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Lawmakers Admit SECURE 2.0 Gave Too Much to Lobbyists

Posted on Jun. 16, 2022

A substantial piece of retirement legislation passed the House by an overwhelmingly bipartisan 414-5 vote, but progressive Democrats who supported it are now admitting the bill gives too much to lobbyists who represent asset managers.

Asked about the obstacles to getting progressive provisions into the Securing a Strong Retirement Act of 2022 (H.R. 2954), House Ways and Means Oversight Subcommittee Chair Bill Pascrell Jr., D-N.J., said he didn’t think every lawmaker in the Democratic Caucus was committed to including meaningful tax reform.

“I don’t think we were all aboard on the Democratic side,” Pascrell said, indicating that some lawmakers let asset managers have too much of a say in drafting the bill. 

“The people are close to the financial institutions in New York, from Schumer down,” he said of the lawmakers, including Senate Majority Leader Charles E. Schumer, D-N.Y.

The retirement bill, commonly referred to as SECURE 2.0, provided an opportunity to close loopholes in the tax code, and the absence of meaningful reform in the bill frustrated Pascrell.

Another lawmaker involved in the negotiations, who was granted anonymity to speak candidly, said, “Bill Pascrell is very wise.”

The interviews were sought as part of research by Tax Notes into claims of some academics and tax policy observers that SECURE 2.0 gave the bulk of its tax expenditures to wealthy American households and the financial industry, while leaving only a few breadcrumbs for low-income workers who could most use the help saving for retirement.

A largely uncontroversial bill when it passed the House, SECURE 2.0 would expand auto-enrollment in retirement plans, provide credits for small businesses to start pension plans, promote and enhance a savers credit geared toward low-income workers, and make student loan payments elective deferrals for the purpose of matching retirement contributions.

But several observers have since said the bill’s tax breaks for low- to middle-income savers are paltry compared with those that would benefit the rich, such as the provision that would raise the required minimum distribution age for retirement plans and another that would increase the catch-up contribution limit from $6,500 to $10,000 for individuals aged 62 through 64.

“This is an industry bill,” Alicia H. Munnell of the Center for Retirement Research at Boston College told Tax Notes. “Financial services are getting good things for their clients, and everything else is very secondary.”

Steven M. Rosenthal of the Urban-Brookings Tax Policy Center called the legislation “outrageous” and said it would exacerbate a broken retirement system in which “we shovel hundreds of billions of dollars of tax expenditures for retirement savings to the richest Americans.”

‘A Beautiful Balloon’

Although advocates have insisted that the catch-up contribution provision helps many Americans who were unable to save earlier in life, a simple analysis yields some insight into why critics have lambasted it as a handout for the wealthy.

Limits set by the IRS dictate that an individual aged 62 through 64 under an employer match program could put a maximum of $27,500, including a $6,500 catch-up, into 401(k)s and $7,000 into Roth IRAs, including a $1,000 catch-up, for a total of $34,500 into tax-advantaged retirement accounts in 2022.

While many savers will encounter the $34,500 limit, high earners with a generous employer match program can put a maximum of $67,500 into tax-advantaged retirement accounts in 2022, Garrett Watson of the Tax Foundation said.

To put those numbers into context, U.S. taxpayers aged 55 to 64 had a median income of $1,134 per week, or $58,968 per year, during the first quarter of 2022, according to the Bureau of Labor Statistics.

That means that a taxpayer would have to deposit, at a minimum, more than half of their annual salary into retirement accounts — or under a full employer match program, around $8,500 more than the average annual salary — to be able to contribute the $3,500 more allowed under SECURE 2.0 into tax-advantaged accounts.

And critics have insisted that a provision raising the required distribution age for retirement plans to age 73 starting in 2023 and 75 starting in 2033 affects a small subset of savers with a substantial financial cushion and no need to make withdrawals at a late age.

Asked about the required minimum distribution and catch-up contribution provisions that the Joint Committee on Taxation calculated would cost the government $9 billion altogether, Pascrell told Tax Notes that the laws are for rich people who pay “a very different tax than you and me.”

“Does it affect you?” Pascrell asked. “It doesn’t affect me either.”

Regarding the income thresholds for savers to take advantage of the catch-up provision, Ways and Means Committee member Danny K. Davis, D-Ill., said they are “up and away” like “a beautiful balloon.”

They were put in the bill at the behest of asset managers and majority stockholders, Davis added.

Snap Your Fingers

Several other taxwriters interviewed expressed disappointment in the retirement legislation, agreeing that there wasn’t enough for people of modest means and that the required minimum distribution and catch-up contribution provisions favored higher-income savers.

“I think many of those things are tilted towards people who have more money,” Ways and Means Committee member Earl Blumenauer, D-Ore., told Tax Notes.

Blumenauer acknowledged that a provision that would eliminate the phaseout for the savers credit — a program that matches retirement contributions by low-income workers dollar for dollar with tax credits — may not make much of a dent for those savers, given that it is nonrefundable in the House-passed bill and only applies to joint filers earning less than $48,000.

Academics have suggested that eligible taxpayers may not have enough of a liability to take advantage of the credit, which maxes out at 50 percent of $2,000 in contributions.

And while the SECURE 2.0 provision pumps up the credit for the lowest-income workers, the bill chips away at the eligibility for the savers credit, eliminating a 10 percent credit available to joint filers making between $48,000 and $68,000 in 2022.

“It’s not as artfully crafted. I’m not going to debate that,” Blumenauer said of the criticism of the savers credit. “But it was an opportunity to move these things forward.”

But critics insisted that the real question progressives should ask is how much bang for their buck are they getting.

Given that the savers credit is so watered-down and doesn’t go into effect until 2027, while the required minimum distribution and catch-up contribution provisions go into effect immediately, the answer may be not very much, tax policy analysts told Tax Notes.

That is especially so considering that in 2019, 75 percent of the highest-income working households aged 55 through 64 had a 401(k), and the median 401(k)-IRA balance for this group was $805,500. But only 21 percent of the lowest-income group had a 401(k), and their median balance was $32,300, according to Munnell’s research conducted with Anqi Chen.

Ways and Means Committee member Tom Rice, a Republican from South Carolina, acknowledged that lopsided distribution but said that making incremental progress to give retirement savers more flexibility was important.

“Unfortunately, the bottom income levels aren’t able to save at levels that higher-income levels are,” Rice said, adding, “I wish I could snap my fingers” to fix the problem.

Slugging It Out

Pascrell said he was eager to fight tooth and nail for a refundable savers credit and eliminate egregious problems in the tax code such as the stepped-up-basis and carried interest statutes that benefit the hedge fund and private equity industries.

“I wanted to slug it out,” Pascrell said. “Because I don’t think we fought hard enough.”

Asked about the income distribution effects for the catch-up contribution increases, Senate Finance Committee member Benjamin L. Cardin, D-Md., himself a champion of this type of retirement legislation, admitted that they fall short for households that didn’t save earlier in life.

“The extra couple thousand dollars of retirement savings isn’t going to make any difference for someone who has not accumulated enough in retirement,” Cardin acknowledged.

Lawmakers were reluctant to specify who was responsible for pushing the required minimum distribution and catch-up contribution provisions.

Ways and Means Committee member Brian Higgins, D-N.Y., said he agreed with Pascrell that Democrats on the committee didn’t fight hard enough to pass meaningful reforms, but he declined to answer any further questions.

“You got it good from Billy,” Higgins said.

Previous attempts to fix tax statutes favoring asset managers have been notably obstructed by Republicans and several moderate Democrats, as well as lawmakers from New York — a state that generated $429 billion in revenue from the financial sector, according to Investopedia.

For instance, a provision that would have treated carried interest as ordinary income instead of capital gains was originally included in the Build Back Better Act (H.R. 5376) but disappeared from the slimmed-down version of the bill unveiled October 28.

The five-page section — which was estimated to cost the private equity and hedge fund industries $14.1 billion over 10 years, according to the JCT — was removed from reconciliation over objections from Sen. Kyrsten Sinema, D-Ariz., according to a Democratic congressional source familiar with the negotiations.

Opposition to those proposals has also come from Schumer, who has acknowledged that he feels compelled to protect the financial industries vital to his home state, according to The New York Times.

‘An Odd Question’

Despite the criticism from several lawmakers, leaders of both the Senate Finance and Ways and Means committees remain staunch supporters of the retirement legislation.

“Every Democrat voted for it,” Ways and Means Committee Chair Richard E. Neal, D-Mass., said, noting how rare it is to achieve the kind of consensus evidenced by a 414-5 vote. “I thought it was sensible legislation.”

Neal called criticism that auto-enrollment of low-income workers may do them little good if they have nothing  to save in the first place “kind of odd.”

He said the increase in catch-up contribution thresholds is designed to remedy that problem.

If families can’t save for retirement early on because of other financial burdens, such as sending their children to college, the catch-up contributions enable parents to put more in their retirement accounts later when they are making more money, Neal said.

Finance Committee member Rob Portman, R-Ohio, said he was surprised that critics would call the Senate retirement legislation a handout for the wealthy, while committee ranking member Mike Crapo, R-Idaho, similarly disagreed with their analyses.

Asked whether raising the required minimum distribution age from 72 benefits those with a substantial cushion, Crapo responded, “Well, they don’t have to [wait] if they don’t want to.”

‘The Art of the Possible’

Many Democratic taxwriters said that while the legislation has shortcomings, changing laws to help move the needle for retirement savers in need requires compromise, and SECURE 2.0 was an important step forward in breaking political gridlock.

“If you’re bridging a bit of the gap between up here and down there, that is movement,” said Davis, who represents a district in Illinois with a poverty rate about 1.7 times the national average, according to Data USA.

Although he would have liked to see more accomplished for lower-income people, “you’ve got to be able to reach some agreement,” Davis said. SECURE 2.0 was brokered out of multiple considerations, including how to handle budgetary constraints, manage the COVID-19 pandemic, and tame inflation, he added.

Ways and Means member Donald S. Beyer Jr., D-Va., said that the retirement legislation was about “the art of the possible.”

“It’s always good to have a Bill Pascrell on the committee,” Beyer said. “You capture their energy, but then you still try to get something done that can be put on the president’s desk.”

Ways and Means Committee member Ron Kind, D-Wis., agreed.

“I’ve just found that if you sit around waiting for the perfect, nothing ever gets done,” Kind said. “This is what bipartisanship looks like these days.”

According to Beyer and Kind, there were several wins and proposals, such as the auto-enrollment and savers credit provisions, that made it worth advancing SECURE 2.0 despite its imperfections.

Provisions that would double the retirement plan start-up credit for small businesses from 50 percent to 100 percent of administrative costs of up to $5,000; expand eligible small businesses from those with up to 50 employees to those with up to 100 employees; and create a tax credit for small employer retirement contributions of up to $1,000 would help fill a “big black hole” in retirement savings, Kind said.

And lawmakers indicated that Senate Finance Committee Chair Ron Wyden, D-Ore., now has a significant opportunity to add more progressive provisions.

Wyden has said that Finance Committee staff are reviewing around 1,000 amendments filed on SECURE 2.0. He told Tax Notes that making the retirement savers credit refundable and expanding its eligibility to couples earning up to $65,000 is his top priority for the bill.

Political Calculations

For Democratic taxwriters, the possibility that the Finance Committee could finagle significant additions for low-income retirement savers may have been integral to the political calculation behind passing the bill in the House.

Republicans were pushing hard for a higher required minimum distribution age, and including that provision was part of the compromise for the bill, according to Kind.

The thinking, Beyer said, was that legislation that is approved by the Ways and Means Committee unanimously can pass the floor easily and has a good shot in the Senate. If legislation instead advances through the committee 25 to 18, then Democratic leadership must contend with a 5-to-10 vote margin in the House and a slimmer chance of passing the bill in Senate, he said.

It’s easier for Wyden to move a moderate bill to the left in the Senate than to try to pass a clearly partisan bill through the Finance Committee, Beyer explained.

“Chairman Neal knows what he’s doing,” Beyer added.

Whether that strategy ultimately pays off in a 50-50 Senate is an open question, but comments from Finance Committee member Chuck Grassley, R-Iowa, on June 8 indicate that Wyden may well have some time to figure out how to bolster progressive provisions in the bill.

According to Grassley, SECURE 2.0 won’t go to the floor until the end of the year as part of an extenders bill. And in the meantime, Ways and Means Democrats will be using the window to work on a long-postponed priority — namely, revamping and strengthening the Social Security system, committee member John B. Larson, D-Conn., said.

Despite his overall cynicism, Pascrell offered a similar assessment of SECURE 2.0’s prospects for becoming a legislative package that could work for people at the bottom of the income distribution.

Wyden’s the guy that could make a difference on the other side,” Pascrell said. “That’s what I conclude.”

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