Revisiting The ‘Retirement Crisis’ And Retirement Legislation In 2022

What’s on the agenda for retirement legislation in 2022?

Let’s start with retirement initiatives that are waiting in the wings:

The “SECURE Act 2.0” is a set of enhancements to 401(k)s and other retirement savings programs which has been in the works, well, pretty much ever since the original SECURE Act passed. Its House version includes such elements as

• Permitting employers to match amounts employees pay as student loan debt service, with the intention to speed up repayment so those employees can move on to retirement saving sooner,
• Requiring employers who already offer retirement plans, to automatically enroll new employees in those plans, with an opt-out opportunity,
• Increasing catch-up contributions for those 50 and older, and
• Gradually increasing the age at which Required Minimum Distributions take effect, ultimately up to age 75.

This bill has bipartisan support, though the Senate version has somewhat different provisions. And while it has stalled, supporters are hopeful for action in early 2022. Recall that the original SECURE Act had likewise stalled until it was attached to a must-pass budget bill in 2019.

Separately, early versions of the “Build Back Better” bill went even further, requiring that all employers with five or more employees would be required to offer a retirement plan for their employees with a 6% automatic contribution for new employees (with opt-out permitted). To reduce the burden on employers, they would be permitted to simply elect to use an IRA, based on a list of eligible IRAs prepared by a government agency.

In addition, at the state level, 14 states have enacted retirement savings programs, generally requiring that all employers who do not otherwise offer a retirement savings program, automatically enroll their employees (with opt-out permitted) in a state-run IRA, with six of these active and the others yet to be implemented. According to the Georgetown Center for Retirement Initiatives, in a further 19 states, there has been a legislative proposal or study in 2021.

At the same time, advocates for the poor elderly and disabled had been pushing for an increase in the monthly benefit provided through the Supplemental Security Income (SSI) program. As it stands, single individuals receive a benefit that’s about 75% of the single-person federal poverty rate, or about 90% adding in Food Stamps (SNAP) and Heating Assistance; married couples receive a benefit of approximately 100% of the two-person poverty rate, again taking into account the supplemental benefits. The Supplemental Security Income Restoration Act of 2021 would have increased the basic benefit to 100% of the single-person poverty rate, per person (that is, simply doubling the benefit for married couples). Because the government’s poverty rate thresholds operate on the assumption that a couple’s living expenses are reduced by sharing a household, this would mean that a couple with SSI benefits would have benefits equal to about 150% of the two-person poverty level.

And, of course, there is the Social Security 2100 Act, which would increase Social Security benefits in a number of ways, from a new minimum benefit of 125% of the poverty level for those with 30 years of work history, to an alternate (and presumed more generous) CPI index, to an increase in the factor used for the PIA formula for the lowest tranche of income from 90% to 93%. This is not legislation that has a serious chance of passing, but I should at least mention it for completeness’ sake. And likewise, President Biden, when a candidate, proposed replacing the 401(k) tax deferral with a system of credits, to shift the savings incentives to lower-income workers, but, to the best of my knowledge, that has not resurfaced since his election.

And into this mix comes AEI scholar and perpetual Cassandra Andrew Biggs’ latest effort to convince readers that, as his December 13 op-ed puts it, “The US ‘retirement crisis’ is a media myth.”

The core of his argument is this:

• The imagined “Golden Age” of employer pension provision was anything but. In 1981, only 27% of surveyed new retirees reported receiving a private pension benefit; in part, this was because large numbers of pension participants (9 out of 10 in 1972) did not vest in their pension benefits.
• The rise of 401(k)s has not resulted in reduced employer benefits, on average; instead employers have “largely maintained their contributions to retirement plans” so that employee contributions have boosted overall balances.
• As a result, however gloomy a tale may be told by such groups as the Center for Retirement Research’s National Retirement Risk Index, which forecasts that half of all American households are “at risk of being unable to maintain their pre-retirement standard of living in retirement,” in reality, older Americans are doing quite well. 8 in 10 tell pollsters they have enough money to “live comfortably,” and fewer than 5% say they are “finding it hard to get by.”
• And part, at least of the reason for these two contradictory narratives is not just that activists prefer narratives of “crisis,” but that data that has been conventionally used is error-prone or misses the story. In addition (as he has said elsewhere on multiple occasions, including a recent Morningstar interview) projections of future retirement income show that future retirees will also do just fine, and in fact, rates of poverty are forecast to decline.

Is Biggs right?

Here are some tables I created from the Federal Reserve survey he references, the Survey of Household Economics and Decisionmaking.

Yes, everyone likes to see data visualizations, but these simple tables tell an interesting story. The question, after all, is one that is very subjective — it doesn’t as how far in debt one is, but allows each individual to interpret “just getting by” or “doing OK” for themselves. And according to their own self-interpretation, relatively few people in even the lowest income category express financial difficulties.

And, as a reminder, the “u-shaped” life satisfaction curve has been well-documented, that as people leave middle age behind, they are more likely to express satisfaction with their lives, whether due to an objective improvement in circumstances or simply a changed perspective (though some of that improvement may, on the other hand be, that dissatisfied older people die on average at younger ages).

So where do we go from here? Here are a few thoughts.

First, we need to keep a distinction in mind between efforts to ensure the elderly do not suffer actual material deprivation, whether that’s lack of nutritious food or adequate housing or medical needs, for instance, and efforts to help Americans plan for retirement and alleviate their expressed worries about the unknowns of retirement.

Second, issues of well-being, such as social isolation, and larger questions of the “right” form of provision of long-term care assistance, are not simple issues of finances but are nonetheless important as Americans age, and these topics should not be drowned out by a “retirement crisis” narrative. It should also go without saying that we will urgently need to turn our attention to the Medicare system as well.

And, third, in one crucial respect our models may fail us: experts have worked out a set of recommendations for asset allocation and income spend-down in retirement, and a set of projections for building those models, which fall apart if our new low-interest world continues, Japan-like, rather than being a temporary situation that resolves itself as we recover from the pandemic. Whether this is a result of government policies or an inevitable consequence of the changing economy, this could upend both Biggs’ projections of retiree well-being and the path to retirement security envisioned by legislation like the SECURE Act 2.0.

As always, you’re invited to comment at JaneTheActuary.com!