Do Americans need a helping hand from their employers – and handouts from Washington – to get them to save for retirement? This is the premise behind the draft retirement formulation in the House Ways and Means Committee’s markup of the $ 3.5 trillion budget reconciliation package. (September 13 update: The Committee today indicated how it will fund the program, including big changes in retirement account rules and increases in income, inheritance and capital gains taxes.)
According to the proposal, from 2023, employers with five or more employees should offer a pension plan and automatically enroll employees, diverting 6% of their salary to a retirement account. An automatic indexation clause would increase the automatic contribution to 10% of salary by the fifth year. The default plan would be a Roth IRA invested in a target date fund, a mix of investments based on your expected retirement year.
For employers, it is a mandate. They should offer the plans. Employees could opt out.
“We are not trying to place an undue burden on the small employer. We’re trying to help the employee who works for a small employer save their life, ”Ways and Means President Richard Neal (D-Mass.) Said during the hearings.
The retirement section of the Build Back Better Act is expected to significantly increase retirement savings. This would create 62 million new retirement savings and add an additional $ 7 trillion in retirement savings over 10 years, according to the Employee Benefit Research Institute. Almost all (98%) of these new savers would be people earning less than $ 100,000 per year.
“We know people are much more likely to save for retirement if they have access to a workplace pension plan (12 times more likely), but there is a real problem with access – small businesses don’t. never quite seem to take the time to set them up. says Nevin Adams, content manager for the American Retirement Association.
To offset administrative costs for employers, the proposal includes a tax credit to employers for setting up the plans. And a tax penalty of up to $ 900 per employee per year if they don’t comply.
“Main Street now faces an onerous new tenure from Washington and a tax penalty if you don’t comply. Small business owners know this is another war on work, or looks like another, ”said Rep. Kevin Brady (R-Texas), the committee’s top Republican. ways and means during hearings.
The small business lobby is crying foul. The National Federation of Independent Businesses (NFIB) says tax credits given to employers for setting up schemes are temporary and limited, and the cost of compliance amounts to a “hidden tax.”
Self-IRAs have been proven to work for both employers and employees. Oregon Representative Earl Blumenauer noted how a similar state-mandated self-IRA program mandated for all employers in his state has so far generated $ 120 million in savings “in our little one. State”. And a Pew poll found 73% of employers were either satisfied or neutral about Oregon’s program.
Along with the self-IRA provision is a change in the credit of the saver. Low-income Americans, even those who owe no taxes, would get a new savings credit – a government match on their savings – $ 100 to $ 500 per person per year from the US Treasury paid into their individual retirement account . The $ 47 billion cost of the retirement proposal is split evenly between the saver’s credit provision and the auto-IRA provision.
This self-IRA proposal is different from the pending bipartite retirement legislation known as SECURE 2.0, which would not require employers to offer these accounts but rather make them voluntary. SECURE 2.0 contains other important provisions, such as allowing employers to put matching money into retirement accounts when workers pay off student loan debt.
Representative Neal said SECURE 2.0 is “going over the goal line this year” as well. Some of the revenue streams for the Build Back Better Act under discussion relate to retirement, and Rep. Neal said they could be released this weekend.
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