Senate Retirement Saving Bill Makes Small Improvements But Retains Basic Flaws of House Version

The Senate Finance Committee recently advanced the Enhancing American Retirement Now (EARN) Act, which would expand federal tax subsidies for retirement saving. The bipartisan Senate bill includes some small improvements over the House retirement saving bill that passed earlier this year (known as Secure 2.0), which would help more households with low and moderate incomes save for retirement ― but the changes do not address the core concerns that we and others raised. Like the House bill, the EARN Act would primarily benefit people with higher incomes whose retirements are already financially secure, rely on timing gimmicks to offset the bill’s cost, and provide only modest help to households with low and moderate incomes.

The EARN Act would make improvements to the saver’s credit, which subsidizes retirement account contributions for those with low or moderate incomes. Under current law, the saver’s credit is not refundable, so people who owe no federal income tax — around 76 million households as of 2019 — aren’t eligible. The House bill did nothing to address this flaw, while the Senate bill would provide a 50 percent government match for filers without an offsetting tax liability beginning in 2027. That is, if an individual contributes $2,000 to a retirement savings account, the federal government would also contribute $1,000 to their account, without regard to tax liability.

This improvement would likely increase the number of low- and moderate-income people with retirement savings — but it is not equivalent to making the credit refundable. With a refundable saver’s credit, a qualifying taxpayer who contributes $2,000 to a retirement savings account would receive a $1,000 tax refund — whether or not they have tax liability — which could be used in any way they see fit. For example, they could make an additional contribution to their account or help cover the cost of child care or basic necessities. Like retirement savings, spending to meet these needs can have long-term benefits. Providing a government-provided match instead of a refundable credit takes away that option, effectively locking up people’s savings for potentially many years, because early distributions from retirement accounts are generally subject to an extra 10 percent tax penalty on top of ordinary income tax rates.

The EARN Act includes a provision that could help these households mitigate this issue. Beginning in 2024, households could withdraw up to $1,000 from a retirement savings account each year to help pay for certain types of emergency expenses, without paying the 10 percent early withdrawal penalty. Withdrawing such funds comes with certain restrictions, however, and may constrain families’ ability to access needed amounts. Making the saver’s credit refundable, on the other hand, would provide maximum flexibility to families.

While the EARN Act’s saver’s credit and new emergency savings provisions would generally be positive changes for low- and moderate-income households, key provisions of the bill would primarily help households that already benefit the most from existing retirement subsidies, which are skewed toward people who are more affluent and white, and therefore would widen income and racial disparities.

For example, like Secure 2.0, the EARN Act would raise the starting age for “required minimum distributions,” or required annual withdrawals from retirement accounts, from 72 to 75. This would allow people whose retirements are financially secure, without tapping their retirement accounts, to defer taxes on their account balances for three more years. Only a small group of wealthy people would benefit from this extra tax deferral; it would also enable them to transfer more tax-subsidized funds to their heirs.

Another provision would allow people approaching retirement age to make larger “catch-up” contributions to their accounts. Under current law, the underlying annual contribution limit for tax-favored employer-sponsored retirement accounts is $20,500 in 2022, but people age 50 or older can contribute an additional $6,500. The EARN Act would raise the $6,500 limit to $10,000 for those aged 60 to 63. But only around 15 percent of retirement account holders approach the current limits, according to a Vanguard survey of its account holders, so this provision would overwhelmingly benefit people high on the income scale who can afford to contribute more.

Further, the bill relies on timing gimmicks to offset its cost within the ten-year budget window. Many of the costliest provisions do not take effect until late in this budget window, including the provision raising the age for required minimum distributions. At $4.36 billion in its first year, this is the costliest provision on a per-year basis. But because it would not take effect until 2032, the last year in the budget window, only one year of its cost appears in the Joint Committee on Taxation’s ten-year cost estimate.

The EARN Act also would result in more retirement contributions being designated as contributions to Roth retirement arrangements, in which contributions are made with after-tax income but neither the growth in account assets nor retirement withdrawals are subject to tax. (In contrast, contributions to a traditional 401(k) or IRA plan are made on a pre-tax basis, in which taxpayers can defer taxes on contributions and earnings until they withdraw the money in retirement, at which point it is taxed as ordinary income.) This would raise revenue over the first ten years because more contributions would be taxed upfront instead of upon distribution, but it would lose significant revenue in later years when withdrawals are made tax free. As a result, the bill is not fully offset in the long term and would increase deficits and debt in future decades. The Committee for a Responsible Federal Budget estimates that the second decade cost of the bill “would very likely exceed $100 billion, possibly significantly so.”

As the bill progresses, policymakers should do more to assist households with low and moderate incomes. For example, they should add a bipartisan proposal from Senators Rob Portman and Sherrod Brown to raise the Supplemental Security Income (SSI) asset limit from a mere $2,000, or $3,000 for a couple, to $10,000 and $20,000, respectively. This change would allow more older adults or disabled people with modest savings and very low incomes to get needed support through SSI, and policymakers should add it to the Senate bill.

And as Congress considers various tax policy initiatives as potential parts of broader tax legislation, policymakers should also work to boost the incomes of families with low and moderate incomes. For these families, a fully refundable Child Tax Credit and an expanded Earned Income Tax Credit for people without children are far more important than providing new tax advantages for retirement saving that would mostly benefit people with higher incomes.