SECURE
Act Leaves Millions of Workers as Insecure as Ever
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| University of Colorado graphic |
One
big Democratic initiative did manage to become law, pushed through as part of a
late-2019 budget deal. Titled the SECURE Act, it’s the latest effort to reshape
and repair America’s private-sector retirement system.
SECURE
stands for Setting Every Community Up for Retirement Enhancement. The bill
doesn’t come close to doing that, partly because the job is so huge.
Despite
extensive use of 401(k)s, IRAs and the like, millions
of employees simply aren’t saving enough to carry them through the Golden
Years. Another 55 million workers, largely
low-income, don’t have workplace
access to any retirement plan; they could easily join the huge
numbers of seniors already managing on little more than Social Security.
Two
provisions of the Act aim at lowering the no-access numbers:
Most promising, the law removes a barrier that’s been keeping small businesses from joining together to form multi-employer plans. Another new rule allows regular part-timers to enroll in 401(k)s if they’ve worked 500 hours for three consecutive years or 1,000 hours in a single year.
Both
changes take effect in 2021. Now for some already in place.
There’s
no longer an age limit
for putting money into traditional IRAs. Contributions formerly had to end at
age 70 ½; now they can continue as long as workers stay on the job. Especially
for those who aren’t saving enough, saving longer gives them a chance to save
more. (The new rule already applies to 401(k) and Roth accounts.)
Annuities
have arrived for 401(k)s. The lion’s share of retirement savings gets invested
in the stock market. That’s not the safest place, as investors have just
re-learned the hard way. Annuities by contrast provide a lifetime income
stream, and the new law “eases
the way for employers to tuck annuities into 401(k) plans.”
In
another major change, the Act ends so-called “stretch” IRAs. President Obama tried
and tried again to get them repealed. Ironically, his wish is now a done
deal signed and delivered by President Trump.
Non-spouse
inheritors were once allowed to keep IRAs active for decades (stretched, in
other words). No longer: with slight exception, the accounts now have to be
cashed out in 10 years.
There
was strong fiscal reason for the repeal. Total tax revenues from those
finally-closed IRAs will reach an estimated $15.7 billion over the next
decade—almost enough to pay for all the bill’s provisions. (It’s a rare
instance of legislation that should ultimately take in nearly as much as it
spends).
In
the end the SECURE Act could have done much more to live up to its name.
The
big shortfall is its lack of any direct impact on workers
without access to retirement plans. The law could have set up universal
payroll-deduction IRAs, an idea endorsed by candidates Obama
and McCain in the 2008 presidential race. Obama’s Administration kept
pushing the idea, once estimating that automatic IRAs might reach around
80 percent of low and middle-income workers.
That’s
what could have happened but didn’t. The law also disappointed in the other
direction, doing something it shouldn’t have. It handed a tax break to those
who need it least.
Most
retirement accounts call for taxable required minimum distributions. These
already had a late start, not kicking in until age 70 1/2. The new law pushes
the starting age back to 72. The later date helps only those who can wait
pretty much forever to tap their nest eggs. It’s also the most expensive of all
the bill’s changes, costing the Treasury more than half of what it stands to
gain from the repeal of “stretch” IRAs.
Summing
up, Democrats deserve some praise for maneuvering the SECURE Act through
Congress. They also deserve some blame for not going further toward improving
our vastly improvable retirement system.
P.S.
The coronavirus pandemic is outside the scope of this article. Going forward, a
bad retirement situation is almost certain to become even worse.
Gerald E. Scorse helped pass the bill requiring basis reporting for capital gains. He writes on taxes.His articles have appeared often in Progressive Charlestown.
© 2020 Gerald E. Scorse