In its original form, the Employee Retirement Income Security Act of 1974 (ERISA) and its offshoots, including individual retirement accounts (IRAs), was an extraordinary piece of legislation. It created vehicles for workers not covered by pensions to save for retirement on a tax-advantaged basis. They could establish an IRA simply by filling a form.
Unfortunately, over the years, ERISA’s were hijacked by Wall Street. What started out as a well-designed program to help ordinary Americans save for retirement has been transformed by the financial industry, the rich people they serve, and those carrying water for them in Congress. Today, IRAs and retirement plans established under ERISA function primarily as vehicles to further enrich America’s wealthiest.
ERISA’s original design was simple. In the decades immediately following its passage, ERISA would impose a significant cost to the Treasury, as contributions were made to the retirement accounts of millions of taxpayers. At some point, however, the annual cost to the Treasury would diminish, as more and more taxpayers received taxable distributions from their accounts. Ultimately, ERISA would reach an equilibrium, where those taxable distributions to retirees more or less offset the deductible contributions to retirement accounts by younger taxpayers.
Soon after ERISA was enacted, however, Congress ignored the original goals of the ERISA and began gravitating towards the needs of special interests, including the finance industry and its rich customers. The “reforms” that Wall Street lobbied for are unrelated to the original purpose of the law and only serve benefit the already wealthy.
Originally, ERISA provided for an excise tax on accumulations of retirement funds beyond what was reasonably required for retirement income security. Basically, it allowed for the recovery of tax deferral benefits that went far beyond what was necessary to fund a person’s retirement, meaning there was no tax benefit to overdoing one’s retirement plan saving. Whatever benefit could be gained from the excessive deferral of income tax would be offset by the excise tax payment at death.
Ultimately, however, rich Americans with bloated retirement plan account balances attacked this modest tax as a “success tax” and Congress obliged, eliminating the excise tax in 1997.
In the same legislation that basically took the lid off tax deferrals for retirement plan accounts, a new vehicle, the Roth IRA, was created. Unlike contributions to traditional IRAs, contributions to Roth IRAs are not tax deductible, which allowed for the elimination (rather than the mere deferral) of tax on retirement account earnings. And of course, allowing a tax elimination status to retirement income largely benefited those in higher income tax brackets looking to avoid those pesky dues.
But they weren’t finished butchering this program yet. With the passage of Bush tax cuts in 2001, the deferral of tax on inherited retirement plan accounts, which originally ended within five years of the death of the retiree, were allowed to continue for an additional generation or more. Effectively, Congress decided that the portion of retirement plan accounts that were not necessary to provide for a person’s retirement – the portion passing to heirs – was entitled to beneficial tax treatment for a far longer period than the portion that was used for retirement. This again created another incentive for rich taxpayers to refrain from using their retirement plan accounts for their intended purpose – retirement – and instead pass them to their descendants.
Ultimately, the additional generation of tax deferrals under the Bush tax cuts was cut back to a 10-year deferral by the Secure Act of 2019, for retirement plan accounts inherited after its enactment, but millions of rich heirs already have secured decades of unjustified income tax deferrals.
Overall, however, the Secure Act of 2019 continued the transformation of ERISA from its original sound design. It delayed the age for minimum required distributions from retirement plans from 70-1/2 to 72. That helps rich people who are using their bloated retirement plan accounts as tax deferral mechanisms but doesn’t do much for ordinary Americans, the great majority of whom must start taking distributions from their retirement plans by age 70 anyhow.
And, to offset the revenue loss from increasing the age for mandatory distributions, Congress expanded the use of Roth IRAs, again trading short-term revenue for a long-term giveaway to America’s rich.
And now, in 2022, Wall Street is back at the trough again, with Secure Act 2.0. This bill, which just passed the House with only five no votes, would allow rich Americans to continue the deferral of tax on their retirement plan accounts to age 75. Now, who can afford to forgo retirement plan distributions until they turn 75? Rich people of course.
Time and time again this program, which started out as a great opportunity for working Americans to put some money aside for their retirement, has been twisted and altered beyond recognition by the interests of the ultra-wealthy to benefit themselves. Of course, if Congress wanted to clean up the mess they’ve created here, it wouldn’t be hard. The original version of ERISA worked fine. We can and should return to that. Every American deserves to save up money for their retirement.
