Last week, the Internal Revenue Service (IRS) announced new limits on various tax-advantaged savings vehicles, such as IRAs and 401(k) contributions, for 2023. As expected, rising inflation significantly increased these limits. For example, the annual 401(k) contribution limit will increase from $20,500 to $22,500, while the annual IRA contribution will increase from $6,500 to $7,500.
Like the attention paid to Social Security’s record 8.7% cost-of-living adjustment for current retirees, it’s important to pay attention to the evolution of these different savings vehicles. -retirement. And not just the contribution limits, but also how the design of these plans has changed over time to ensure that future retirees have enough options to save for a financially secure retirement.
Over the years, the popularity of these retirement savings vehicles has grown through sound policy that has been informed by research findings in behavioral economics. 2002 Nobel Laureate in Economics Daniel Kahneman and his co-author Professor Amos Tversky led the way with their research in the 1970s. They showed that in the face of complex problems and uncertainty, people used heuristics or rules of thumb to guide action, leading to less than optimal results. Professor Richard Thaler took this research further, studying the financial aspects of behavioral traits such as procrastination and inertia, which ultimately won him the 2017 Nobel Prize.
Based on this groundbreaking research and the follow-up studies by countless talented economists, a simple change in law in 2006, making it easier for companies to enroll their employees in 401(k) plans and automatically increase their dues, was a major success. in driving the adoption of these plans. According to 2022 T Rowe Price Research, “Auto-enrollment nearly doubles plan participation and is successful in getting participants who might not have started saving otherwise.”
The available research also underscores the positive feelings Americans have toward 401(k) plans. According to an annual survey conducted by the Investment Company Institute, Americans appreciate the discipline and investment opportunities that these plans represent. Ninety percent of survey respondents agree that these accounts have helped them think long term, not just about their current needs, and 89% agree that payroll facilitate savings.
Of course, this is not the end of the story when it comes to retirement savings and related legislation. Despite the successes, we still have a long way to go due to a changing economy. The lack of retirement plans offered by small businesses, due to various costs (monetary, legal or time, among others) was a key issue in the last finalized retirement legislation.
In fact, the Secure Act of 2019 provided an opportunity for these employers to unite by authorizing several employer plans that increased access to “more favorable retirement investment outcomes and management services.” more effective and less costly. It also provided various credits and simplified safe harbor rules to help small businesses with these pension plans.
When it comes to ongoing and future legislative work, we can build on the success of past legislation, but we also need to consider the changing workforce and emerging issues when designing new legislation. a versatile retirement policy. For example, the House version of the new Secure Act 2.0 uses auto-enrollment success and includes language that requires auto-enrollment for new 401(k) plans. It also takes into account the growing student debt crisis and includes a provision that allows employer contributions made on behalf of employees for “qualifying student loan payments” to be treated as matching contributions.
Another issue on many experts’ radar is that of non-traditional working arrangements. With the rise of technology over the past decade, the gig economy and the number of people involved in project-based freelance work have grown. Additionally, the COVID-19 pandemic has shifted Americans’ work preferences, further increasing the casual, part-time, and freelance workforce, even among high-skilled occupations.
Many expect these trends to continue. In fact, according to one study, by 2027 more than half of the American workforce will be self-employed. All of these developments tell us that we need to work to make pension plans and other benefits more accessible to this part of the workforce. Meaning. Warner (D-Va.), Young (R-Ind.), and DelBene (D-Wash.) have introduced legislation to test innovative wearable perk designs for the growing independent workforce.
The bipartisan nature of the bills currently in Congress shows agreement on the importance of these plans for the American workforce. The inclusion of tax-advantaged retirement savings vehicles and their role in many of these bills speaks to their effectiveness.
Any new legislation should build on the success of previous ones and work to expand access to these vehicles and increase retirement savings. It should also take into account the ever-changing US economy and its challenges to remain relevant.
Pinar Cebi Wilber is Executive Vice President and Chief Economist of the American Council for Capital Formation.