You know the safety net is in danger when lawmakers fire away and claim they’re trying to save it. On the first day of the new Congress, the House warned that Social Security benefits might need “saving”. The Congressional Budget Office twice ran the numbers on “saving” Medicare by raising the starting age from 65 to 67. It’s a shame, the story goes, but the money just isn’t there.
It isn’t? The far-sighted authors of the 1974 Employee Retirement Income Security Act might beg to disagree. The bill created tax-deferred retirement savings accounts, a landmark win for workers—and, over the long run, for the nation as well. The Treasury is closing in on a golden payback, and it could make the safety net much safer.
Let’s follow the money, and see how the 1974 law is rewarding America. Then let’s see how Congress could make the rewards even greater.
On the front end of the retirement bargain, workers get decades of tax-free investment. On the back end, they cash in but so does the Treasury: it gets revenue each year from taxable withdrawals. Payouts can begin at age 59 1/2 but can be put off until age 70 1/2. From then on, minimum required distributions (MRDs) kick in. Starting next year, it’s MRD time for an affluent demographic—the best-off of the baby boomers, waiting as long as they legally can to touch their retirement nest eggs.
Over 76 million boomers were born from 1946 to 1964. From 2016 on, those with untapped accounts will be paying back each year (joining, of course, the millions of others already taking taxable distributions). For decades to come, year after year, tens of billions in long-deferred taxes will be pouring into the Treasury.
Congress should dedicate those receipts to shoring up the safety net. It’s only fitting that revenues generated by retirement accounts should be reinvested in the safety net; after all, that’s what the 1974 bill set out to strengthen.
In addition, to lessen the long-range fiscal threat, lawmakers could take an effectively painless step. They could revisit the MRD rules, and make two changes that would raise added revenue without raising taxes. Here they are, and the policy reasons for making them:
65, not 70 1/2: It never made fiscal sense for MRDs to begin at age 70 1/2; it makes no sense for the common good either. Gradually, say in half-year increments, move up the starting age to 65. When it’s Medicare time, it’s also time to begin paying back Uncle Sam for those retirement tax breaks (and helping Medicare in the process).
Raise the percentages: The withdrawal rates for MRDs start out low and creep up slowly. The formula that applies to most accounts calls for a starting MRD of under 3.7 percent. Twenty-five years later, at age 95, the rate is just 11.6 percent. Congress should phase in higher rates for required withdrawals. The social contract would reach a new level of fairness: by paying back faster for their tax breaks, recipients of MRDs could help shore up Medicare, Social Security, whatever. (No, higher rates wouldn’t cause retirees to exhaust their savings. If MRDs were doubled, the rate at age 95 would still be only 23.2 percent—leaving 76.8 percent still invested. Minimum distributions can’t clean out accounts; only larger, voluntary withdrawals can do that.) Speeding up MRDs would hurt no-one. It would help millions. It would raise billions. It would also pour more money into the economy, and likely create more jobs as well.
The United States is the richest country in the world. Politicians should stop poor-mouthing the safety net, and use some of our riches to mend it. The coming windfall from boomer MRDs would be a good place to start.
Gerald E. Scorse helped pass the bill requiring basis reporting for capital gains. He writes on taxes.