American workers and retirees are getting nice year-end gifts from Washington.
As part of a larger bill to keep government going, Congress passed and President Biden signed, something called Secure 2.0, which will make it easier for millions of Americans to store more money in their workplace pension plans.
It will also help middle- and low-income workers who may not be able to save a lot by offering them a new benefit that is equivalent to a savings contribution, up to $1,000 per person.
Finally, it will make it easier for part-time workers to enroll in an employer’s pension plan, by requiring plans to automatically enroll workers unless they opt out.
Read: New catch-up contribution limits could boost your 401(k) — if you can afford it
This latest change is potentially significant, as there are some 26 million Americans who, for various reasons, only work part-time. Why should pension plans only be offered to full-time workers? Last week’s bill builds on 2019 legislation requiring employers with 401(k) plans to allow long-term part-time employees to enroll, including those with one year of service ( with 1,000 hours) or three consecutive years (with 500 hours of service) . Beginning in 2025, the new bill will reduce this waiting period by one year, meaning that part-time workers will be able to enroll in their employer’s plan after two years, instead of the current three.
Read: Automatic 401(k) enrollment in Secure 2.0 to help retirement savers
But now let’s read the fine print. Secure 2.0 automatically enrolls part-timers into their employer’s pension plan unless they retire, but only if the pension plan is new. Existing plans do not have to automatically enroll their workers. Then there’s this: Many employers still don’t offer pension plans, making all of this irrelevant for many workers, the very people who need to save more for retirement.
Every nickel workers can resell matters, given that study after study shows how much a few tens of millions of Americans have saved. How little? According to investment giant Vanguard, the average retirement savings by age is downright scary:
|
Age |
Medium |
Median |
|
under 25 |
$6,300 |
$1,800 |
|
25-34 |
$37,200 |
$14,100 |
|
35-44 |
$97,020 |
$36,117 |
|
45-54 |
$179,200 |
$61,530 |
|
55-64 |
$256,244 |
$89,716 |
|
65+ |
$279,997 |
$87,725 |
|
Source: Vanguard’s How America Saves report |
It is the middle column on the right that interests me. The median means half have less and more, which means half of Americans between the ages of 55 and 64 have less than $89,700 in their retirement accounts. How far do you think this will go, especially in a time of high inflation? As I’ve mentioned many times before, just one item – the health care costs borne by a couple retiring at age 65 – is, according to Boston investment giant Fidelity, estimated at $315,000. So yes, it’s more important than ever to make it easier for everyone to save, or anything for that matter.
Despite its limitations, I’m heartened that in this era of political polarization, Secure 2.0 has garnered bipartisan support, drawing “yes” votes from opposites like Mitch McConnell, the right-wing Republican Senator from Kentucky, and Alexandria Ocasio-Cortez, the New Yorker. left-wing representative. This could perhaps bode well for future efforts to resolve the pension crisis in the United States.
In fact, a bill to build on Secure 2.0 was just introduced in Congress two weeks ago. He is also bipartisan, as he has Republican and Democratic sponsors in both the House and the Senate. It’s called the Americans Retirement Savings Act of 2022 (RSSA), which is proposing a very big change: a single, federally-run 401(k) retirement plan for workers without an employer-sponsored retirement plan.
This would be a very big deal, as it would allow millions of workers left behind by SECURE 2.0 to be automatically enrolled in a plan, allowing them to save more – or start saving – for their retirement. Workers could change jobs without having to worry about access to a plan; the assets would go into a low-fee diversified investment fund. And they would get something in return in the form of a refundable tax credit, not from their employer but from the federal government.
Of course, where the money will come from will be a major sticking point, given concerns about the future viability of existing programs like Social Security and Medicare. The only way to strengthen them is to either raise taxes, raise the eligibility age, or cut benefits, or some painful combination of all of the above. In this context, launching another federally funded retirement program is likely to prove politically difficult.
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