Secure 2.0 Act Still Leaves Holes in Retirement Planning

Retirement Reforms

Yes, there are some provisions for low-income and left-behind workers, notably a refundable tax credit that needy workers can use for non-retirement purposes. Refundable tax credits go into a workers’ retirement account, but a worker can withdraw it before retirement.

Beginning in 2024, workers would be allowed to take an early “emergency” distribution of up to $1,000 once a year from the retirement account to cover financial needs. The 10% tax that applies to early distributions is waived. This is a double-edged sword; emergency savings is good, but easy withdrawal from retirement accounts is not.

In hopes of expanding coverage, Secure 2.0 requires newly created employer plans to automatically enroll workers unless workers opt-out. This sounds like a good idea, but the impact may be limited. Existing plans do not have to automatically enroll all workers. And crucially, many employers don’t bother to create a plan so it doesn’t really matter if auto-enrollment is required.

A better plan is the universal coverage offered by RSSA. That was a big bold idea — also bipartisan — introduced mid-December in the Senate by John Hickenlooper and Thom Tillis and sponsored in the House by Terri Sewell and Lloyd Smucker. (It will be introduced again in the new Congress.) This bold plan proposed a single retirement 401(k)-type plan run by the federal government for workers without an employer-sponsored retirement plan.

RSSA solves the problems of non-universal coverage, portability and inefficiency. In this new bill, workers without a plan would be automatically enrolled in an American Worker Retirement Plan (AWRP), at a 3% contribution rate and slotted into a low-fee diversified investment fund. And workers get a match, not from the employer but the federal government.

Low and moderate earners would receive up to a refundable government matches in the form of a refundable tax credit. What I like about RSSA is that it really forced a retirement plan to be a retirement plan — not emergency money for medical expenses or a payment towards an adult child’s house.

The Secure 2.0 bill, although well intentioned, is inferior to RSSA. It is being sold as a solution to the retirement crisis — but it is really a victory for brokers, with gaping holes leaving behind about 60 million workers. With this much bipartisan support for serious retirement reform, Americans could have gotten a better bill.

Teresa Ghilarducci is the Schwartz Professor of Economics at the New School for Social Research. She’s the co-author of “Rescuing Retirement” and a member of the board of directors of the Economic Policy Institute.

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