Former Senator Urges Caution in How Tax Reform Treats Retirement Plans
“I would encourage caution among policymakers when considering dramatic changes to retirement policy for tax policy purposes,” former Sen. Kent Conrad (D-ND) told the Senate Committee on Banking, Housing, and Urban Affairs’ Subcommittee on Economic Policy on April 5.
“As tax reform discussions progress, the tax treatment of retirement savings accounts appears to be on the table,” said Conrad. “In particular,” he noted, “some have proposed moving all traditional tax-deferred retirement plans (such as 401(k)s and IRAs) to an after-tax Roth system in order to create “budget savings” in the 10-year window.” However, Conrad said, “the current scoring system significantly overstates the costs of tax-deferred accounts and understates the cost of Roth accounts.” He said that Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings, for which he serves as co-chair, “recommends changing the scoring of these tax provisions to a system that would score both types of accounts on an equal basis.”
“Hundreds of billions of dollars are saved in these retirement accounts every year,” Conrad told the subcommittee, “and the tax incentives play a significant role in this system.” Conrad warned that “While debating the merits and structure of retirement tax preferences is certainly appropriate, hastily overhauling them without due consideration for the impact on American savers could serve to worsen the retirement security predicament about which we are all concerned.”
Retirement Security Challenges
Conrad returned to the chamber where he had once served to discuss the BPC commission’s findings and recommendations on how retirement security can be better pursued and bolstered.
“Millions of Americans are financially unprepared for their retirement. Too many lack adequate savings, having set aside money at insufficient levels. Even those who do accumulate sufficient savings for retirement run the risk of outliving those funds, and others are forced to raid their retirement accounts early due to a shortage of short-term, emergency savings,” Conrad told the subcommittee. “Compounding these challenges is the fact that Americans often lack the financial capability to take actions that are in their own best interests,” he added.
Conrad outlined six retirement security challenges that the BPC commission identified:
1. Too few workers participate in a workplace retirement savings plan.
2. Many Americans lack the income or resources to save for short-term needs, forcing them to raid their retirement accounts for unexpected expenses.
3. Americans are living longer and are increasingly at risk of outliving their savings.
4. Home equity is an underutilized source of retirement savings.
5. Many Americans lack financial capability.
6. Social Security is facing a significant financial shortfall and needs modernization.
In addition to arguing for caution about tax reform, Conrad highlighted five other policies he said “might be particularly ripe for near-term action.”
1. Establish simplified Retirement Security Plans for small businesses. The commission suggests the creation of new “Retirement Security Plans” that Conrad said “would dramatically simplify the process of offering automatic-enrollment plans for small businesses.” Such MEP-like plans would allow employers with fewer than 500 workers to band together and form retirement plans that the commission argues could “defuse” administrative expenses. They would be run by third-party administrators that would be certified by a new oversight board designed to protect consumers from bad actors.
Conrad noted that a similar proposal creating MEP-like “pooled employer plans” (PEPs) was included in the Retirement Enhancement and Savings Act of 2016, which he noted “was unanimously reported out of the Senate Finance Committee on a bipartisan basis.”
2. Allow employers to enroll employees in multiple savings accounts. As a way to help make sure retirees don’t outlive their savings, says Conrad, the commission argues that employers should be able to automatically enroll employees into an account intended for retirement savings and another account for short-term savings. “By building up these rainy-day savings, individuals might be less likely to raid their retirement savings in the event of an unexpected emergency,” said the former senator.
3. Encourage younger workers to save for retirement. To help build a culture of savings and improve families’ financial resilience, the commission proposes a new Starter Saver’s Match, which it suggests replace the existing Saver’s Credit for individuals younger than 35. “The current Saver’s Credit,” said Conrad, “reduces the income-tax burden for lower-income individuals who contribute to retirement accounts, but the credit is not refundable, meaning that individuals with no income-tax liability cannot benefit from it.” The Starter Saver’s Match, however, would be a refundable credit of up to $500, deposited directly into the claimant’s retirement account. “This change would better encourage younger workers with lower wages (those who are least likely to save on their own) to start saving for retirement,” argued Conrad, and “would also maximize the government’s ‘bang-for-the-buck’ by allowing the invested match more years to grow.”
4. Facilitate the establishment of a “Retirement Security Clearinghouse” to improve portability. “Many savers face the problem of having several retirement accounts scattered among their previous employers,” said Conrad. Accordingly, the commission suggests the creation of a Retirement Security Clearinghouse to make it easier to consolidate accounts.
5. Encourage plan sponsors to integrate easy-to-use, sophisticated lifetime income features. “Including lifetime income options can be a complex endeavor that entails concerns about fiduciary liability; in addition, businesses often have to invest significant time and resources to develop lifetime-income features,” said Conrad. He told the subcommittee that the commission suggests:
- providing limited protection for fiduciary liability;
- modifying regulations; and
- giving additional guidance to plan sponsors that wish to incorporate lifetime income options in their DC plans.
“These developments could have a similar effect for lifetime income solutions as the Pension Protection Act of 2006 had for retirement plan auto-features,” Conrad said, adding that in his view, “The lifetime-income field is ripe for comparable changes.”