Recently introduced legislation takes aim at Americans’ poor retirement savings habits by proposing sweeping reforms to current laws.
Americans Don’t Save Enough for Retirement
It’s no secret that, in general, Americans door a very poor job at saving and investing for the future to ensure they have money in their retirement years. Numerous studies confirm this, and it’s a sad trend for one of the wealthiest countries on the planet.
A GAO report released earlier this year found that nearly half of households aged 55 and up had no retirement savings.
A survey from 2015 found that 28% of workers it surveyed had less than $1,000 in retirement savings. In 2017, it was 24%. The lack of savings spotlighted in these surveys was often due to simply not being willing to give up spending on luxuries such as going to coffee shops or paying for TV/streaming services.
Other data show that overspending is indeed a big part of the problem of not putting enough away in savings for the future. Consider these facts:
- Student loan debt is at an all time high; 44 million borrowers collectively owe $1.5 trillion in student loans.
- Car loans now total over $1 trillion; Americans owed more than $1.14 trillion in auto loans as of September 2018, 23% more than 2013.
- Credit card debt is on the rise. It collectively totaled $420.22 billion at the end of 2018.
- Total mortgage debt stood at nearly $9 trillion dollars in 2018.
- As of the first quarter of this year, total household debt rose by $124 billion to reach $13.67 trillion, an increase of nearly 1% over the previous quarter.
The Retirement Security & Savings Act
What to do? Two Senators have some ideas that they believe can help reverse the trend.
The Retirement Security & Savings Act (S. 1431) was recently introduced by Senator Rob Portman (R-OH) and is co-sponsored by Ben Cardin (D-MD). It would make some significant changes to current laws regarding retirement savings plans.
Increasing Catch-up Contributions
The bill would let older Americans put more money away for retirement plans. For 2019, the current catch-up contribution limit for the Thrift Savings Plan and 401(k) plans is $6,000. Under the bill, this would increase to $10,000 for baby boomers (Americans over age 60). This new limit would, presumably, apply to the TSP as well since the IRS includes it with 401(k) contribution limit guidelines.
The bill would also index to inflation the allowable catch-up contribution to Individual Retirement Accounts (IRAs). For 2019, the total amount somebody over 50 can put into an IRA is $7,000 ($6,000 annual limit plus a $1,000 catch-up contribution). This limit last increased in 2013 and is not subject to an annual cost-of-living adjustment.
Reforming Required Minimum Distributions
The bill would also increase the age requirements for taking required minimum distributions (RMD) from traditional IRAs. Currently, RMDs kick in at age 70.5; the bill would increase this to age 72 in 2023 and age 75 by 2030 with the idea that Americans who choose to work longer can keep their retirement savings going.
The bill would also create an exception on RMDs for individuals with $100,000 or less in aggregate retirement savings, allowing them to choose to keep saving for retirement at any age.
The penalty for not taking an RMD would be reduced from its current 50% of the shortfall amount to 25% in most cases, and as low as 10%, if you self correct.
The bill also would provide tax credits for businesses and lower income workers to encourage retirement saving. Other highlights of the bill are covered in Senator Portman’s press release.