What will the 2018 midterm elections mean to millions of Americans who are justifiably worried about their retirement? In a post on the Studio entitled “America’s Retirement Savings Crisis,” I detailed the sources of these worries: too many Americans with too little saved for retirement and too few with protected lifetime income; too few workers covered by easily accessible employer-provided retirement plans; and too much money “leaking” out of Americans’ retirement savings. The diagnosis is well-known. Will the next Congress produce the right prescriptions?
A Challenging Political Environment
The safest bet, even in the best circumstances, is that Congress will not act, and 2019 and 2020 will not present the best circumstances. The midterm elections’ “blue wave” has already given Democrats control of the U.S. House of Representatives for the first time in eight years. At the same time, Republicans’ majority in the U.S. Senate grew, but not enough to overcome Democratic filibusters. When power in Congress is divided, legislation can grind to a halt. Partisan conflict, congressional investigations, and posturing for the next election can build. That hasn’t always been true, but it has happened frequently enough that it should not be a surprise if it recurs. The 2019 government shutdown certainly has not helped to build bipartisan comity.
Nonetheless, I am optimistic. Retirement policy, with only a few exceptions, has long been a bipartisan issue. The interests of key stakeholders—employers, the retirement services industry, retirees, and workers—often align on important policy questions. Congress has not enacted major retirement legislation in 12 years, but comprehensive bipartisan retirement legislation advanced in 2018, and more bipartisan bills are in the queue. I will not promise a panacea for America’s retirement crisis is forthcoming, but Congress might overcome a challenging political environment to enact some solutions. America’s retirement savers will benefit if it does.
The “Lame Duck” 2018 Session
Bipartisan retirement legislation was pending in Congress at the end of 2018: the Senate’s Retirement Enhancement and Savings Act (RESA) and a House tax bill including many of the same provisions. The crush of business, rather than lack of support, kept Congress from acting on these bills. Legislation combining these bills’ retirement provisions likely will pass during the 116th Congress.
Among many other provisions, the bills would promote protected lifetime income by making annuities —the asset class featuring lifetime income—more available and more salient to retirement savers and financial advisors. In particular, they would make it easier for employer-sponsored retirement plans to offer annuities, require illustrations of the streams of lifetime income that current retirement savings could generate, and expand employer-plan annuities’ portability.
The House bill would also help some with inadequate retirement savings. Retirement savers with $50,000 or less would be excused from “required minimum distribution” rules that force regular withdrawal and possible taxation of savings in retirement accounts. An existing ban on contributions to Individual Retirement Accounts after age 70½ would be eliminated by the House bill benefitting those who continue to work. Both bills would also expand coverage by employer-sponsored plans by making “Open Multiple Employer Plans” (OMEP) available. OMEPs allow more businesses, particularly small businesses, to band together to offer plans. The bills also mildly encourage automatic enrollment of employees in their employers’ plans, again expanding coverage. In sum, the bills contain a lot of good retirement policy. They won’t entirely solve the retirement crisis, but they will ameliorate it. Again, expect Congress to act in 2019.
Likely and Unlikely Federal Action on Retirement Over the Next Two Years
Social Security and Medicare
More than 9 in 10 Americans age 65 and older receive protected lifetime income from Social Security.1 It is the central pillar of most Americans’ retirement plans and, for too many, the only pillar. Yet, according to the Social Security Trustees’ 2018 annual report, “Social Security’s total cost is projected to exceed its total income in 2018 for the first time since 1982.”2 Further, the Trustees’ long-range projections suggest the trust fund that pays Social Security retirement benefits will be depleted in 2034.3 In addition, nearly 49.5 million Americans over the age of 65, and another nearly 9 million younger Americans with disabilities, receive health insurance from Medicare.4 But, according to the Medicare Trustees’ 2018 annual report, Medicare is already in deficit and its principal trust fund may be depleted by 2026.5
Congress needs to shore up both Social Security’s and Medicare’s finances. Don’t count on it in the 116th Congress. Fixing Social Security requires painful choices: raise the cap on income subject to Social Security taxes (Democrats’ preference), or reduce benefits or delay the retirement age (Republicans’ preference). Medicare funding may be even harder to solve. It is bound up in Republican efforts to repeal President Obama’s Affordable Care Act and Democrats’ efforts to expand the program to cover many more—perhaps all—Americans. And President Trump has promised to protect both Social Security and Medicare, although without offering specifics. The bottom line: these issues are too big and knotty to address with a presidential election looming.
Omnibus Retirement Legislation
Another large and bipartisan retirement bill—the Retirement Security and Savings Act—was introduced by Senators Rob Portman (R-OH) and Ben Cardin (D-MD) in the last few days of the 2018 congressional session. The Portman-Cardin bill, which is extremely broad with a host of detailed provisions, would build on the RESA/House tax bill. It includes proposals that would expand access to and incentivize annuities and their protected lifetime income. It would help increase inadequate retirement savings for some, especially lower and middle-income retirement savers, and expand coverage by providing greater incentives and protections for automatic enrollment of employees in employer plans. And that is only a small sampling of the bill’s many provisions.
Omnibus legislation of this breadth and complexity takes time, and the Portman-Cardin bill is brand new and lacks a House counterpart. So, if it passes during the 116th Congress, 2020 is more likely than 2019. However, if action on the RESA/House tax bill is delayed deep into 2019, the Portman-Cardin bill may have to wait for the 117th Congress.
"I will not promise a panacea for America’s retirement crisis is forthcoming, but Congress might overcome a challenging political environment to enact some solutions. America’s retirement savers will benefit if it does."
Employer Plan Coverage
The most important retirement development in Congress is that, in January 2019, Rep. Richard Neal (D-MA) will take over as chair of the House Ways & Means Committee, the committee with jurisdiction over many retirement issues.6 Neal is a retirement expert, and the issue will top his committee’s agenda. One of his favorite proposals would address inadequate retirement coverage and savings by requiring all but the smallest employers to establish 401(k) (or 403(b)) retirement plans and automatically enroll all their employees in those plans. The Automatic Retirement Plan Act may pass the House during the 116th Congress, but it faces rough times with Senate Republicans who reflexively reject employer mandates. Yet, the financial services industry is warming to the idea, and some companies (including Jackson, State Street, TIAA, and Transamerica) and the Insured Retirement Institute, an annuities trade association, have endorsed Neal’s bill.
One reason support for the Neal bill is growing is that 10 states and one city have established their own retirement plans for private-sector employees lacking access to an employer plan. With seven new Democratic governors and more state legislatures under Democratic control after the 2018 elections, the number of state retirement plans may grow over the next two years. Employer and financial services trade associations would prefer private-sector solutions, and the Neal bill may be their best alternative.
With the fight over the U.S. Department of Labor’s “fiduciary rule” largely concluded, the Securities & Exchange Commission (SEC), the National Association of Insurance Commissioners (NAIC), and individual states will take charge of the rules governing financial advisors’ advice to retirement savers about how to invest their savings. The SEC is expected to publish a final “Regulation: Best Interest” in 2019. The NAIC appears to be waiting for the SEC to finish its work before issuing a model regulation governing advice about and distribution of annuities. Meanwhile, a few states, including Nevada, New York, and New Jersey, are already working on their own “baby fiduciary rules.”
Congress will not legislate in this space, but expect the new House Democratic majority to pressure the SEC to impose tough consumer protections in Regulation: Best Interest. At the same time, newly elected Democratic governors and Democratic majorities in state legislatures may propose their own stricter retirement investment advice regulations regardless of the NAIC’s final model rule. In sum, one fiduciary rule fight may be done, but a broader, multi-front struggle over market conduct relating to retirement advice and products is just beginning.
Even with divided control of the 116th Congress, good things can happen in federal retirement policy. Few bills may become law, but there will be a great deal of action that retirement savers and financial advisors should watch closely.
*What is an annuity?
Annuities are long-term, tax-deferred investments designed for retirement. Variable annuities involve risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½. Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.