On 1/28/16, the Senate Finance Committee held a hearing on –Helping Americans Prepare for Retirement: Increasing Access, Participation and Coverage in Retirement Savings Plans. This isn’t the first time for this topic. There were a few hearings on this in 2014. I’m not sure if anything is driving the renewed attention to this topic now. While tax reform is challenging in an election year, this important topic seems good for any year. There is a need for reform of the tax rules for retirement plans to make them more equitable and simple to help more people save for retirement.
Here are a few suggestions I have for reform in this area. They focus on equity. I submitted these to the Senate Finance Committee in April 2015 when they were seeking ideas for tax reform via their working group project. I’ll likely submit them again and add more on simplification. One overall reform I recommend is to change the focus of retirement plans from the employer to the employee, making them truly portable from job to job and if in employee or contractor status or both.
Bring greater equity to retirement savings rules and better enable young people to save for retirement. Possible approaches include:
A simple system to enable all workers (employees and self-employed individuals) to have a retirement savings account. This should occur for both part-time and full-time workers and even if an employer does not help with administration or contributions.
Retirement savings contributions should be coordinated with payroll tax deductions. A system to enable self-employed individuals to also make contributions along with self-employment tax payments should be considered.
Find ways to help individuals improve their financial literacy.
Portability. Be sure the system allows for contributions to be made to one account even if a worker changes employers or also has income from self-employment.
Example of a new approach: The first time an individual receives a W-2 or pays self-employment tax (whichever happens first), the government could set aside a set dollar amount in a retirement account for that person. This would constitute the start of their retirement account that would be used for all future contributions; there would be only one account. When the individual works for an employer who also wants to contribute to employee retirement accounts, such funds are placed in the individual’s existing account. Also, for each paycheck or quarterly estimated tax payment of a self-employed individual, an amount would be contributed to their retirement account. Individuals could be allowed to transfer their retirement account to a commercial broker for management or let it stay with the federal government. The federal government could be allowed to transfer management to third parties for a fee.
Annual reporting would be required to let individuals know their account balance and other details. Rules would continue to exist, but in more simplified form, governing how much could be contributed annually, how much employers could also contribute, the age when distributions may begin, hardship withdrawals, etc.
Benefits of this type of approach:
All individuals who work would have a retirement account. This single account would be used whether they are an employee or sole proprietor or both.
The initial contribution from the government ensures that all workers start a retirement account.
The initial contribution from the government may also encourage individuals to be tax compliant from the start of the time they begin earning money.
The system ties to payroll tax withholding and so should not be burdensome to any size employer since they already are required to comply with payroll tax rules.
For low-income workers, the annual contribution could be made via part of the earned income tax credit.
What do you think? What would help all the individuals better save for retirement?