FREE NEWSLETTER

We’re Overruled

Richard Quinn

I BEGAN TRYING TO figure out the laws related to retirement and employee benefits after the enactment of ERISA in 1974. I spent endless hours over many years in lawyers’ offices in Washington, D.C., as each new law or regulation came along.

TEFRA, DEFRA and COBRA are but a few of the many laws that now confound Americans. I bet most people think COBRA was only about health insurance. In fact, it’s the Consolidated Omnibus Budget Reconciliation Act. When you see a D in a law’s acronym, it usually stands for deficit. Meanwhile, an R means reduction or reconciliation. Good luck with that.

Recently, HumbleDollar’s Greg Spears explained some of the new rules in the so-called SECURE 2.0 Act. When you look closely at such laws, it’s questionable whether they provide the right incentives, whether they’re administratively feasible and—most important—whether they benefit the Americans who most need help. My experience in trying to explain, comply with and administer these laws over many decades tells me the answer to these questions is almost certainly a resounding “no.”

ERISA alone added thousands of pages of regulations. It also contributed to the decline of pension plans by making them more costly to operate. SECURE 2.0 delays required minimum distributions yet again, first to age 73 and later age 75. Who but the wealthy can delay taking retirement savings until their mid-70s?

The primary beneficiaries of all this complexity are consultants and lawyers. The losers are average Americans. They’re turned off by what they can’t understand and often interpret the rules incorrectly. It can get them into a mess of trouble.

Just consider the many different retirement plans we now have: defined benefit pensions—with many variations—the 401(k), solo 401(k), 403(b), 457, SEP-IRA, traditional IRA and Roth IRA. Each one has a different set of rules and limits.

Why? There’s no need for all these variations. Some retirement and benefit laws are pushed by the wealthy, some by employers and some by unions. But doesn’t everyone have the same objective—to strengthen retirement for all workers? I doubt Congress understands human nature when it comes to money.

Our Free Newsletter

Writing each law in isolation, Congress has created a mishmash of benefits tied to different income levels. When compared, they don’t seem fair. You can be eligible for the saver’s credit if the family earns up to $73,000, and yet a couple would owe taxes on as much as 85% of Social Security benefit payments with a total combined family income of over $44,000.

A deductible IRA uses various income limits, partially dependent on whether a spouse has a retirement plan at work. Meanwhile, there are no income limits on Roth conversions.

In 2023, a worker can contribute up to $22,500 to their 401(k) plan, plus $7,500 more if they’re 50 or older. Yet a person relying on an IRA—without an employer match—can contribute just $6,500 this year, or $7,500 total if they’re 50 or older.

Why are Roth withdrawals excluded from the modified adjusted gross income (MAGI) calculation, while tax-free interest on municipal bonds is not? No doubt that logic got lost in the tunnels underneath the House and Senate.

How can all these disparate rules—and their associated high administrative costs—be justified? Are they necessary? Are they fair? I can’t see how. Do we really need more laws designed to motivate Americans to save for retirement? Don’t we have enough already?

What we need with retirement plans, as we do with health care, is simplification, consolidation and uniformity. How great would it be if financial education could focus on just one set of rules? The multitude of choices we have with both retirement and health care plans is not helping Americans.

Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

Do you enjoy HumbleDollar? Please support our work with a donation. Want to receive daily email alerts about new articles? Click here. How about getting our newsletter? Sign up now.

Browse Articles

Subscribe
Notify of
12 Comments
Inline Feedbacks
View all comments
Cammer Michael
Cammer Michael
6 days ago

You’re right.
But I would add a detail that suggests it’s not all to benefit wealthy people.
We’d like to fund IRAs, but we can’t because our incomes are too high. It’s not a terrible problem to have as we do have 403(b) contributions in plans with low fees, but it would be nice to have the system rigged more in our favor.

Martin McCue
Martin McCue
6 days ago

Good article. Thank you.

Just as it is usually a lot easier to build a new house on raw land rather than land that has been cluttered with prior development, subsurface facilities and modifications that may or may not be obvious, it is probably easier to simply identify a new “need” and then layer a new plan onto the existing retirement provisions in the tax code. The legislators are happy to let others find the contradictions and loopholes.

[Then again, if there were a single framework that worked for retirement income planning, there would be an awful lot of lawyers, accountants and financial advisers who would be out of jobs. We need all these people now because not only is the tax code gigantic, it is difficult to understand, it changes all the time, and as I learned in law school, sometimes you really need to know all of the code in order to know any of the code.]

Randy Starks
Randy Starks
6 days ago

Thanks Dick for your thoughtful article. Just as a reminder, K-Street in Washington is the center for numerous lobbyists and advocacy groups. They influence your Congressman and/or Congresswoman. They (the lobbyists) fight for their constituents like the AFL-CIO, the teachers Union(s), CalPERS, SEIU, well union after union after union and Big businesses as well. So, the pulling and tugging of interests go back and forth. No wonder Congress is a swamp and tax laws have “unintended” consequences.

Just take the IRS tax code, please. It’s a abomination. The Tax Code is 6,871 pages, but when you include the tax regulations and official tax guidance from the IRS, it will be about 75,000 pages. It’s a code only Accountants and Tax Lawyers could love.

“The Internal Revenue Code (IRC) is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. U.S. tax laws began to be codified in 1874, but there was no central, comprehensive source for them at that time.”

Lis7
Lis7
6 days ago

“SECURE 2.0 delays required minimum distributions yet again, first to age 73 and later age 75. Who but the wealthy can delay taking retirement savings until their mid-70s?”

Random thoughts:

There is nothing preventing an individual from taking an IRA distribution once they turn 59 1/2. However, the questions of when and how much is where things get complex.SECURE 2.0’s delay in RMDs is a benefit to some retirees, although I suspect that it may also be a first step in a longer term plan to potentially reduce Social Security benefits for future cohorts. In other words, if no distributions are taken until required, one’s IRA, in theory, would likely have grown and this would provide an additional financial cushion in the event of any future reductions in Social Security (and Medicare) benefits. No inside knowledge, but it does make one wonder….Delaying the age for RMDs (and Social Security benefits) does nothing to address the flip side, which is age discrimination by employers, starting around age 50, and the degree to which it adversely affects lifetime earnings and savings. In addition, fewer companies offer pension plans, and this has had the effect of shifting significant financial risk to employees. Companies also hire contract labor in place of employees, with lower pay and far fewer, if any, benefits.Some thresholds (income, deduction limits, property tax exemptions) are not indexed to inflation, particularly at the state level.I agree with the author that the laws are too complex. Unfortunately, accountants, financial planners, tax attorneys, tax prep services and software providers, brokerages, lobbyists, et al are all invested in keeping things this way.

Last edited 6 days ago by Lis7
Sonja Haggert
Sonja Haggert
6 days ago

Informative article. I didn’t realize the “d” and “r” had consistent definitions.

Mark Royer
Mark Royer
7 days ago

Society would benefit if government at all levels was lean, efficient and honest. I think that includes simple. But too many of us vote for officials who promise to deliver the goods (pork) to their constituents, to the disadvanage of others.

Rick Connor
Rick Connor
9 days ago

Dick, one of your best articles. Thanks. I wish I had a solution but I don’t know of any.

The Drake
The Drake
9 days ago

Re-electing the people who approve this nonsense is the problem. We get the government we deserve. If you continually vote to re-elect your congressman or senators nothing will change. Complaining about it is silly. We have the power to change it. It matters not what your party is. It matters that the elected office holders aren’t being held accountable.

Andrew Forsythe
Andrew Forsythe
9 days ago

Absolutely agree, Dick. The complexity is mind boggling and counterproductive. Sort of like our income tax system.

I wish there were a decent chance of streamlining either one of them, but that’s probably a pipe dream.

Jo Bo
Jo Bo
10 days ago

I also agree that you are spot on, Richard. We need simplification of taxes, too.

An anecdote: Years ago, a 403b saver needed to opt for one of three different contribution procedures, and then use the same procedure to determine a contribution limit in subsequent years. This was before email or internet. I recall having to request the calculation of an annual, personal contribution limit by calling my financial firm, then waiting weeks to receive the calculated limit by mail. I wonder how many other savers had the patience for that? One year, the firm mistakenly refunded my contributions at year’s end as they believed I had followed a different contribution calculation. Several calls and letter exchanges later, the mistake was corrected. A less persistent contributor might have just cashed the check. I still threw up my hands in frustration. Needless complexity!!!

Ormode
Ormode
10 days ago

“But doesn’t everyone have the same objective—to strengthen retirement for all workers?”

If you look at our system as each interest group trying to gain an advantage over others, so that their retirement will be better than everyone else’s, it makes perfect sense.

Martymac
Martymac
10 days ago

Unfortunately your logic is too good. The golden rule “keep it simple stupid” obviously doesn’t apply to our leaders in this country.
once again, you are spot on. Thanks for the article

Free Newsletter

SHARE