Do Americans need a nudge from their employers—and a handout from Washington—to get them to save for retirement? That’s the premise behind draft retirement language in the the House Ways and Means Committee mark up of the $3.5 trillion budget reconciliation package.
Under the proposal, starting in 2023, employers with five or more employees would have to offer a retirement plan and automatically enroll employees, diverting 6% of their pay to a retirement account. An automatic escalation clause would increase the automatic contribution to 10% of pay by year five. 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’s a mandate. They would have to offer the plans. Employees would be able to opt out.
“We’re not trying to put an undue burden on the small employer. We’re trying to help the employee who works for a small employer be a lifetime saver,” Ways and Means chairman Richard Neal (D-Mass.) said at the hearings.
The retirement section of the Build Back Better Act is expected to dramatically expand retirement savings. It would create 62 million new retirement savers and would add an additional $7 trillion in retirement savings over a 10-year period, according to the Employee Benefit Research Institute. Nearly all—98%—of these new savers would be folks who earn less than $100,000 per year.
“We know that people are far more likely to save for retirement if they have access to a retirement plan at work (12 times more likely), but there’s a real access problem – small businesses just never quite seem to get around to setting these up,” says Nevin Adams, chief content officer 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 mandate from Washington and a tax penalty if you don’t comply. Small business owners know this is yet another, or feels like another, war on work,” Rep. Kevin Brady (R-Texas), the top Republican on the Ways and Means Committee said at the hearings.
The small business lobby is crying foul. The National Federation of Independent Business (NFIB) says the tax credits provided to employers for setting up plans are temporary and limited, and that the cost of compliance amounts to a “hidden tax.”
There is evidence that auto-IRAs work for both employers and employees. Rep. Earl Blumenauer of Oregon noted how a similar state-mandated auto-IRA program mandated for all employers in his state has generated $120 million of savings “in our little state” so far. And a Pew survey found that 73% of employers were either satisfied or neutral about the Oregon program.
Hand-in-hand with the auto-IRA provision is a change to the Saver’s Credit. Lower-income Americans, even those who don’t owe taxes, would get a newfangled Saver’s Credit—a government match on their savings—$100 to $500 per person per year from the U.S. Treasury paid into their individual retirement account. The $47 billion cost of the retirement proposal is evenly split between the Saver’s Credit provision and the auto-IRA provision.
This auto-IRA proposal is different from the one that is in pending bipartisan retirement legislation known as SECURE 2.0, which would not mandate that employers offer these accounts but rather make them voluntary. SECURE 2.0 contains other important provisions, such as allowing employers to provide matching money to retirement accounts when workers pay off student loan debt.
Representative Neal said that SECURE 2.0 is “getting over the goal line this year” too. Some of the revenue raisers for the Build Back Better Act under discussion relate to retirement, and Representative Neal said that they could be released this weekend.
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