Last week, House Democrats voted to include a major measure in their $3.5 trillion “human infrastructure package” that tackles everything from paid leave to affordable child care to expanding the child tax credit. That measure would require companies that have more than five employees and don’t already offer retirement plans to automatically enroll most employees into individual retirement accounts in either a 401(k) or IRA format.
The only companies that would be exempt from this rule are, as previously stated, companies with fewer than five employees. Companies that have been in operation for less than two years would also be exempt. Per the Wall Street Journal, companies would also be required to enroll even part-time employees who work at least 500 hours a year for two consecutive years.
Companies that don’t comply would be fined $10 per employee, per day, for up to three months. The rule would begin on the first day of 2023, and would “require employers to deduct at least 6% from workers’ paychecks and automatically increase that savings rate by 1 percentage point a year until reaching 10% of pay,” per the publication. Employees do not have to match contributions; they would be able to change their retirement savings rate to what or when they want, and employees under 21 would not be covered.
Per Pensions & Investments Online, the plan would also allow participants with more than $200,000 in their retirement savings accounts to “an option to take a distribution of at least 50% of their vested account balance in the form of a protected lifetime income solution.”
And the measure would also make the saver’s credit — formerly referred to as the Retirement Savings Contribution Credit, that gives a tax break to low and middle-income taxpayers who are saving for retirement but might not have as much money to put away.
Per TurboTax, only 12 percent of American workers who make less than $50,000 — and qualify — are aware of the Savers Credit, which in its current iteration can reduce or even eliminate your tax bill. The expansion would make the credit refundable, so people without income tax payments could receive the benefit in the form of a contribution to their 401(k) or IRA — something that would dramatically increase retirement savings nationwide.
In fact, the plan would add up to $7.3 trillion in retirement savings over the next decade and would help 63 million more workers start investing in their retirements.
House Democrats voted 22-20 in a Budget Committee meeting to include the provision in the spending package that is aimed at making the economy fairer for all workers, working parents, and families. In a country where the vast majority of working Americans — Gen X’ers and millennials, especially — don’t have enough money saved for retirement, which compounds the stresses and costs of long-term care and raising kids, this move will help workers and working parents finally start putting money away towards their non-working years. In other words, this plan is a pretty big deal.
A recent survey from the Insured Retirement Institute, which looked at 990 Americans between the ages of 40 and 73, found that more than half of those surveyed had less than $50,000 in savings for retirement and that almost 60 percent of workers surveyed are putting less than 10 percent of their income into retirement. (Most financial experts suggest that workers put somewhere between 10 to 20 percent of their paycheck away in their 401(k) or retirement plans.)
A major problem that the law doesn’t solve is that, with the mass adoption of 401(k)s and IRAs over traditional retirement programs like pensions, the gap of retirement income widened between the wealthy and the poor. In fact, per the Economic Policy Institute, 2019 research has found that the shift to 401(k)s has increased “gaps in retirement preparedness based on income, race, ethnicity, education, and marital status.”
No small part of this is because many workplaces will not offer 401(k)s to part-time employees until 2024, thanks to the passage of the SECURE Act. Employers are not required to contribute to 401(k)s, either. That means that people who earn more money save more for retirement, and people who earn less money save less for retirement, and plenty of people have no access to employer-sponsored plans at all. The shift away from pensions to account-type savings plans has harmed lower-income workers the most — but even among those who make more money, they also “do not have adequate retirement savings or benefits,” per the EPI. This provision would target at least one of those problems.
Add that to the fact that Social Security reserves are set to be depleted within a decade, meaning that, in a worst-case scenario, retirees will only get up to 75 percent of the retirement benefits they are fully entitled to by the government, and major action to protect the elderly when they leave their places of work is needed. (That being said, there are a number of actions that the federal government can take to ensure that no one’s Social Security benefits are depleted or harmed by the time that day rolls around, so it’s certainly not a lost cause.)
This bill, though it wouldn’t be able to solve all of the problems of a lack of preparedness for retirement alongside our increased life expectancy, would be able to help more people prepare for their future. It’s certainly a step in the right direction. One problem with the plan is that it doesn’t help people who genuinely cannot afford to save — as many working Americans live paycheck to paycheck.
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