Any $1.7 trillion spending bill passed just before the Christmas holiday is bound to have some wastefulness and policies with unintended consequences. But as a retirement economist, I find the changes to the retirement system, called Secure 2.0, to be the most offensive.
The bill does have some good things. It increases retirement-account participation by making it more attractive for small employers to offer benefits; the administrative costs for small plans can make it too expensive for many businesses. The bill will also give part-time employees access to their workplace 401(k) plans. It also requires automatic enrollment in plans, a practice shown to increase participation.
But the bill’s provision to delay the age when retirees must take money out of the accounts is galling. Beginning at age 72 (the bill increases it to 73 next year), retirees must take Required Minimum Drawdowns (RMDs) each year and pay taxes on the withdrawal. Pre-tax accounts like 401(k)s or 403(b)s are tax deferred, and RMDs are how the government ensures that people eventually pay that tax, especially wealthier people, who often have other forms of savings that fund their retirement. Secure 2.0 increases the age at which retirees must start taking RMDs to 75 over the next decade, after it has already been inching up over the years.
I assume the justification is that people are living and working longer. But if we are willing to acknowledge that reality, why is the slightest mention of increasing the Social Security retirement age considered “gutting the program”? It could be that the people most affected by the age change are wealthier and tend to live longer. If that’s the case, then raising the age is clearly a ploy to help wealthier people avoid paying taxes.
To top it off, lawmakers are using budget gimmicks to claim that the delay won’t cost anything over the next ten years because the provisions encourage more contributions to Roth IRAs, which are post-tax. But the distributions from these accounts are tax-free, so this merely takes money from the long-term to make the policy look free in the medium term—and that already describes everything wrong with our current retirement system.
True, many retirees don’t like paying taxes on the RMDs and are unpleasantly surprised by the tax bill. But there are better ways to craft policy. For example, another good part of Secure 2.0 is that it increases the amount people can spend to buy a deferred annuity. This will help them reduce the risk of outliving their savings, as well as helping pay for long-term care. It also reduces individual tax burdens, because the RMDs can be used to buy the annuity instead of paying the tax. This is worth the lost tax revenue, but Secure 2.0 should have left it at that. Instead, it offers another way for high-net-worth people to avoid paying taxes.
Cost-wise, Secure 2.0’s changes are estimated to be a drop in the bucket compared with our unfunded entitlements. But it is worrying because it goes in the wrong direction by making our retirement system even more expensive for taxpayers when what we really need to do is come to terms with how to fund retirement. Ideally, we would take a long, hard look at the whole system—individual accounts and entitlements together—and put it on a sustainable path. Offering people the option to defer their taxes further suggests that we may never have this conversation and instead just count on someone else paying for it all in the future.
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