Congress passed SECURE 2.0 on December 22, 2022, as part of a year-end omnibus spending package. For details on what lawmakers included in the final version, see SECURE 2.0 Passed. What Made It In?
Congress continues to make progress on SECURE 2.0, bipartisan legislation aimed at bolstering Americans’ personal savings for both emergencies and retirement. BPC has long supported efforts to enhance Americans’ financial security. In fact, several provisions currently under consideration were recommended by our 2016 Commission on Retirement Security and Personal Savings, and some were previously adopted in SECURE 2.0’s predecessor, the 2019 Setting Every Community Up for Retirement Enhancement Act.
With three iterations of SECURE 2.0 at various stages of the legislative process (passed on the House floor in March and advanced by the Senate Committee on Finance and the Senate Committee on Health, Education, Labor, and Pensions in June), lawmakers must make consequential decisions about the final bill. Here is what they should keep in mind.
Boosting Retirement Savings Is the Name of the Game
SECURE 2.0’s primary focus is enhancing Americans’ retirement savings by closing coverage gaps and expanding incentives for employers to offer and savers to participate in workplace retirement plans. A BPC-Morning Consult poll found that only 52% of individuals with household income at or below $50,000 have access to an employer-sponsored retirement plan, compared to 79% of people with higher household income. Moreover, small businesses, which employ 47% of American workers, often report that the financial and administrative obligations associated with setting up a retirement plan for their workers deter them from doing so. As a result, their employees disproportionately struggle to save for retirement: Less than one-third of employees at the smallest companies save for retirement compared to nearly two-thirds of those at the largest. Several provisions on the table would advance this goal and address existing inequities in retirement saving.
For example, a core set of provisions in the House and Senate versions of SECURE 2.0 would address challenges that low- and moderate-earners face by: allowing student loan payments to qualify for matching employer contributions to retirement accounts, ensuring that more part-time workers can participate in retirement plans, and enhancing the Saver’s Credit. The Senate Finance Committee’s proposal goes a step further by making the Saver’s Credit fully refundable, expanding its support and saving incentive to many earners who have no federal income tax liability.
All versions of SECURE 2.0 also allow 403(b) plans—401(k)-type plans typically provided by nonprofit organizations—to participate in multiple employer plans, which are premised on permitting smaller employers to offer the same type of retirement benefit as larger organizations without bearing the full administrative burden of offering such a plan.
Increasing the use of automatic enrollment and automatic escalation would also amplify the benefits of expanding access to retirement plans. Notably, only the House version of SECURE 2.0 currently includes the most impactful of such provisions, requiring most new retirement plans to automatically enroll eligible participants and automatically increase contributions by one percentage point (up to 10% of wages) annually. (Participants would retain the ability to opt out.) The Senate bills include various incentives for plans to adopt automatic features. Such approaches can significantly increase participation and saving rates; recent research from Vanguard shows that automatic enrollment boosted participation in retirement plans from 28% to 91%. Additionally, Senators Todd Young (R-IN) and Cory Booker (D-NJ) have a complementary proposal that lawmakers could still include in the final version of SECURE 2.0.
While SECURE 2.0 centers on helping workers accumulate assets, several important provisions could help retirees better preserve their standard of living in retirement. In general, these proposals would expand access to annuity options, making it easier for retirement plan participants to turn their savings into a lifetime stream of income.
Progress on Emergency Savings Is Overdue
In addition to saving for retirement, Americans need help saving for short-term, unexpected needs. Too many Americans lack adequate liquidity to pay for an emergency expense, which has wide-ranging effects on household finances, health, and retirement security. Indeed, 34% of people would struggle to afford an out-of-pocket expense of $500 or less. Having access to an emergency savings account allows workers to set aside additional funds to pay for an unexpected cost, such as a car repair or medical emergency.
Moreover, adequate emergency savings are an important buffer against early withdrawals from retirement savings when unexpected expenses arise. The Senate HELP Committee’s bill would permit employers to automatically enroll employees into emergency savings accounts that could hold up to $2,500 of post-tax contributions to be accessed at least once a month. Employees could opt out or adjust their contribution rate at any time. Automatic contributions to the short-term savings account would be up to 3% of pay, and any excess contributions would automatically flow into their workplace retirement account. Meanwhile, the Senate Finance Committee aims to achieve the same goal by providing workers the ability to withdraw up to $1,000 penalty-free from their retirement account to cover an emergency expense. Provisions such as these would allow many employees to save for emergencies without forgoing matching contributions to their retirement account, helping them strengthen their short- and long-term savings at the same time.
While these provisions would only stand to benefit the 72% of American workers with access to an employer-sponsored retirement plan, it would be a significant—and vital—first step. To reach those without employer plans, policymakers should consider “out-of-plan options,” providing access to emergency savings accounts not directly tied to retirement savings.
Remember Who Needs the Most Support
The lowest 25% of earners are less than half as likely to have access to an employer-sponsored retirement plan than the highest 25% of earners, and less than one-third as likely to participate in such a plan. Federal policy changes could make long-term financial security a reality for many lower- and middle-income workers, and the positive effects of such reforms—on both the household and societal levels—are likely worth the cost. For example, offering small financial incentives (such as low-value gift cards) for contributing to a plan could help many get started, ultimately contributing to greater financial security in retirement for the most vulnerable workers. While current law does not allow such incentives, provisions in the House and the Senate versions of SECURE 2.0 would remove that barrier. Along with the previously discussed enhancements to the Savers Credit and other related proposals, the final bill could create significant new incentives for low- and middle-income workers to save for retirement.
To further focus the impact of SECURE 2.0 on individuals who need the most support, Congress should also consider adding a provision—not currently included in any version—to address outdated asset limits for Supplemental Security Income, which penalize saving for the lowest-income Americans. Potential solutions include increasing asset limits and exempting certain income from restrictions.
In contrast, several of the pending provisions are aimed at higher-income workers. Reforms such as raising the age at which participants must begin taking required minimum distributions or increasing the catch-up contribution limits applicable to participants nearing retirement primarily allow those who already have financial security to accumulate more assets at taxpayer expense.
Offset Real Costs with Real Savings
As with any legislation, policymakers should consider the budgetary impacts of SECURE 2.0, but the current scoring of retirement provisions does not accurately convey their cost. Since official budget estimates incorporate only a 10-year window, they overstate the cost of tax deferral (which shifts tax revenue into the future, outside the 10-year window) and understate the cost of increasing contributions to Roth accounts (which shifts tax revenue forward, into the 10-year window). These dynamics allow legislation to be “fully paid for” through gimmicks rather than legitimate offsets, and current versions of SECURE 2.0 include such legislative sleight of hand—something policymakers should avoid as much as possible without derailing the bill’s passage. Moving forward, a long-term scoring approach based on the discounted net present value of the projected revenue changes would be a preferable lens through which to evaluate retirement legislation.
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