BELIEVE IT or not, Congress does sometimes enact actual legislation. At times, it relates to matters of practical significance to everyday Americans. And it can even be bipartisan. A case in point is the Secure Act, freshly approved by a unanimous House Ways and Means Committee. The measure represents a long-postponed effort to modernize tax-advantaged individual and employer-based retirement savings plans, which have superseded traditional pension benefits as a supplement to Social Security. The most popular employer-based plan, the 401(k), has 100.2 million participants, with $5.7 trillion in assets, per 2016 data compiled by the American Benefits Council.
The downside of the shift from pensions to 401(k)s is greater individual exposure to market volatility, as millions of savers learned the hard way a decade ago during the Great Recession. The upside is that 401(k)s and other “defined-contribution” accounts belong to individuals immediately, rather than after a vesting period, and they are portable, not attached to a particular employer. Many workers do not have the opportunity to reap these benefits, however, because their employers do not offer a 401(k) plan or because their pay is so low that it leaves them little margin for saving even when it’s tax-deferred. And for the nearly half of American households that owe no income tax each year, tax deferral is no benefit at all. Meanwhile, the evidence that these programs boost the overall national savings rate, as opposed to shifting it from taxable to tax-advantaged vehicles, is mixed.
The 401(k)’s benefits to individuals are real, in other words, but concentrated in the upper reaches of the middle class. Just 5 percent of those making $25,000 or less reap any tax benefit at all from existing retirement savings incentives, according to the Tax Policy Center. One way to alter that balance would be to scrap the current system of tax deferrals in favor of a tax credit for savings, perhaps 25 cents for each dollar a worker chooses to save up to $18,500 per year, as economist Benjamin Harris of Northwestern University’s Kellogg School of Management proposes.
The Secure Act does not do anything remotely that radical. Rather, it boosts incentives for small businesses to offer their employees 401(k)s and to enable the businesses to enroll employees automatically once a plan is in place. It enables part-time workers to join 401(k)s. Also, it raises from 70 1/2 to 72 the age at which individual retirement accounts (IRAs) must be tapped, to account for longer life spans. In laudable contrast to much other legislation, the Secure Act includes offsets for most of its $5.7 billion in new tax breaks over the next five years, and is fully paid for over a decade. The Senate is considering a similar but somewhat broader bill that would enable unrelated small businesses jointly to offer a unified plan to their employees. That measure, too, enjoys bipartisan support and may well pass this session.
When it comes to overhauling the United States’ retirement system, Congress is playing small ball, but for now that’s the only game in town.