Labor Economist Warns of Unaddressed 'Huge Problem' in 'Secure 2.0' Retirement Legislation: Exploring Potential Solutions

Legislators on Capitol Hill are taking steps to broaden the scope of workplace retirement plans.

A set of retirement benefits, known as "Secure 2.0," have been included in the government's budget for the 2023 fiscal year.

Congress is attempting to pass changes to retirement savings before the end of the year, but the legislation does not address the main issue of the retirement savings gap in the United States - the lack of access to retirement savings plans. This is according to researchers at the Schwartz Center for Economic Policy Analysis at The New School.

Secure 2.0 is a proposal that would require employers with retirement plans to automatically enroll eligible workers in those plans. This would apply to new 401(k) and 403(b) plans starting in 2025, with certain businesses being exempt. These businesses include those with 10 or fewer employees, those that have been open for less than three years, and church and government plans.

Despite the proposal, Teresa Ghilarducci, a labor economist and professor of economics and policy analysis at The New School, believes that a "huge problem" still remains. Employers can choose whether or not to offer a retirement plan, and if they do, the design of the plan is not heavily regulated.

Ghilarducci believes that the proposed automatic enrollment expansions may not be very effective, as they do not require employers to contribute or to offer plans.

Ghilarducci noted that a major issue is that those with lower incomes require assistance when it comes to contributing, and that half of the population does not have an employer that offers a plan.

She noted that Secure 2.0 does not address the two major issues.

Data regarding retirement readiness is not encouraging for certain demographics.

At a speech in Washington, D.C. recently, U.S. Secretary of Labor Marty Walsh pointed out that only 36% of African American households between the ages of 55 and 64 have any retirement savings. This number drops to 30% for Hispanic households. He also noted that those who do have savings often have very little set aside.

According to Walsh, this is an issue that needs to be taken care of in the United States.

A survey conducted by the Bipartisan Policy Center and Morning Consult in the beginning of this year revealed that only 52% of people with a household income of $50,000 or less have access to an employer-sponsored retirement plan, while 79% of those with higher incomes do.

Personal Finance has highlighted the importance of having access to retirement savings in times of crisis. Without an emergency fund, individuals may be at risk of making a costly mistake. Additionally, the long-term effects of Covid-19 may be considered the next public health disaster.

Research conducted by The New School has revealed that the current system has caused the average older worker who earns less than $40,000 annually to have no savings for retirement.

The median savings for those aged workers who make between $40,000 and $115,000 annually is only $60,000. On the other hand, those who make more than $115,000 per year have a median savings of $200,000.

Research conducted by The New School has revealed that a significant portion of middle income workers, up to 40%, could be facing poverty or near poverty in their retirement years.

According to a report, the amount of people aged 62 and over who are in or near poverty is projected to rise from 18 million to 21.3 million between 2019 and 2045, which is an increase of 22.3%.

Recently, Sens. John Hickenlooper (D-Colorado) and Thom Tillis (R-North Carolina) and Reps. Terri Sewell (D-Alabama) and Lloyd Smucker (R-Pennsylvania) proposed the Retirement Savings for Americans Act. This bill has inspired new proposals.

Ghilarducci suggests that we should not rely on employers to provide retirement plans for everyone. A more effective approach may be to create a universal retirement plan.

According to Ghilarducci, a universal access plan is a retirement plan that is available to everyone, regardless of their employer.

The Retirement Savings for Americans Act proposes the creation of tax-advantaged retirement savings accounts for workers. This would include both full-time and part-time employees who do not have access to retirement plans, and they would be automatically enrolled in the program.

The universal retirement plan would eliminate the voluntary aspect, according to Ghilarducci. Contributions would be taken out of each paycheck. Additionally, similar to Social Security benefits, these funds would generally not be accessible until retirement.

The government would provide additional support to those who make less than the median income by contributing to their retirement plans in addition to the workers' own contributions.

Retirement accounts would provide a selection of investments with minimal fees for savers to pick from.

A federal tax credit could be made available to those with low- to moderate-income, even if they do not have a large amount of money or do not file a federal tax return, according to Ghilarducci. This credit would be refundable.

The Retirement Savings for Americans Act proposes a refundable tax credit with a maximum of 4% in matching contributions for those with low to moderate incomes. This credit would start to decrease as incomes reach the median.

This alteration would make the retirement system more equitable by guaranteeing that the $250 billion already used to assist people in saving would include the lower half of the income bracket. At present, 70% of the money goes to the top 20%, while less than 5% goes to the bottom half, according to Ghilarducci.

The Secure 2.0 proposal has been met with criticism due to its potential to worsen the situation for those with substantial individual retirement accounts. The bill would increase the age at which retirees must take required minimum distributions from 72 to 75, with the change being implemented over a period of 10 years.

Taking money out of retirement accounts before retirement can be detrimental to financial security, especially for those with lower incomes. The New School research suggests that implementing safeguards to prevent early withdrawals can help ensure that the money is still available when the individual is ready to retire.

The research suggested that retirement funds should not be taken into account when deciding if someone is eligible for public assistance benefits.

The Retirement Savings for Americans Act seeks to make it simpler for employees to maintain the retirement accounts established through the new program. This would be done by allowing them to keep the accounts for their entire lives and to start and stop their contributions whenever they wish. Additionally, the money in the accounts could be passed down to future generations.

Social Security provides a safety net for individuals, ensuring that they will not be plunged into poverty, regardless of their circumstances.

Ghilarducci suggested that, in addition to the implementation of universal retirement plans and private savings, Social Security should be reinforced and broadened.

It is noteworthy that benefits are a major source of income for those in the lower half of the income distribution, and these benefits have a greater impact on their financial situation than those in higher income brackets.

Ghilarducci commented that it helps to bring people closer together and form a sense of community.

The Retirement Savings for Americans Act does not include any changes to Social Security. Nevertheless, other legislative initiatives have proposed increasing the scope of the program.