The Secure Act 2.0, The RMD Age Change, And The Risk Of A Reverse Nudge

Is the Secure Act 2.0 a game-changer for retirement savings? A set of modest but real improvements? Or a costly giveaway to the rich?

Yes, I’m late to the party in writing about this legislation, included in the omnibus spending bill signed by President Biden last week. Summaries of the key provisions can be found at the Washington Post, Yahoo!, and at sssss. You can also read a detailed summary and the legislation itself.

The list of changes is long, including:

• The conversion of the “saver’s credit” from a traditional tax credit to a direct government contribution of up to $2,000 into an IRA;
• Requirements that, except for small plans, newly-created 401(k) plans autoenroll their employees into participation;
• The ability for employers to treat their employees’ student loan payments as if they were 401(k) contributions for the purposes of employer matching;
• A retirement “lost-and-found”;
• An increase in the catch-up contribution available to employees reaching age 60; and
• An increase in the age at which Required Minimum Distributions are required, up from the current age 72 to age 75 by 2032.

Is this the right set of changes? The law has been the subject of criticism for not doing enough to fix the “retirement crisis”; for example, as reported by CNBC, Teresa Ghilarducci, professor at The New School, complained that the bill was deficient because it did not require employers to provide retirement savings plans or to contribute to those plans. She repeats the complaint in a column at the Washington Post: wealthy households will benefit from the delay in the RMD age and the increase in contribution limits, and the changes to the saver’s credit are not meaningful because of increases in the ease with which workers can take “emergency” distributions before retirement. From the other perspective, Allison Schrager at City Journal directs her criticisms towards the at the fiscally imprudent elements of the law: the cost of the RMD age delay and the budget gimmick that the program is “fully funded” — because, once again, the 10-year budget window allows Congress to count as “revenue” the shift to a Roth version of retirement savings, that is, with taxes paid right away as usual and the tax benefit consisting of exempting all future asset returns from taxation.

But let’s take a closer look at the RMD changes.

Until the original SECURE Act, retirement savers were required to begin removing funds from their tax-deferred accounts at the age of 70 1/2. SECURE moved that to 72. The new move to age 75 has been justified by Americans’ growing life expectancy and increasing retirement age.

But the reality is that, although the average retirement age is indeed increasing, age 75 is well above the typical retirement age, and, let’s face it, not a realistic retirement age for most people, and it is improbable that increasing health will make this more realistic even in 2032. One recent study at AEI which analyzed not just the average retirement age but an “upper” and “lower” age (the age at which 25% and 75% of the population are still working), found that in the past 20 years the average retirement age increased from about age 62 to about 65 (after staying level at age 62 in the prior decade). However, considering the past 30 years, the “upper” age increased from just above age 65 to a peak of 70.5 in 2019 (that is, pre-covid). Surprisingly, the “lower” age increased much less, increasing only from 54 in 1990 to 56.5 in August 2021. When split by sex, men’s peak “upper” age was 73 in 2018, with a decline to age 71 now; women’s peak “upper” age was/is age 69 (with less covid decline). In other words, very few workers will actually maintain their working income up until age 75, though some may have other investment income they prefer spending first.

So what’s the purpose of allowing savers to keep their money in tax-deferred accounts until age 75?

Nobel Prize-winning behavioral economist Richard Thaler developed the concept of the “nudge” to refer to systems which encourage desirable behavior, with autoenrollment in a 401(k) plan serving as the prime example: there’s nothing mandatory because employees can always opt out but it increases the likelihood of workers saving for retirement because they don’t have to take any active steps to do so. Thaler also writes about “sludge,” which is sort of the opposite of a “nudge,” ways in which things are just harder to do, for example, the fact that it’s very easy to start a subscription to a newspaper, but to cancel requires finding the customer service number, calling during business hours, waiting on hold, and so on.

It would appear that the age 75 RMD start is meant as a nudge — but it is, quite honestly, a bad nudge or, to coin a phrase, a reverse nudge, that encourages financial decision-making that’s unintentionally worse than the alternative.

We know that Social Security benefits increase the longer one delays starting them, up to age 70. (If I had my way, I’d increase that age even further.) This is about the best deal you can get when it comes to retirement financial planning — you simply cannot get guaranteed lifetime benefits with cost-of-living adjustments from a private-sector provider (that is, insurance company) without paying much more than the “cost” of deferring your retirement. Not only is it wise to keep working to avoid taking Social Security earlier than age 70, but it is equally a sensible decision to spend down your 401(k) to bridge the gap until you reach that age.

This “bridge” option is a comparatively new concept but it has been promoted by the Center for Retirement Research at Boston College (December 2021), Kiplinger (September 2022), and Yahoo! (October 2022), and, before that, at Pew, which suggested in March of 2018 that the new state auto-IRA programs could help workers defer starting Social Security. While it wouldn’t be prudent to spend down all of one’s assets — having some cash available to replace a roof will still be necessary in retirement of course — it’s important to start thinking about the most sensible way to spend down your savings once you are no longer working, rather than avoid it for as long as possible.

And the new RMD age sends entirely the opposite message, and risks reverse-nudging people into bad decision-making.

Now, having said that, I will readily admit that this is just a hunch. It may not work out this way at all and new retirees may not perceive any signal at all in the RMD age. Perhaps in fact the reverse will be true, and the process of moving the RMD threshold to ever-increasing ages will mean that new retirees will perceive of it as something with no relevance at all to their situation.

And it is certainly just one piece of the overall legislation, but it does serve as a bit of an illustration that there are no pat answers, now that we have reached that point when the overall structure of the retirement savings system has been established and we are tinkering with the details.