By Paul Brandus
Every nickel that workers can salt away is important given how little people saved
America’s workers and retirees are getting some nice end-of-the-year gifts from Washington.
As part of a larger bill to keep the government running, Congress passed and President Biden signed something called Secure 2.0 that will make it easier for millions of Americans to put more money into their workplace retirement plans.
It will also help middle- and low-income workers who may not be able to save much by offering them a new benefit that amounts to a savings contribution — up to $1,000 per person.
Finally, it makes it easier for part-time workers to enroll in an employer’s pension plan by requiring plans to automatically enroll employees unless they choose not to.
Read: New catch-up contribution limits could increase your 401(k) — if you can afford them
This last change is potentially significant as there are approximately 26 million Americans who only work part-time for various reasons. Why should retirement plans only be available to full-time employees? Last week’s bill builds on 2019 legislation that requires employers with 401(k) plans to allow long-term part-time workers to join, including those with one year of service (with 1,000 hours) or three consecutive years (with 500 hours of service). . . From 2025, the new draft law will shorten this waiting period by one year – so part-time employees can enroll in their employer’s plan after two years instead of three.
Read: 401(k) Auto-Enrollment in Secure 2.0 to Help Retirement Savers
But now let’s read the fine print. Secure 2.0 automatically enrolls part-time employees in their employer’s pension plan unless they opt out – but that only applies if the pension plan is new. Existing plans do not have to automatically enroll their employees. Then there’s this: Many employers don’t offer any retirement plans at all, making all of this moot for many workers — the very ones who need to save more for retirement.
Every nickel workers can salt away matters as study after study shows how little millions of Americans have saved. How small? According to investment giant Vanguard, the average retirement savings by age is downright scary:
Age Average Median Under 25 $6,300 $1,800 25-34 $37,200 $14,100 35-44 $97,020 $36,117 45-54 $179,200 $61,530 55-64 $256,244 $89,716 65 Report+ $279,722 $279,997 by Vanguard
It’s the middle column on the right that concerns me. Median means half have less and more, meaning half of Americans ages 55 to 64 have less than $89,700 in their retirement accounts. How far do you think this will go, especially in times of high inflation? As I’ve mentioned many times, one item alone — the out-of-pocket healthcare expenses for a couple retiring at age 65 — is estimated at $315,000, according to Boston-based investment giant Fidelity. So yes, making it easier for everyone to save more – or anything at all – is more important than ever.
Despite its limitations, I’m encouraged that in this era of political polarization, Secure 2.0 has garnered bipartisan support and “yes” votes from opposites like Mitch McConnell, the right-wing Republican Senator from Kentucky, and Alexandria Ocasio-Cortez, the new representative of the Left in York. This could perhaps bode well for future efforts to deal with the US pension crisis.
In fact, just two weeks ago, a bill was introduced in Congress that aims to build on Secure 2.0. She is also bipartisan, having both Republican and Democratic sponsors in both the House and Senate. It’s called the Retirement Savings for Americans Act of 2022 (RSSA) and it proposes a very big change: a single 401(k) type retirement plan run by the federal government for workers without an employer-sponsored retirement plan.
This would be a very big deal, as it would allow millions of workers left behind by SECURE 2.0 to be automatically enrolled in a plan that allows them to save more for retirement — or start saving. Workers could change jobs without worrying about accessing a tariff; Assets would flow into a diversified mutual fund with low fees. And they would get something in return in the form of a refundable tax credit, not from their employer but from the federal government.
Of course, where the money would come from will be a big sticking point given concerns about the future viability of existing programs like Social Security and Medicare. The only way to strengthen them is to either raise taxes, raise eligibility ages, or cut benefits — or a painful combination of the above. Against this background, the introduction of another state-funded pension program is likely to prove politically difficult.
-Paul Brandus
(ENDS) Dow Jones Newswires
12/29/22 0858ET
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