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SECURE 2.0 Pension Reform. Daniel Merritt, Gonzaga University, Intern.

Through their January 24th discussion on SECURE 2.0 (America’s evolution of pension reform set to take effect in 2025), the Brookings Institution conveyed a powerful sentiment: retirement plans in America are ineffective and insufficient. 

Brookings senior fellow Mark Iwry started the conversation by summarizing a recent work put together by himself and coauthors examining SECURE 2.0 and how it has developed in the grand scheme of American retirement since the 20th century. He indicates that the story starts with ERISA, a 1974 pension reform policy which put retirement plans in the hands of employers. Not only did this prove to be intangible but it also favored those who retained their jobs for life, unfairly polarizing those with volatile employment histories or the need to switch professions (a population often composed of minority peoples). 

Seeing discontentment with ERISA, Iwry considers the rise of the 401K in the 1980s. The 401K promised a distinct improvement to the previously employer-centric ERISA, seeking to broaden the scope of eligibility and ease-of-access through vehicles like the Auto-401k and Auto-IRA and level the playing field through a 50% refundable tax-credit to America’s low-income population. Unfortunately, promises proved empty. The 401K established the ‘Auto’ vehicles above, but Congress saw the equity-oriented ‘saver’s credit’ dropped to 10% in 2001. 

Moving into the modern age, Iwry mentions that SECURE 2.0 is reinstating the previous 50% tax-credit come 2027. Other key improvements in SECURE 2.0 are the creation of emergency savings for the low-income as well as the auto-salvage of abandoned assets in the IRA to prevent petty loss of income. Though still on the horizon, SECURE 2.0 looks to address previous concerns with America’s retirement plans… so why does Brookings panel believe that it won’t be as effective as promised?

Regina Jefferson (Professor at Columbus School of Law) was the first to make the argument that a standardized retirement plan is insensitive to the varying degree of class disparity faced by Americans. 

Put into a racial-ethnic-gender context, she makes the point that factors such as intergenerational wealth, access to financial education, and nonvolatile work environments aren’t present for the low-income minority American. Panelists Fiona Greg (Vanguard group head of research and policy) and Josh Gotbaum (Brookings economic scholar) further emphasize her point. They discuss how the fragmentation of income and lack of education for those facing the brunt of the wealth gap leads to confusion in ‘where to spend the next dollar’. Consequently, the vehicles present in SECURE and the 401K approach mean nothing without proper knowledge concerning where that money is going. 

After all, to a struggling low-income family, giving a significant portion of their income away only to be seen again in 30 years is akin to a starving man throwing food in the freezer to be retrieved in 3 decades. This is why SECURE 2.0 incentivizes involvement with tax cuts and emergency savings.

It is yet to be seen if that is enough to convince low-income families of retirement savings’ pivotal long-term benefits. 

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