The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) recently passed in the House of Representatives by a margin of 417-3 last Thursday. The bill is slated to be successfully ratified into law by the U.S. Senate later in the year in a rare moment of bipartisanship.
The SECURE Act marks the most momentous legislative change in retirement planning since the Pension Protection Act of 2006. That said, the SECURE Act that passed in the House of Representatives recently is a necessary and expected change to the U.S. retirement system.
The Senate has a sister bill called the Retirement Enhancement Securities Act (RESA), which will interplay with the U.S. House of Representatives SECURE Act. Aspects of the Senate bill will make their way into, and be modified by, the House bill and vice versa over the coming weeks.
This reconciliation process is needed to harmonize the bills with each other and with what average Americans want out of their retirement plans. The bill that makes it out of reconciliation is expected to remove IRA age limits, expand the start of required minimum distributions (RMDs), and enhance the possibility that more employers set money aside for retirement plans.
As described in a previous post, the age of retirement rising has been met with some controversy, but in order to sustainably use and maintain the allotted budget of the Social Security program, such a change must be made. Already, the age of retirement (at which retirees are eligible to claim their full benefits) is in the process of rising to 67 years, but new legislation proposes raising the age to 72 years instead. The bill, dubbed the Secure Act, has been passed by lawmakers in the House of Representatives and is moving closer to becoming law.
Both the SECURE Act and RESA are meant to address social security funding issues and out-of-control pharmaceutical costs in particular and healthcare expenses more generally. The Medicare system is thought to be under serious strain at present since about a third of Americans don’t set anything aside for retirement and rely on the system to the exclusion of everything else.
So, how can the SECURE Act and RESA make things better?
Through many initiatives, the Secure Act in particular aims to maximize the money available in the Social Security program and offer alternative outlets for retirement savings. Its ultimate goal is to better provide for the retiree population without putting additional financial strain on the government’s resources.
401(k) Plan Availability
Individuals who currently do not have the option to invest in a 401(k) are at a severe disadvantage and are more likely to experience financial hardship following their retirement. Depending on place of employment, some individuals have difficulty in having access to 401(k) plans. The Secure Act aims to change this. By enabling small businesses to band together and offer 401(k) plans, instituting auto-enrollment for employees, establishing a tax incentive to keep saving, even employees of businesses that previously were not eligible for 401(k) offerings will be able to invest in a retirement plan. Additionally, the auto-enrollment feature could boost long-term savings as individuals are more likely to save if they do not have to enroll themselves.
Another revision to current proceedings would be the introduction of a rule that requires businesses to offer retirement benefits to long-term, part-time employees. This shift would benefit a number of Americans who are unable to work more than 1,000 hours each year, which is the current requirement for individuals to qualify for a 401(k). Among those who don’t make the cut are disabled individuals as well as parents who are raising young children. Under the Secure Act, businesses would have to open up availability for a 401(k) to part-time workers based on specific guidelines, thereby allowing more individuals to better save for their retirements.
In promoting the 401(k) plan, as well as other individual retirement accounts (IRAs), the Secure Act effectively promotes a lower dependence on Social Security funds. However, the program will still be in place, and not every individual will be able to invest in retirement accounts enough to make a difference in their financial planning. In order to account for these individuals and ensure all retirees have sufficient funds after their retirement, the Secure Act proposes raising the age individuals can claim their full benefits to 72 years.
By raising the retirement age, this act would not only encourage more individuals to contribute to alternative retirement accounts but would also ensure that each individual receives more than they currently would at the full retirement age. This act would strive to provide for each individual so that they are not impoverished upon retiring.
This increase is beneficial for all individuals regardless of when they choose to claim their benefits, especially for retiring individuals. The raised age of retirement allows individuals to wait longer to claim their money, particularly from IRA funds. Most older Americans would prefer to wait longer, and the ages that are currently in place to limit and organize retirement funds are ineffective and unreasonable; rather than sticking with a round number, more difficult and inconvenient ages (like 55.5 and 70.5) are in place instead. The system up to this point has been flawed, and acts like SECURE and Resa are working to amend the issues.
But since every new piece of legislation has to include both a stick and a carrot in order to correctly balance incentives that Americans will face when planning for retirement, both the SECURE Act and Resa feature some kind of tax credit for automatic enrollment. These tax credits will redound to small employers. The aim is greater accessibility.