I’ve long thought that an overhaul to the U.S. retirement savings system is in order. And, it appears that I’m not the only one.
For the first time in 13 years – a period marked by financial turbulence and change — Congress is actively considering legislation to update the way retirement accounts are governed and administrated.
Our country is on the verge of a retirement challenge, if not crisis. More than half of US households are at risk of being unable to maintain their standard of living during retirement. Social Security may well run short of money by 2033. About one-third of US workers aren’t offered retirement plans by their employers.
If either version of “retirement reform” becomes law, it would mark the most significant and comprehensive change for retirement plans since 2006, when Congress smoothed the way for employers to automatically enroll employees in 401(k)-type plans and to transition those tax-deferred investments from stocks to bonds as workers age.
Since then, little has changed by way of the governance and administration of retirement accounts. Many proponents of the new bills believe it’s past time for some much-needed changes to the way the retirement savings system currently operates here in the US.
I’m one of those people.
The most significant potential positive outcome I see from the proposed legislation is a leveling the savings playing field.
Earlier this month, Senate Finance Committee Chairman Chuck Grassley (R., Iowa) and Sen. Ron Wyden (D., Ore.) introduced the Retirement Enhancement and Savings Act (RESA). This bill would:
- Repeal the current age limit of 70½ for folks to contribute to traditional individual retirement accounts.;
- Ease the way for small businesses to offer 401(k) plans; and
- Allow certain employers to automatically increase employees’ contributions to 401(k) plans above the current cap of 10% of their salary.
RESA came on the heels of a similar bill from the House Ways & Means Committee Chairman Richard Neal (D-Mass.), The Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019. In addition to repealing the age cap for contributions to individual retirement accounts (like RESA), this bill would also up the age by which you must begin taking withdrawals from tax-deferred retirement accounts from 70½ to 72.
It’s absurd that the government requires you to withdraw money from your retirement accounts; it smacks of a punishment for being a diligent saver. Raising the age at which you must begin taking distributions is a good start to cure this problem.
Making people stop contributing at 70½ is precisely the kind of “bear trap” that confuses people and makes it harder to encourage them to save for retirement. The tangled web of rules for the various savings vehicles is part of the reason that we are in a savings crisis. Automatically having folks increasing a plan participant’s contributions is an excellent antidote to this problem.
Both the Senate and the House versions of this retirement reform also encourage 401(k)-style plans to offer annuities, as Congressional proponents believe these help participants transform their savings balances into steady income for the duration of their lives. They also give employers the option to band together to offer 401(k)-type plans – a move designed to persuade companies without retirement plans to begin offering them.
While I’m not particularly a fan of annuities, if annuities remove some of the complexity and emotion-driven decision making from the saving process, I could be persuaded to get on board.
And, I am one hundred percent behind the proposal to allow multi-employer plans because it would fill a huge gap – there just aren’t many retirement plan choices out there for small businesses under the current framework. So, access to savings will always get my whole-hearted support.
We could learn something from Australia on this matter. The country has a government-mandated retirement savings plan for workers ages 18 to 70. The Super (short for The Superannuation Guarantee) requires companies to contribute to their employees’ retirement savings accounts to the tune of 9.25% for every employee. Over the coming year, this rate is slated to increase to 12% gradually.
Australian employees get to choose where to invest that money. Because employees are not allowed to borrow from this retirement account, it grows undisturbed for years or decades. As of 2018, The Super held a hefty $2.8 trillion in assets.
Critics may say that this level of government involvement in businesses and retirement planning may hint of too much regulation, which I loathe. But it’s hard to ignore the fact that Australia’s economic system has avoided recession for 27 straight years and operates as a thriving capitalist democracy. Functionally, The Super is the equivalent to the approach taken by the Teachers Retirement System of Georgia, a retirement plan for the state’s educators that is administered and funded in accordance to laws enacted by the state’s legislature.
I think The Super, and plans like it, are prudent approaches to mitigating – if not solving – a problem that could wreak havoc on an economy. This Australian program insulates that country from the potential impact of a “retirement crisis” in which a significant number of older citizens are unable to maintain their lifestyle or, in some cases, simply meet the financial demands that come with aging. The U.S. could benefit mightily from policies that provided that same protection.
Both RESA and SECURE address issues that urgently need attention.
We need to support workers’ savings efforts by providing better access to savings plans and easier-to-understand, non-punitive rules for our tax-advantaged savings programs.
The result will be a more financially secure nation, and one better able to sleep at night.