Local ‘broken’ | AMERICAN SOCIETY OF PENSION PROFESSIONALS AND ACTUARIES

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Perhaps because of last week’s full moon, the “enemies” of the nation’s 401(k) were in effect.

Yes, last week we were “treated” with a Bloomberg opinion piece with ideas on how to “fix” America’s broken retirement savings system, a (sort of) backhanded compliment on SECURE 2.0 at Forbes by Teresa Ghilarducci, and the trifecta was completed with an academic opinion piece in the Washington Post claiming that the current retirement system is “built for the rich.”

Most of the criticism focused on the same old myopic view of taxes and tax preferences, all dressed up through the prism of a highly biased preference for the involvement of the federal government in such matters, rather than the private sector.

Key points

So let me take a couple of minutes to highlight a few points that always seem to get overlooked:

one. Tax deferral is not tax avoidance. Those contributions and earnings will be taxed (though generally outside the 10-year budget scoring window Congress uses).

two. The ability to save for retirement on a pre-tax basis is a powerful incentive, even, and perhaps especially, for those who scholars say have no rational reason to do so (because, on net, they have no federal income tax liability). rent). ).

3. Tax preferences encourage not only participation in the plan (although it does), but also the creation/existence of retirement plans, in which low-income workers are 12-15 times more likely to save than on their own .

Four. Nondiscrimination tests and statutory contribution limits work (as designed) to maintain an effective balance between the benefits of higher-paid workers and others. In fact, actual data shows that while higher income earners have higher account balances, those balances are roughly in proportion to their income. They are not “upside down”.

Now, with those elements in mind (we’ll come back to them later), what did the haters have to say?

The arrangements’

Well, the Bloomberg editors’ “fix” to the system they claim is “broken” involves: (1) making access universal (but wait, what about Social Security?), with a 3% automatic default with an opt-out (they cite the UK NEST opt-out rate of 8%, although the opt-out rate for comparable state IRA programs in the US is three to five times higher ); (2) keep it “simple” (the federal government’s Thrift Savings Plan or TSP was cited), ostensibly with an abbreviated fund menu, or perhaps simply because it’s a government solution; (3) make it “portable” (actually, they want it centralized, presumably with the federal government, so it never has to be moved/dumped), and (4) they want it to be “progressive”. which basically means changing the current tax deferral to a direct government match for “low earners.”[1]

There’s really nothing new here, the solution seems to be, more or less, a “nationalization” of retirement savings, with a program focused on helping those at the lower end of the income scale, but completely ignoring the vast sea of ​​middle income. savers, for whom Social Security alone probably won’t come close to replicating their retirement income needs.

The Washington Post The opinion piece was written by Daniel Hemel, a professor at the University of Chicago Law School and a visiting professor at New York University School of Law. He seems pretty pissed off at the bipartisan support for SECURE 2.0 (actually the Securing a Strong Retirement Act of 2022) as some kind of sellout by Congress to the financial services industry. He has a problem with “mega-IRA,” but also points to Roth contributions, the extension of the required minimum distribution term, the Saver’s Credit no-tax refund, as well as the tiered increase in catch-up limits, all of which are characterized as a gift to the rich, a budget “trick”, or both. He offers no solutions to any of this, although he does suggest that a focus on a strengthened Social Security would be a better use of his time (I, for one, would support it). Nor does it acknowledge that this “created for the rich” system has ever managed to end up with about two-thirds of its participants in tax brackets that, by most measures, would fall significantly below what that label would cover. Groups for whom this “broken” system is a lifeline beyond the Social Security baseline and the pension benefits they never had.

And then, just before that article, Teresa Ghilarducci, a well-known critic of 401(k) plans, writes an article ostensibly focused on the provisions of SECURE 2.0 (even taking the time to try to explain why it gained such strong bipartisan support) in his way of pointing out why his proposal (now called the Ghilarducci/Hassett/EIG withdrawal proposal) is superior . Now, most of us would think that the legislation (any legislation) passed by the US House of Representatives by a margin of 414 to 5 would have to be about something as innocuous as naming a job, which would promote so many retirement aspects. instead, security is a testament to the importance of the problems and the potential to advance their solution.

Well, Ms. Ghilarducci seems to think that while SECURE 2.0 is perhaps better than being poked in the eye with a sharp stick (my words, not hers), she says that the solutions it provides are too few (and probably too many). afternoon). compared to her solution (if bipartisanship in the US Congress is quickly dispensed with, she prides herself on her alignment with conservative economist Dr. Hassett) that would build a TSP-like program for, well, everyone, or at least those that don’t. She no longer has a retirement savings plan at work. This particular article doesn’t go into the details of its solution, but we’ve seen (and written about) it before. Mind you, she’s not really concerned with what you and I might consider middle-income workers — her focus is on the low end (less than $52,000 median household income). She requires a contribution from the government (instead of an employer), but only 3%. Now, that’s a number that has come up in previous proposals that you’ve put forward, and Jack VanDerhei, while at the Employee Benefits Research Institute, projected that it’s way below where the status quo brings that same group in the current system.[2]

‘broken’ premises

Now, those of us who actually work with real people know that this so-called “broken” system works amazingly well, for those who have access to it, including, especially, those at the lower end of the income scale. Academics routinely target the wealthy in their criticism, but ignore the needs of middle-income households for whom Social Security surely won’t be… enough. And completely dismiss/ignore the role current tax preferences play in encouraging the formation and maintenance of these retirement plans.

In fact, underneath all the criticism, the real problem seems to be that, as we’ve repeatedly pointed out, not enough American workers have access to that system. What these critics don’t seem to appreciate is that instead of bridging that gap by encouraging more participation and plan formation, these random op-eds, often based on myopic viewpoints and flawed premises, only serve to undermine that gap. objective. But then, maybe there’s a reason…

There are many success stories out there. I’ll bet each of our 35,000+ readers knows one, ten, a dozen, maybe hundreds…it’s about time we started counting them.

Footnotes

[1] Oddly, as an add-on, they suggest that people should be able to “leverage their accounts for occasional emergency spending,” which they claim would “save billions more than would otherwise go toward interest on payday loans to often abusive.”

[2] My guess is that, like the previous proposals, your math works because it assumes that balances that the person (and perhaps their spouse) don’t actually withdraw will be absorbed into the “common fund” and used to fund other payments.

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