Why Congress’ new retirement reforms aren’t all they’re cracked up to be

A new set of reforms to America’s retirement tax and savings plans passed a key hurdle in Congress last week.

Variously known as the SECURE Act 2.0, the EARN Act and the RISE & SHINE Act, the measures will make changes to rules around IRAs, 401(k)s and other tax-privileged retirement plans. 

The bills are getting broad cheers from Republicans and Democrats and most of the financial press.

But there are not one, but three, big problems.

  1. They barely address the biggest retirement crisis facing the U.S.

Nearly a third of the over-55s in America have no retirement savings whatsoever — and no pension plan either. So reports the Government Accountability Office, which puts the shocking figure at 29%. Oh, and that was before the pandemic and the lockdowns.

This, in an aging society where the financial needs of senior citizens are rising, not falling. Tens of millions will be living in old age in poverty. 

Albert Feuer, a benefits lawyer and an expert on the bills, says the one thing that could really help these people would be an expansion of the so-called Savers Tax Credit.

This credit is a modest annual bonus that taxpayers give to the working poor if they put some of their own hard-earned dollars into a retirement account like an IRA. It’s limited to $1,000 per person per year and to people on low incomes: $34,000 a year in adjusted gross income for a single tax filer and $68,000 for joint filers. And it goes to saving, not spending.

The new bills will expand the program. For instance it will give more people the maximum $1,000, and it will direct the money straight into their retirement plan, and it will make the credit refundable

But the expansion only goes so far. It doesn’t, for example, raise the amount beyond $1,000—a sum, while helpful, that is still grossly inadequate for retirement. The Joint Committee on Taxation, the Congressional office that runs the numbers on tax and spending, says that less than one quarter of the cost of this bill goes on expanding the credit. The other three quarters goes on tax breaks for the upper middle class.

The expansion of the Savers’ Credit won’t even kick in until 2028.

As a result, Feuer argues SECURE 2.0 is likely to increase, not decrease, retirement inequality because it directs most of its benefits towards those higher up the ladder.

2. The math isn’t honest.

The Committee for a Responsible Federal Budget says the Senate is hiding the real cost of the bill to taxpayers. The CRFB estimates the actual cost will be $84 billion, not the alleged $39 billion, once you strip out “accounting gimmicks.”

Feuer himself says the bill is full of “smoke and mirrors.” Many of the true costs are effectively hidden: For example Congress counts the upfront revenue gains from contributions to Roth IRAs, which are made with after-tax dollars, but not the future losses of revenue once the money is in the shelter.

3. They don’t touch the biggest tax shelter abuse

The bill abandons plans to claw back some of the extraordinary tax breaks realized by the wealthy through so-called Mega IRAs and Mega 401(k)s.

It is not only screaming socialists who think there is something weird about special tax breaks allowing very rich people to shelter an extra $280 billion in assets from the government. But that was the total held in 2019 in so-called Mega IRA accounts worth more than $5 million. And $93 billion of that was in IRAs valued above $15 million.

A balanced index of U.S. stocks and bonds has gained about 10% since the end of 2019, even when you account for the recent meltdown, so the figures are presumably that much higher today.

None of this is illegal or even reprehensible. People used the loopholes available to them. But it’s still egregious, and it is absolutely not what these shelters were created for. It should be reasonable to rake in at least some of the windfalls.

There was a proposal to require people who’ve accumulated that much to start taking distributions above the $10 million level, but it was dropped from the bill that was approved in Senate committee last week. The Joint Committee on Taxation estimated that proposal alone would have generated an extra $14 billion in tax revenue: More than is being spent just expanding the savers’ credit for the poor.

In other words, just requiring people to cash out IRA balances above $10 million would allow us to double the help being given to the working poor trying to save for retirement. It would more than pay for it. Sen. Ron Wyden (D-Ore.), the chairman of the Senate Finance Committee, promised to keep up his pressure force distributions from mega ITAs.

“I want members and all who are following this to know, I’m going to keep bird-dogging this issue,” Wyden said last week.

A “fortunate few” hold more than $200 billion in IRAs or 401(k)s, said Wyden. “There is no reason why American taxpayers should be on the hook for subsidizing these massive accounts…The final retirement bill that hits the president’s desk ought to crack down on this obvious abuse of the tax code.”

Will Congress fix these issues? Stay tuned.

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