Lawmakers from across the country are proposing legislation to encourage more Americans to save for retirement, and they’ve got a list of ways to do it.
The Senate held a hearing this week for the “Retirement Security and Savings Act,” which would allow people with little in savings to catch up and also help small businesses provide retirement plans to its workers. Senator Ron Wyden, a Democrat from Oregon and a member of the Senate Finance Committee, introduced another bill this week that would match a worker’s student loan repayments to go toward their employer-sponsored retirement account.
When to collect Social Security
“There’s certainly momentum on this issue,” said Kathleen Coulombe, vice president of retirement security at the American Council of Life Insurers, a Washington, D.C.-based life insurance trade group.
The House of Representatives is expected to vote on the Retirement Enhancement and Savings Act by the end of the month, a bill that would expand auto-enrollment features, link small businesses together to offer retirement accounts and describe a fiduciary responsibility. The SECURE Act (Setting Every Community Up for Retirement Enhancement Act) is also waiting for a vote in the House.
“The retirement savings system that we have is actually very good but it can be improved,” said Bob Grohowsky, head of legislative and regulatory affairs at financial services firm T. Rowe Price. “All of these ideas are ideas to build upon the system we have.”
Though there are numerous provisions to save for retirement, such as 401(k) plans and IRAs, Americans are not saving enough for retirement. Some may not have access to employer-sponsored retirement accounts, which would let them save more than they could in an IRA, and others may have access but may not prioritize retirement saving when they have so many other obligations to pay for, like housing, student loans, raising a family or building a business. Data from studies and surveys consistently show how unprepared Americans are for retirement.
Along with saving and planning for retirement, Congress is discussing ways to improve Social Security, which is facing insolvency in the next 16 years. If nothing is done, the program will still pay benefits to the elderly and the disabled, but it will be about 80% of what they’re owed. Meanwhile, states have taken it upon themselves to create programs that would offer, and in some cases mandate, small businesses to offer retirement plans in the form of individual retirement accounts.
Many of these bills overlap each other in certain aspects. Here’s a more detailed explanation of each of these proposals, and where they stand:
Retirement Security and Savings Act
The bill, also known as the Portman-Cardin bill as it was proposed by Ohio Republican Senator Rob Portman and Maryland Democratic Senator Ben Cardin, was reintroduced to Congress on Tuesday and sets forth a myriad ways to improve the current retirement savings system:
- Increases the “catch up” contribution to $10,000 from the current $6,000 for individuals 50 and older with 401(k) plans;
- Allows employers to make addition contributions for employees in SIMPLE retirement plans;
- Gives employers bigger tax breaks, such as increasing the credits employers who offer safe harbor plans get and for small businesses that start a new retirement plan;
- Creates a “government match” for low-income savers by allowing the Saver’s Credit to go directly toward their retirement accounts;
- Allows companies to match student loan repayments to their retirement plans;
- Includes part-time workers in 401(k) plans;
- Increases the required minimum distribution age to 72 from 70 ½ years old by 2023, and then age 75 in 2030; creates an exception for individuals with $100,000 or less in eligible accounts, so that they can continue saving instead of having to withdraw; and reduces the penalty for failing to take RMDs from 50% to 25% of what they should have distributed.
“It has a lot of common sense things that would make life easier for retirement savers and plan sponsors and administrators,” Grohowsky said.
Sen. Wyden’s student loan bill
This proposal was originally part of other retirement security bills, including the Retirement Security and Savings Act, but Sen. Wyden introduced the concept as a stand-alone proposal as well this week. The proposal, called Retirement Parity for Student Loans Act, would let employers make matching contributions to a 401(k) for employees who are paying off student loans, but not mandate it.
Americans, especially millennials, argue student loan debt is keeping them from saving for their future, as well as spending on everyday necessities and meeting other financial goals. “Millions of college grads are buried under tens of thousands of dollars in student loan debt that prevents them from building their future — buying a home, saving for retirement and starting a family,” Sen. Wyden said, according to The Hill. “The sooner workers start to save for retirement the better, and paying down student loans shouldn’t stop them from building their nest egg.”
Then there are the SECURE Act and RESA, which are essentially the same proposal but in two different chambers (the House and Senate, respectively).
The SECURE Act, which was passed by the House Committee on Ways and Means in April, has four major parts:
- Small businesses could work together to create multiemployer 401(k) plans and see tax credits for including automatic enrollment for those accounts;
- Automatic escalation maximums could be topped at 15% (up from 10% now), which would allow employees to save significantly more in their plans;
- The age for required minimum distributions would increase to 72 years old, up from 70 ½ right now. Workers would also be able to contribute to their IRAs after turning 70, which is currently prohibited;
- And part-time workers would be eligible for retirement benefits, after meeting certain requirements (like working at least 1,000 hours in a year, or 500 hours for three consecutive years).
Many of the ideas in these bills, as well as the legislation themselves, have been introduced a few times to Congress. RESA has been discussed in similar ways since 2016, and includes small changes to the current retirement savings infrastructure. The proposal would allow businesses to create multiple employer plans without needing to be within the same industry and wouldn’t punish all companies in those MEPs if one were to violate the rules.
The proposal also makes it more attractive for small businesses to incorporate auto-enrollment. Lastly, it would help employees see their savings as lifetime income, by requiring benefit statements to translate their savings into lifetime income at least once a year.