Tuesday, October 19 2021

Readers, I am embarrassed to admit that a radical change in our pension system, included in the “Build back better” budget reconciliation bill, had completely escaped me until very recently. As explained by Ashlea Ebeling, also at Forbes,

“Under Proposal, from 2023, employers with five or more employees should offer a pension plan and automatically enroll employees, diverting 6% of their salary to a retirement account. An automatic indexation clause would increase the automatic contribution to 10% of salary by the fifth year. 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 should offer the plans. Employees could opt out. “

For employers who already offer a 401 (k) or similar plan, nothing would change; it is intended for small employers who do not currently offer such a plan.

In some ways, this would be similar to the automatic enrollment plans currently in place or being implemented in Oregon, California, Illinois and elsewhere. In Oregon, for example, employees participate in a state-run IRA by default, starting at a contribution level of 5% and increasing to 10%, but with employees able to adjust their contribution or reject the contribution entirely.

But there are some crucial differences. First, under the new federal mandate, employers would be required to select a specific IRA in which to enroll their employees, rather than simply passing payroll deductions to the state. It looks like they would choose from a list of approved vendors. Second, the various state programs have been phased in; the federal mandate applies to all employers with 5 or more employees on day one, and there does not appear to be any analysis of how it would be for these small employers to do this. Third, the program requires employers to choose, not just any IRA, but only those in which there is an option to convert the account balance to an annuity upon retirement.

It also continues to be the case that workers are “pushed” towards contributions of 10% of salary without any useful indication as to the level of savings appropriate for their personal situation; given the progressive level of social security benefits, which replace a much higher percentage of the wage for low incomes than for middle or higher incomes, there is no single answer here, and, indeed, some low income Maybe better without any savings. There is also very little information about what happens when paycheck-to-paycheck workers are placed in these programs – are they mutually exclusive? Reduce their expenses? Or end up in debt? (To the best of my knowledge, only one study exists on this question, concluding that on average, the debt does not increase, in the case of an automatic enrollment program with a contribution rate of 3%.)

But what is most disturbing is that this proposal is hidden in the Reconciliation bill, camouflaged as a tax because, you see, the fine that employers will pay, $ 10 per employee per day, for non-compliance with the requirements, is labeled a “tax”, so that the law fits into the requirements of a reconciliation bill. Likewise I found it appalling to contemplate passing a major family leave bill using the reconciliation process, without a public debate on the design and funding of the scheme (or lack thereof) , it’s also the kind of bill that just has no business going that way, and catching people by surprise afterwards.

This is a profound, profound change for employers and employees. If IRA providers develop easy ways for employers to choose their offerings and tailored educational programs for participants, if the planned automatic IRA advisory group does its job well, and if the government creates compliance methods that burden the least. possible employers while achieving the objectives of the program are largely unknown. It would also be much better if such a program were implemented alongside a broader social security reform. Hiding it in a massive spending program is another illustration of Congress’ profound failures as a governing body.

As always, you are welcome to comment at JaneTheActuary.com!

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