Will You be Able to Retire?

Update 344 — Will You be Able to Retire?
Boomer vs. Millennial Takes on Senior Security

The average age of baby boomers is 65 today. 10,000 boomers retire every day and thousands more reach the antediluvian retirement age of 65.  Those who haven’t retired are generally unprepared for it financially. Among millennials and younger Americans, the situation is more remote but also more dire.

How do the retirement circumstances of boomers and millennials compare?  What are the current leading proposals in Congress to address the nation’s multi-trillion dollar shortfall in senior security?  We review these questions below.

Best,

Dana

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Yesterday, House Ways and Means unanimously passed H.R. 1994, “Setting Every Community Up for Retirement Enhancement Act of 2019” (the SECURE Act).  The bill would enable workers to increase retirement savings through tax incentives. Also known as the Retirement Enhancement and Savings Act (RESA), the bill is a worthwhile but modest approach to solving the retirement problem.

RESA has bipartisan and bicameral support, but tax incentives can only go so far. Some House and Senate Democrats are calling for an expansion of Social Security to ensure a basic standard of living for all Americans in their retirement, including the millions without any savings.

Per a 2017 survey by Transamerica Center, 80 percent of Millennials and GenX’ers believe they will not receive any Social Security benefits, but they still are not saving enough to meet their basic needs in their retirement years. Nearly half of all Americans do not have any retirement savings, and based on current retirement account assets, 92 percent of households do not meet their savings target.  Overall, America’s retirement savings gap is between $6.8 to $14 trillion.

Attention: Deficit in Savings

Baby Boomers did not maintain the savings rates of their predecessors.  Half of American families near retirement age have less than $12,000 saved and a third have less than $5,000. Younger generations do not fare any better.  Gen X’ers (currently between 40-54 years old) have the lowest retirement savings rate compared to their older and younger counterparts. They also have the highest levels of overall debt.  While Millennials (and working age Gen Z) do save more than Gen X’ers, they are still gravely underfinancing their retirement. Experts point to a few reasons why Americans stopped saving:

  • wage stagnation
  • household debt: credit cards, student loans, and mortgage payments
  • rising cost of living and healthcare expenses
  • lack of access to a workplace retirement plan

The SECURE Act:  Incentivizing Saving

The SECURE Act is one of the few pieces of legislation with a chance of becoming law in a divided Congress, but does it do enough to stem the oncoming crisis?

For individuals, the SECURE Act:

  • redefines IRA compensation eligibility for some students and home health care workers, so they will be able to save more.
  • allows money in college savings (or 529) plans to be used toward home schooling, apprenticeships, and student-loan expenses.

The bill has a CBO score of $16.3 billion after taking into account a pay-for that requires most inherited plans be distributed within 10 years. Aside from encouraging individual saving, the SECURE Act contains many provisions aimed at helping small businesses. A 2015 Social Security report found that only a fifth of businesses with fewer than 10 employees offered a retirement plan, like a 401(k), compared with 72 percent of businesses with more than 100 workers.

In addressing the lack of access to workplace retirement plans, the SECURE Act:

  • creates a new tax credit to encourage small employers to set up and automatically enroll their workers in retirement savings plans
  • expands an existing tax credit for small employers to defray pension-plan startup costs.
  • allows small employers to pool together resources and create multi-employer retirement plans (adopted during markup)

The SECURE Act will help Americans save. But it merely expands on current tax incentives on the books. These tax incentives are regressive (they mostly go to wealthy people), and people who already save can simply shift funds to tax-favored accounts. This legislation will not affect the 40 percent of middle class Americans who couldn’t cover a surprise $400 expense.

Expanding the Social Safety Net

Incentivizing savings through tax credits is not a panacea.  Over 150 House members and 19 Senators are members of the Expand Social Security Caucus — established in September 2018, the Caucus is committed to bolstering and protecting Social Security.

In February, co-chair of the caucus, Senator Bernie Sanders, introduced the Social Security Expansion Act, along with House Rep. Peter DeFazio. The Social Security Expansion Act would:

  • apply Federal Insurance Contributions (FICA) tax collections to income over $250,000
  • increase benefits by over $1,300 annually for seniors making less than $16,000 per year
  • increase cost-of-living adjustments
  • ensure that social security can pay every benefit owed for the next 52 years

The Social Security 2100 Act (H.R. 860), introduced by Rep. John Larson on January 30, has over 200 cosponsors, all Democratic. The Senate companion, S. 269, is cosponsored by Sens. Blumenthal and Van Hollen.  The bill would:

  • apply FICA tax collections to income over $400,000
  • increase benefits by 2 percent for all beneficiaries
  • revamps the the cost-of-living adjustment formula to guard against inflation
  • sets a minimum benefit 25 percent above the nation’s poverty line
  • provides a tax cut for Social Security beneficiaries and phases in increases in the contribution rate, beginning in 2020

Expanding Social Security and providing tax incentives to encourage savings should not be considered substitutes for each other. The two approaches to solving retirement insecurity can be used in tandem to ensure that every American can retire with dignity and those that have the ability and means to save during their working life are incentivized appropriately to do so.

Making Retirement Great Again

On Monday, Senate Finance Committee Chairman Grassley and Ranking Member Wyden reintroduced RESA, which is nearly identical to the SECURE Act. As with the House bill, RESA  has a long history and members have been negotiating the details since 2006. We expect a markup and referral to the full Senate sometime soon.

Retirement security is also a popular topic among Democratic Presidential candidates.  Sen. Warren co-introduced the bipartisan Retirement Savings Lost and Found Act last year, which seeks to make retirement savings information digital and accessible. Sens. Cory Booker, Kirsten Gillibrand, and Kamala Harris are all co-sponsors of Sen. Sanders’ Social Security Expansion Act.

The SECURE Act/RESA may be the only comprehensive retirement legislation that could be enacted into law this Congress. But proposals introduced this Congress breathe new life into Social Security and give younger generations some hope that they will still continue to enjoy the retirement benefits.

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