Financing the Final Quit

Update 617 — Financing the Final Quit:
But Are Retirement Bill Fixes Equitable?

America’s population is aging. Since 2010, there has been a sizable 34 percent increase in the 65-and-older population, the fastest-growing of all age cohorts. Retired Americans receive most of their income through government-sponsored income transfers or through income tax deductions and deferral. And, miracle of miracles, a bipartisan bill updating the rules of financing retirement looks bound for passage later this year.

Last week, the Senate Finance Committee voted unanimously to approve the Enhancing American Retirement Now (EARN) Act, the Senate’s answer to the Securing a Strong Retirement Act (Secure 2.0). This passed the House in March, 414-5, showing strong bipartisan support for boosting Americans’ ability to save for retirement. But look under the hood and you can see the devil in the details: despite including some modest improvements for low-income workers, the bulk of the benefits go to the wealthy.

Today, we discuss the House and Senate bills, suggest some room for improvement, and look ahead as the chambers negotiate an agreement in the coming months.



Nearly half of adults between the ages of 55 and 66 had no personal retirement savings in 2017. Congress is attempting to address the issue through EARN and Secure 2.0, albeit with limited success.

Similarities between the House and Senate bills

  • SAVERS TAX CREDIT: Simplifies and expands eligibility for the saver’s tax credit by creating a single rate of 50 percent of contributions up to the maximum, rather than a phase-out system. 
  • ELIGIBILITY EXTENSION: Makes part-time workers eligible for 401(k) plans after two years with their employer instead of three.
  • ROLLOVER PROVISION: Creates a national “lost and found” to help workers keep track of old 401(k)s and pensions. Both bills would raise the limit on rolling a 401(k) into an IRA when leaving a job from $5,000 to $7,000.
  • EMPLOYER MATCH: Allow employer matching of 401(k)s for employees who are making student loan payments instead of contributing to their retirement account.
  • CATCH-UP CONTRIBUTIONS: Allows increased catch-up contributions. Workers nearing retirement would be allowed to make up to $10,000 in catch-up contributions as Roth contributions. 
  • MINIMUM DISTRIBUTION AGE: Raises the required minimum distribution age to 75. 
  • EARLY WITHDRAWALS: Allows for penalty-free early withdrawals in case of emergency. Both versions of the bill would also allow victims of domestic violence to make penalty-free withdrawals. 

Differences between the House and Senate bills

  • AUTO ENROLLMENT: The House version includes a provision requiring employers to automatically enroll workers in their 401(k) plans. Auto-enrollment has been proposed in the Senate, but is not currently included.
  • MINIMUM DISTRIBUTION AGE: Under the House bill this change would take effect in 2033, and in the Senate version it would take effect in 2032.
  • SAVERS TAX CREDIT: The Senate version of the bill would make the credit fully refundable.
  • CATCH-UP CONTRIBUTIONS: The House bill would apply to workers ages 62 to 64 while the Senate bill would apply to workers ages 60 to 63. 

Mean Retirement Accounts by Percentile of Net Worth (Thousands of 2019 Dollars)

Source: Survey of Consumer Finances

Rags to Retirement

While some provisions do offer benefits to low- and middle-income taxpayers, a disproportionate amount of the benefits would go to wealthier taxpayers. Requiring employers to auto-enroll their employees in their 401(k) plans and reducing the time part-time employees take to qualify for benefits would help increase takeup and access, but these measures do nothing to help low-income workers actually build wealth. Provisions like increasing the required minimum distribution age and allowing increased catch-up contributions only help wealthier households with the excess earnings required to save. 

Delaying required minimum distributions only benefits wealthier retirees who can afford not to take distributions until their seventies. Low-income retirees are much more likely to take out more than the required annual distribution and tend not to live as long. However, wealthy retirees can use the extra time to allow their money to grow in a tax-advantaged account and to withdraw less before they die and pass the accounts on to their heirs.

Larger catch-up contribution limits also benefit only those savers who have the excess income to dedicate to increased retirement contributions. In 2020, only 15 percent of account holders made a catch-up contribution of any size, and 58 percent of those affected by the limit have incomes of at least $150,000. Raising the contribution limit allows wealthier individuals to move more money into tax-advantaged accounts but offers little to workers who have had no chance to build wealth prior to age 60.

Encouraging the use of Roth accounts over traditional IRAs not only raises costs in the long run but also exacerbates existing wealth inequalities. Because Roth contributions are made post-tax, Roth accounts favor wealthy households who expect to be in the same tax bracket or a higher tax bracket when they retire. With no required minimum distributions, wealthy taxpayers can more easily hand down tax-advantaged Roth accounts to their heirs.

These changes are likely to exacerbate both wealth and racial inequalities. Higher-income workers in the predominantly white managerial and professional services, for example, are far more likely to have access to retirement benefits through their employer than workers in the service sector where wages are lower and a higher proportion of employees are people of color. White families are also more likely to benefit from the accumulation of intergenerational wealth. As a result of disparities in both income and wealth, white households are more likely to have retirement savings accounts than Black or Hispanic households.

Mean Retirement Accounts by Race or Ethnicity (Thousands of 2019 Dollars)

Source: Survey of Consumer Finances

Next Steps

With the Finance Committee’s approval of the EARN Act, the Senate is one step closer to putting a retirement package on the floor. Once the Senate has passed a bill, the two chambers will have to work out an agreement on any differences between their bills. With overwhelming bipartisan support for many of the provisions, it’s likely the two chambers will find common ground with relative ease. However, after Congress returns from their July 4th recess, the top priorities for the Senate will be finalizing the USICA/COMPETES negotiations and possibly a reconciliation bill, not leaving much time to address retirement. Accordingly, the retirement package will most likely be dealt with as part of a larger fiscal package at the end of the year.

If Congress wants to address retirement disparities, they will need to do more. For example Supplemental Security Income program asset limits need to be substantially raised in order to allow people with disabilities to both receive needed benefits and put money away for retirement or emergencies. A proposal by Senators Sherrod Brown and Rob Portman, which is not currently included in the Senate markup, would raise the SSI asset limit from $2,000 to $10,000 for individuals and index it to inflation. 

EARN and Secure 2.0 fail to appropriately tackle mega-IRAs, a small number of tax-advantaged accounts with massive balances that allow wealthy investors to avoid paying capital gains or estate taxes so Congress should do more by limiting the maximum balance of mega-IRAs, banning back door mega IRAs, and limiting allowable investments to publicly traded securities.

Congress should additionally work on keeping Social Security solvent in a way that expands rather than cuts benefits to seniors who need them most. Social Security is an essential yet often insufficient source of income for low-income retirees, and expanding benefits would do more for poor retirees’ standard of living than allowing for bigger contributions to retirement accounts.

The provisions Congress has laid forth will not address the underlying reasons that many Americans don’t or can’t save enough for retirement. Low-income families may struggle to take advantage of employer matching contributions even when they have access. If Congress were to take steps to boost the income of poor households through a permanent expansion of the child tax credit, that could do more to improve low-income households’ standard of living than many of the provisions in EARN and Secure 2.0. Congress can also do more to protect and encourage unionization efforts. Union workers are more likely to have access to retirement benefits, as well as healthcare benefits, paid sick leave, and higher wages.