Parsing SECURE 2.0: Good News/Bad News and Future Focus
Mark Iwry, it's such a pleasure to talk with you again today. You're very busy in 2023. What's exciting for you right now?
Always great to talk with you, Lisa.
I’m not sure I’d use the word “exciting”, but I am glad the SECURE 2.0 legislation is done. I've spent a great deal of time on it over the last several years -- responding to requests from people on Capitol Hill for ideas, solutions, analyses, and feedback on a wide range of legislative proposals and counterproposals being considered for SECURE 2.0, and pushing for more meaningful reform.
SECURE 2.0 was largely a fallback bill – plan B. It followed the latest unsuccessful effort at major reform of our private pension system by trying once again to enact the federal Auto IRA legislation. That would accomplish on a uniform, nationwide basis the expansion of coverage through automatic IRAs that states have begun to demonstrate. When I first started encouraging state legislators and treasurers, 20 years ago, to help expand private-sector retirement coverage, I hoped pilot projects in one or two states might be enough to spur action in Congress on a unform, nationwide solution.
But by now about a dozen states have adopted state-facilitated Auto IRA legislation – despite constant, heavily-funded industry lobbying against it -- and it’s already providing proof of concept in California, Oregon, and Illinois. Every year Congress fails to enact this solution to include the 57 million working people who have no access to a workplace saving plan, more states step into the breach and take it up themselves. They recognize that the 57 million of our fellow citizens who are uncovered consist disproportionately of Black, Hispanic, women, and lower-income workers.
So once the more ambitious effort to get nationwide automatic IRA enacted went down with the Build Back Better Act (may it rest in peace), people in Congress just wanted to get something done by getting the necessary bipartisan agreement. As a result, everyone knew going in that this would have to be more in the nature of incremental changes – and not all of them the best policy. But – if we can force ourselves to avoid focusing too much on the opportunity cost -- all the good that could have been done instead with a better bill – the glass can be seen as half full.
Among many other provisions, SECURE 2.0 expands the saver’s credit significantly to give lower- and moderate-income workers a little more incentive to save, and expands automatic enrollment and auto-escalation to make saving easier and cover more people, begins an important effort to encourage emergency saving without detracting from retirement saving, and does a bit more to help part-time employees save.
Also, it does feel a bit personal for me, as a fair number of the SECURE 2.0 provisions expand on or otherwise affect initiatives I developed, co-authored, or pushed forward over the years: automatic enrollment and other auto features in 401(k)s; the saver’s credit; the SIMPLE-IRA plan; the QLAC; the startup tax credit for small business retirement plans; EPCRS self-correction including safe harbor for correcting auto-enrollment/auto-escalation errors; facilitating user-friendly rollovers between retirement plans; the state-facilitated retirement saving/auto IRA programs, etc. I can’t help but relate to these a bit like my “children” (albeit in some cases, step children, god children, or wayward children).
For a walk through a few specific Secure 2.0 provisions – its good, bad, and backstory jump here.
You’re currently working with some folks on technical corrections in SECURE 2.0 and related legislation. Please share what you can.
On the heels of extensive legislation like this inevitably come technical corrections – entirely normal in a 350-plus page law like this. There will always be drafting glitches, no matter how much care was taken in the drafting.
A technical correction will be needed, for example, to undo the inadvertent elimination of the ability to make most catchup contributions for 2024 – both the age 50+ and the new types of catchup contributions added by 2.0. Of course, tax incentives of value to company decisionmakers play a key role in encouraging the sponsorship of plans in our voluntary system. But 2.0’s further expansion of the ability to contribute more than $22,500 a year on a tax favored basis (not counting employer contributions) is something only a small fraction of employees can afford to take advantage of, generally those who least need the additional savings. Its main effect is to expand assets under management for the benefit of the investment industry, diverting revenues that could have been used for those who most need the help saving the first dollar in a plan or IRA, such as by beefing up the saver’s credit and enacting nationwide auto IRAs. This was one of the disappointing though unsurprising aspects of SECURE 1.0 and 2.0.
Other technical corrections include fixing the inadvertent preclusive impact of allowing SEP and SIMPLE Roth accounts on Roth IRA contributions and fixing the error in RMD drafting, so people born in 1959 have two different required beginning ages (73 and 75). But the thing to focus on here is not the technical corrections but the major missed opportunity relating to required minimum distributions policy.
SECURE 1.0 and 2.0 defer the RMD beginning age incrementally, costing billions of dollars of revenue in each case. Those billions could have been far better spent on completely exempting ordinary savers – those with more modest savings, say under $200k or $250k -- from required minimum distributions. That would help a majority of America’s seniors and would be far better policy, since the RMD rules are intended to prevent the use of the retirement tax incentive for estate planning or multi-generational tax deferral by people affluent enough to make that their priority. A bottom-up exemption, which my staff and I proposed during the Obama administration and which both Chairman Neal and Senators Cardin and Portman introduced as bills in the past, would provide true simplification so Gramps and Granny would not to have to worry about these rules and the excise tax penalties that go with them.
Four out of five seniors already take out more than the RMD minimums because they need the savings to live on in retirement. They shouldn’t have to worry about compliance with what for them are complex rules prescribing a particular pattern of minimum withdrawals and involving the risk of tax penalties. Instead, the RMD regime should be limited to affluent savers who have the incentive, like some of us, to defer taxes as long as possible, who aren’t relying on all their retirement savings to maintain their standard of living in retirement, and who can afford to hire professionals to help them comply with RMDs in their IRAs.
Net of everything you've seen happening over the last few years legislatively, Mark, are there some things that still worry you?
Well, most of what should concern us has not been solved by the work we've done so far. The problem is not “access” but actual coverage: the 57 million workers, largely Black, Hispanic, women, and lower-income workers, who lack workplace retirement savings. The state auto IRAs are obviously very much a part of the good news, and are a fine demonstration of what can be done. But getting that to scale on a uniform, nationwide basis has yet to be accomplished.
One of the great benefits of having really outstanding leadership from Treasurer Tobias Read and from you as the first director of the program in Oregon, Majority Leader Kevin DeLeon as well as Katie Selenski in California, and Treasurer Michael Frerichs, Senator Daniel Biss, and Courtney Eccles in Illinois -- one of the real benefits of having the A team leading the charge in the states -- has been the relative uniformity of the state programs. There have been small variations, but the basic important principles have been consistently and jointly adhered to.
These basic guidelines include continuing focus on the purpose of encouraging low- and moderate- income workers to save, and to do this without any harm to the private pension system. In fact, the state auto IRA programs enhance the private pension system by ultimately promoting more 401(k) and other plan formation.
Another guiding theme is to do this in a way that's efficient: not big, heavy government, but through a private-public partnership using private-sector investments in IRAs with a private-sector program manager/recordkeeper. And also the key value of fiduciary oversight by state appointed boards using responsible, carefully-overseen RFPs to get the products and pricing negotiated as well as possible given the economies of scale challenges in this space.
We see Colorado and Connecticut and Maryland going live now, alongside the existing programs and ahead of the five or six other states that have authorized programs. To me, that's exciting and encouraging. But ultimately, what we need is a uniform nationwide auto IRA program providing universal coverage.
What else should we be focusing on?
There's so much in the system that needs improving, in addition to the need to cover the 57 million uncovered workers (who disproportionately consist of Blacks, Hispanics, women, and lower-income households). There’s also too much leakage. There are portability problems. We need more retirement income that is reliable, regular, reasonably priced, and otherwise consumer-protective, preferably for life. But we're not making a lot of headway there. There’s some progress following SECURE, but it’s more conversation and less action. We also continue to need more effective consumer protections. And conflicts of interest continue to be a real concern.
We haven't been able to do very far-reaching things in Congress. We know the roots of this problem. Among other concerns, much of our area (retirement) is wired through the tax code. And given the dominance of effective private-sector lobbying, it’s fair to say that our tax code is the most eloquent brief ever written in favor of campaign finance reform.
Mark, you have a way of keeping us looking at things that matter. Thank you for sharing your perspective today.
As part of his continuing illustrious career, Mark focuses on retirement and health policy, sometimes in the forefront and sometimes behind the scenes. You can connect directly with Mark here. You can follow Mark’s work at the Brookings Institution here. You can also connect with Mark on LinkedIn.
This piece was featured in the March 24, 2023, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here
