Situation: Clients might come away in a panic if they have been following the headlines in recent years on the question of America’s retirement savings. The prediction of doom comes from several sources. First, according to the Social Security trustees, the Old-Age and Survivors Trust Fund is forecast to become insolvent by 2034, at which point continuing taxes are expected to be enough to cover only 78% of scheduled benefits. The Center for Retirement Research at Boston College estimates that more than half of working-age households are at risk of having inadequate retirement resources. The National Institute on Retirement Security goes further, claiming that at least 65% of workers are saving less than what is required to meet their retirement income needs. Unsurprisingly, most Americans believe that we face a retirement crisis.
The dire tales of crisis have not gone unnoticed in the halls of Congress. Bipartisan legislation (known as SECURE 2.0) designed to help shore up the employer retirement plan’s leg to the “three-legged stool” stalled in 2021, but is expected to pass in 2022. In addition, The Treasury Department and the IRS updated the tables used to determine required minimum distributions (RMDs) to reflect current longer life expectancies. The new tables are effective for distribution calendar years beginning on or after January 1, 2022. Finally, Social Security solvency has long been an interest of Congress. While it is not clear whether Congress will have time this year to address Social Security, one proposal known as the Social Security 2100 Act: A Sacred Trust has nearly two hundred Democratic cosponsors and includes provisions, which may be embraced by Republican lawmakers. Thus, 2022 could be an important year for changes in retirement planning. This Counselor’s Corner will provide a review of these changes and proposed changes.
Solution: A major theme of the retirement crisis story is that the private retirement saving system — which for most individuals means employer-sponsored 401(k) plans and individual retirement accounts — has been ineffective for large segments of the population and is becoming less effective as time passes. The shift by private employers from traditional defined-benefit plans to defined-contribution plans, moreover, has heightened criticisms of this segment of the retirement system.
To help address some of the perceived shortfalls on December 20, 2019, Congress passed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). In addition to making significant changes to the Required Minimum Distribution (RMD) rules, the legislation included provisions aimed at increasing access to employer retirement plans and preventing older Americans from outliving their retirement assets. Specifically, the legislation helps to increase access by:
- Making it easier for small businesses to set up 401(k)s by increasing the cap under which they can automatically enroll workers in “safe harbor” retirement plans from 10% of wages to 15%.
- Providing a maximum tax credit of $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment.
- Enabling businesses to sign up part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service.