Retirement Plan Legislation
by Doyle Ranstrom on Jun 4, 2019
There is a bill working its way through Congress called "Retirement Enhancement and Savings Act of 2019" [RESA]. Though it is a beneficial bill, I would suggest it is missing one very important provision. The bill has a number of important updates or enhancements for qualified retirement plans. Many of the provisions should have been enacted in years past, but it is good they are being addressed with this bill.
Though beneficial, in my estimation, it will not improve the retirement picture for Americans overall. The reason is the bill may increase options for participants in retirement plans, however, it does not enable more individuals or households to save for retirement. In understanding this, it is important to note the following;
- The median household income in the US is about $60,000. This means half have higher incomes and half less. An individual making $60,000 with no consumer debt or student loans and modest mortgage would be able to save for retirement, possibly a lot if depending on their living expenses. On the other hand, a household with two adults and two children at $60,000 annual income are barely making ends meet and would have a very difficult time saving for retirement. According to the 2017 Federal Reserve's Survey of Consumer Finances, about 40% of households could not come up with $400 in cash if they needed to and 25% of households have no retirement savings.
- The 2013 US Government financial study found the median net worth by households in the US excluding home equity was about $25,000. It may be somewhat higher today, but not much. In a recent study done by the Federal Reserve's Survey of Consumer Finances found that of those who owned retirement accounts, between ages 55-64, the median value was about $120,00. Again, this does not include households who have no retirement accounts so the actual median counting all households in this age group would be substantially less.
- Defined Benefit Plans or pension plans used to be the cornerstone of retirement for many households. The primary reasons are they were 100% funded by the employer and guaranteed an income, normally a percentage of highest earnings, at retirement. The number of pensions plans has declined substantially over the years and is now rare in for-profit companies and gradually being phased out for non-profit's including educational organizations and government entities. Though I do not necessarily agree, I do understand the reasons for the gradual elimination of pension plans. However, one result is for households in the bottom half of the median income's, saving for retirement is increasingly their responsibility and as outlined above, it will be difficult for many.
- Note: Members of Congress, which are among the highest paid employees in American, have maintained a very generous pension plan for themselves.
- The largest reason for bankruptcy in the US is uncovered medical expenses and the majority of these households had some form of medical insurance. This does not include all the households who did not declare bankruptcy but their discretionary income went to paying down medical bills. Also, it does not include households that took withdrawals from their retirement plans to pay medical expenses reducing their potential future retirement income. It is difficult if not impossible for low-income households to save for retirement and pay off medical bills.
- Student loans reduced the ability of many households to save for retirement. This especially important in the early years of earned income because it reduces the benefits of compound interest.
Again, the proposed legislation will do little to help the bottom half of income earners. I suspect the number of defined benefit pension plans will continue to decrease. For high-income earners and/or individuals who work for companies who have strong employer contributions to their employee's retirement plans, they will be fine. For individuals and households who are in the bottom of household earnings and do not work for employers with generous employer contributions for their employees, I believe it will be difficult for these workers to build sufficient retirement portfolios to maintain their lifestyle after retirement.
The challenge for Congress is to address the ability for the bottom half of income earners to maintain their lifestyle after retirement. Keep in mind, these are individuals who have worked their entire adult life contributing to the US economy. This will take a coordinated approach addressing problems on various fronts.
A good start and also a sign of good faith would be to add a provision to the RESA which would eliminate defined benefit pensions to members of Congress. Currently, Congress has a very generous pension plan which pays a lifetime income after only five years of service. It makes no sense the number of pensions overall is declining, while Congress continues to have an outstanding plan paid for by American workers. It is hypocritical that many members of Congress have run on platforms eliminating pension plans for various types of workers.