Have you ever seen a movie and thought: “that was nice”? It didn’t change my life, but it was enjoyable. And then you hear that this movie is getting a sequel? And you think: “I’m not sure that, as a society, we need this second film.” For me “The Princess Diaries” series satisfies this criteria. The original movie was nice. A young Anne Hathaway, a still rocking it Julie Andrews, that lovable scamp Hector Elizando. A fun time for all. But, The Princess Diaries 2: Royal Engagement seemed a bit more like Princess Diaries 2: Money Grab. It all reminds me of the most recent retirement savings policy in the U.S.: Secure 1.0 and Secure 2.0.
Secure stands for: Setting Every Community Up for Retirement Enhancement Act. (If ever there was a case of having an acronym in mind and making the words go along, this would be it.) I want to focus on the sequel. But, to get a sense of why Secure 1.0 was a sort of harmless but meaningless policy, I’ll tell you one thing about it. Most descriptions of Secure 1.0 start with this: “it delayed the required minimum distribution (RMD) age to 72.” The RMD requires people to take money out of their 401(k) so that they can’t avoid paying taxes on their savings forever. So, the plan of Secure 1.0 was to enhance retirement for the average American by delaying when they can access the savings they probably don’t have. It’s like trying to solve a water crisis by keeping bathrooms open later.
But, Secure 2.0 is less harmless and more of the money grabbing type. I honestly had forgotten about Secure 2.0 until my dad sent me a great article on it from Politico on how much money it wasted. After this fatherly e-mail, I read through the provisions again. And, I think one thing in particular can illustrate why it is such a useless waste: the expansion of the “Catch-Up” Provision.
[If you liked this intro and want to learn more about inequality, you can read my book. It’s only $3.99 for an e-copy, and 25 percent of my royalties go to Big Brothers Big Sisters of Eastern MA.]
Secure 2.0 and The Catch-Up Provision
The Catch-Up Provision has existed since 2001. On its face, this provision sounds like a pretty good idea. Because 401(k)s allow individuals to get the benefit of deferred taxes, these retirement plans have a contribution limit. For example, in 2024 the limit is $24,000. But, people age 50 and over can contribute $7,500 more, for a total of $31,500 per year. Like the name says, the idea is to let people catch up if they are behind in their retirement goals by saving more as they approach retirement.
Secure 2.0 makes this catch-up provision more generous for people ages 60-63. Starting in 2025, the ability of people in this age range to catch up will go up from the current $7,500 to $10,000. I guess the idea is to let people even further behind catch up as they get even closer to retirement.
So, why do I say that this is the retirement policy equivalent of a not-so-great movie sequel? Because, the goal of Secure 1.0 and Secure 2.0 is ostensibly to help people become better prepared for retirement. But, most people who use the catch-up provision don’t need any help at all — they are already quite well off. Just think about it — once Secure 2.0 takes effect, the full catch-up contribution for an individual would total $34,000. The median total earnings of workers in this age range with a retirement plan is about $64,000. So, for this median person, “catching up” means contributing 50 percent of their income to a 401(k). Not likely. Don’t believe me? Would you believe my CRR colleagues?
Do Catch-Up Contributions Increase 401(k) Savings?
Back in the summer of 2015, my colleagues Matt Rutledge, April Yanyuan Wu, and Francis M. Vitagliano wrote an issue brief on this very topic. Their goal was to see if the introduction of the Catch-Up Provision in 2001 encouraged people to save more. If it did, then Secure 2.0 might actually be helpful in boosting retirement savings. If the introduction of the Catch-Up provision didn’t do much back then, then no reason exists to think now would be any different.
Their main conclusion hinges on a simple observation — the only people that benefit from increasing the Catch-up Provision are people who are already near the 401(k) contribution limit. And, these people tend to be quite wealthy. The figure below comes from their analysis of The Survey of Income and Program Participation. It shows that people at the 401(k) max — the people who benefit from increasing the Catch-Up — earned 2.8 times more and had net worth 2.2 times as high as the paper’s full sample of workers.
Figure. Mean Earnings and Asset Levels for Maximum Contributors and Full Analysis Sample
The following quote from the study makes the point about who benefits from Catch-Up pretty clearly. In particular, I like the last sentence of the quote — it’s almost like the authors knew way back in 2015 that someday, someone would want to expand this thing again.
The study indicates that at least one group of 401(k) participants is sensitive to a change in tax incentives: workers around age 50 who are constrained by the tax-deferred maximum. … This finding of a strong response by a small group of individuals with high incomes is consistent with recent research examining changes in tax incentives. The bottom line is that further tinkering with the contribution limit for 401(k)s would likely affect only a very small group of people; it does not offer a broad-based solution for low saving rates in the United States.
Secure 3.0 Better Include Social Security
Ok, so what is a broad-based solution to actually help the average American’s retirement security? It’s pretty obvious: we need to take Social Security’s impending Trust Fund run down seriously. By current estimates, Social Security’s Trust Fund will run out in 2034. If nothing is done to fix this issue, in 2034 everybody’s benefits will be cut by about 20 percent. If you want to “enhance retirement,” I might start by ensuring the one program that serves almost everybody doesn’t get cut by a fifth in one decade.
How can the run down of the Social Security Trust Fund be prevented? Well, you can do your own calculations here. Personally, I prefer a compromise approach — increasing both revenue and decreasing benefits slightly. To increase revenue, I would increase the payroll tax by 1 percent and subject all earned income to the payroll tax (as opposed to the cap that exists now at $168,000). To decrease benefits, I would increase the full-retirement age to 68 from 67. These three changes would ensure the program remained fully funded for the next 75 years. My fear is that instead, 75 years from now we will be on to Secure 14.0 — and still have accomplished nothing.
SECURE 2.0 is not a total dud. It included provisions that improved coverage, increased use of automatic enrollment, improved the Savers Credit, and added useful provisions like student loan matching , and emergency savings. Still your point is well-taken.
The problem with all of this though is that it’s hard to save if you don’t have the income to do so. Thus many of these solutions simply ignore the root cause of the problem….which is probably why these types of provisions enjoy widespread, bipartisan support in the first place.
Its a good point JDD on some of the automatic savings provisions — these are good. But, I do think these mostly hope people who would likely save anyway. Hard without doing much more to get lower-income folks to save, especially since one reason they don’t sav is because lower income.
That’s what’s so great about Social Security. Thanks for reading!