Congress seems about ready to pass a package of about 28 retirement and pension plan changes the House calls the SECURE (Setting Every Community Up for Retirement Enhancement) Act. This bill demonstrates bipartisanship, generally good policy, and a willingness to finance its tax cuts with some offsetting tax increases, features that have been in short supply in Congress.
Still, despite its title, the SECURE Act only modestly enhances retirement security. Congress has yet again failed to tackle broad--and badly needed--reforms.
The bill’s most costly provision increases from 70 to 72 the age at which individuals must start to take required minimum distributions (RMDs) from retirement accounts. This is a modest but worthy adjustment since people are living longer than in 1974 when many of the current RMD rules were written. By 2029, this change would cost about $900 million per year.
The bill’s second most-costly provision would make it easier for employers to organize retirement plans covering workers from multiple firms. This should make it easier for smaller firms to offer retirement benefits to their employees, expanding coverage somewhat.
The bill’s biggest revenue-raiser requires children and other beneficiaries to take distributions from their inherited retirement accounts more quickly, thus forcing them to pay taxes that they otherwise would defer. Curbing a tax break that does nothing to enhance the retirement security of deceased persons who did not spend all their pension wealth would generate about $2.5 billion by 2029.
Still, the bill accomplishes very little for the population as a whole.
First, the bill tinkers with several provisions of pension law, worth a few billion in tax subsidies but is likely to have little effect on overall retirement savings in the US. The total amount of tax benefits for pension and retirement savings was about $250 billion in 2018. By 2029, annual Social Security costs are projected to increase by about $500 billion relative to 2018 in inflation-adjusted 2018 dollars. And the total value of pension and retirement accounts of all types in the US is about $25 trillion.
Second, these changes do little to address a major disincentive for people to save through tax-advantaged accounts—their complexity. While some provisions of the SECURE Act do simplify the law, many of the changes would create additional savings options and add administrative costs to savers.
Third, many of these new provisions mainly increase tax benefits that already inure to the benefit of higher income people. Low- and moderate-income people, for instance, often have little retirement saving, and, if they do, they generally can’t wait until age 72 to draw upon them. Michael Doran, in a June 10 Tax Notes article, lays this criticism on almost all recent pension tax legislation.
For decades, Congress has been unable to deal with the great inequality in retirement assets, tax subsidies for retirement, and, more generally, wealth. The result is that most households go into retirement with limited assets to support many years of old age while some households accumulate large amounts in a tax-favored fashion. I hate to criticize the SECURE Act. After all, it does represent modest progress, something sorely lacking on so many legislative fronts. But in the end, it is another missed opportunity.
