year found that only 52% of individuals with $50,000 or less in household income have access to an employer-sponsored retirement plan compared to 79% of people with household income. high.

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A “flawed system” has led to an older worker earning less than $40,000 a year for not saving anything for retirement, according to The New School research.

Older workers who earn between $40,000 and $115,000 annually have an average savings of just $60,000. Meanwhile, workers earning more than $115,000 have an average savings of $200,000.

Up to 40% of middle-income workers are at risk of moving into poverty or near poverty in retirement, according to The New School research.

Between 2019 and 2045, the number of people over 62 living in or near poverty will increase by 22.3%, according to the report, from 18 million to 21.3 million.

And according to Gillarducci, four major policy changes could prevent this.

The proposals are inspired by the recent introduction of the Americans Retirement Savings Act. The bill was proposed earlier this month by Sen. John Hickenlooper of Colorado. and Tom Tillis, North Carolina State; Rep. Terry Sewell, D-Alabama; and Lloyd Smoker, R-Penn.

1. Create a general retirement plan

For starters, we should give up hope that employers will cover everyone with retirement plans, according to Gillarducci. Alternatively, creating a universal retirement plan might better achieve this goal.

“A universal access plan is a plan where everyone, no matter what their employer does, is in a retirement plan,” said Gilarducci.

The idea is included in the Retirement Savings for Americans Act, which would create tax-advantaged portable retirement savings accounts for workers. Full- and part-time workers who do not already have access to retirement plans will be automatically enrolled in the program.

More importantly, Gilarducci said, the universal retirement plan would eliminate the voluntary component. Contributions will occur with each paycheck. Furthermore, just as you can’t borrow against your Social Security benefits, you often won’t be able to access that money until retirement.

For low-income workers who earn less than the average income, the government will also contribute to their retirement plans along with the workers.

Retirement accounts will include a list of low-fee investments that savers can choose from.

2. Make tax expenditures fairer

A refundable federal tax credit may be provided to eligible low-to-moderate income individuals. Gillarducci noted that this would be available even to people who don’t have a large amount of money or don’t file a federal tax return.

The Retirement Savings for Americans Act calls for a tax refundable credit of up to 4% in matching contributions for low-to-moderate-income workers. Credit will begin to phase out at average incomes.

This change will make the pension system more equitable by ensuring that the $250 billion already spent helping people save will include the bottom half of the income distribution. Right now, 70% goes to the top 20%, while less than 5% goes to the bottom half, Gilarducci says.

She said the Secure 2.0 proposal would make this worse by easing restrictions on people with large individual retirement accounts. The bill would raise the age at which retirees must take required minimum distributions from 72 to 75, a change that will be phased in over 10 years.

3. Protect your retirement savings

Early withdrawals from retirement accounts can undermine retirement insurance, especially for low-income workers. Creating safeguards to prevent these distributions can help ensure that the money will still be around when an individual reaches retirement age, according to The New School research.

The research said retirement assets should also not be counted when determining an individual’s eligibility for public assistance benefits.

Notably, the Retirement Savings for Americans Act aims to make it easier for workers to maintain retirement accounts set up through the new program by making it so that they can keep them for their entire lives and stop and start their contributions at any time. It will also be possible to pass the money in the accounts to future generations.

4. Strengthening and expanding the scope of social security

Social Security helps ensure that people don’t fall into poverty, no matter what happens to them.

With the boosters including universal retirement plans and private savings in place, Gilarducci said, social security should also be strengthened and expanded.

Notably, benefits are a major source of income for the bottom half of the income distribution, and elevate these beneficiaries more than those in the higher income levels.

“It actually brings us a little bit closer together, and it creates community,” said Gilarducci.

The Retirement Savings for Americans Act does not include Social Security reform. However, other legislative proposals have called for an expansion of the program.

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