529 Accounts. The ABLE Act. Multiemployer pension plans. State Secure Choice initiatives in Illinois and California. Prize-linked savings. With the U.S. national savings rate on a long-term downward trend, baby boomers entering retirement, student loan debt growing rapidly, and the Social Security Disability Insurance Trust Fund nearing depletion, personal savings issues have unsurprisingly grabbed the policy spotlight.
No wonder President Obama’s Fiscal Year 2016 budget includes a heavy dose of proposals to facilitate Americans’ savings, especially for retirement.
According to his plan, which has also been in his last several budget submissions, any employer with at least ten employees would be required to auto-enroll them in an Individual Retirement Arrangement (IRA). Employers would only be responsible for facilitating the set-up of the IRAs and making the ongoing payroll deductions; no matching contributions would be required.
The proposal is designed to confront two major impediments to higher retirement savings by expanding payroll-deduction retirement accounts to those who currently lack them as well as utilizing the nudge of automatic enrollment (with an ability for employees to opt out) to boost participation.
Access for Part-Time Workers
Furthermore, the budget proposes to enable more part-time workers to contribute to their workplace retirement plan. Under current law, employers may exclude workers who work fewer than 1,000 hours per year, but if the new provision is enacted, a part-time worker who has been with their employer for at least three years and works for a minimum of 500 hours per year would be allowed to contribute to their employer’s plan.
Tax Credits for Small Employers
In exchange for the requirement to offer their employees retirement plans and expand eligibility, Obama would also provide a carrot to small businesses. Any employer that offers an auto-IRA and has 100 or fewer employees would receive a $3,000 tax credit. In addition, the existing “start up” tax credit would triple to provide up to $1,500 per year for three years to small employers that do not have an existing plan, and a new $1,500 credit would be offered to those small employers that already have a plan in place but add auto-enrollment.
How To Pay for the Changes
All of the above provisions to increase workplace retirement plan access and contributions and provide employers with support for setting them up are projected to cost $17.5 billion over the ten-year budget window.
In order to pay for these reforms, the budget proposes to close tax advantages that are primarily used by the well off. Wealthy individuals sometimes utilize tax-preferred retirement accounts as tax shelters, which has sometimes resulted in IRAs exceeding $25 million. Obama’s proposal would restrict benefits in tax-preferred retirement plans once the balances are on track to reach about $3.4 million; any additional contributions or accruals would be subject to taxation as normal capital gains and dividends.
Additionally, Obama would change the rules for non-spouse beneficiaries of deceased workplace-retirement-account or IRA owners such that the beneficiaries would have to withdraw the funds within a five-year period after the original owners’ passing – much more quickly than under current law. The most significant budgetary impact from this change would be the effect of moving revenues forward into the ten-year window that otherwise would have been collected in later years.
These new, targeted limitations on the tax advantages for savings are projected to reduce deficits by $31.5 billion over the decade.
Some of Obama’s proposals, like the workplace retirement plan tax incentives for small businesses, have bipartisan support, while others such as an auto-IRA mandate have evoked concerns, including the potential administrative burden and costs to employers. But the fact that the president and others in Congress are drawing attention to the vital issues of personal savings and retirement security is a promising sign.
Learn more about BPC’s Commission on Retirement Security and Personal Savings.
Bryan Burcat contributed to this post.