There seems to be an unwritten rule with lawmakers that, every time they create a terrible piece of legislation, they give it the most noble-sounding name.
The USA PATRIOT Act from 2001 was a great example. It sounds great. Who wouldn’t love a law named for Patriots?
And yet that was easily among the most freedom-killing laws ever passed in US history, giving the federal government nearly unlimited authority to wage war and spy on its own people.
There are so many other examples– the USA FREEDOM Act from 2015 (which renewed many of the worst provisions of the PATRIOT Act).
Or the HIRE Act from 2010, which created some of the most heinous tax rules of the last fifty years.
The names of these laws all sounded wonderful. But their effects were absolutely terrible.
The new SECURE Act will likely be no different.
If you haven’t heard of SECURE, it’s a new piece of legislation aimed at ‘fixing’ the US retirement system.
SECURE stands for “Setting Every Community Up for Retirement Enhancement”, which is pretty clever when you think about it.
People want to associate their retirement with a word like ‘secure’. So even without knowing anything about the law, most people will probably have good feelings about it based solely on the name.
But if you actually read the legislation, SECURE contains a number of predictably terrible consequences.
For starters, SECURE is a basically a gigantic tax increase. And it’s a tax increase that will particularly affect your children when you pass away.
Under current law, you could leave your IRA to your children in a fairly tax efficient way. That’s actually one of the nice things about an IRA.
If your kids inherit your IRA, they’re required to pay out a small portion of the funds each year… and those distributions would be taxable income.
But the current rules only require tiny distributions; your kids are allowed to stretch out the annual payouts over the course of their lives, resulting in very minor taxation.
The new rules completely eliminate this benefit.
Under the SECURE Act, your kids would have ten years to pay out (and be taxed on) the entire value of your retirement account.
This means that the annual payouts would be MUCH larger… thus bumping your children up to a higher tax bracket… meaning that they’ll end up paying much higher taxes on your retirement savings.
This is tantamount to a huge estate tax increase. And it’s one that primarily affects the middle class.
For wealthy people, retirement accounts typically only comprise a small percentage of their assets. So this rule change won’t have much of an impact.
But for the middle class, retirement accounts are often one of the largest sources of their estates. And this legislation will be a significant hit for them.
The US House of Representatives already passed the SECURE Act. And just in case you’re about to start hating on your least favorite political party, you should know that it was passed with almost unanimous support from both parties.
(though I have my doubts whether most members of Congress even read the legislation…)
It’s currently in the Senate and seems likely to pass, so this is a reality to prepare for.
In related news, Congress also made some movement on the Rehabilitation for Multiemployer Pensions Act.
Sadly this one doesn’t have a catchy acronym. But in essence the legislation is their comical attempt to address the multi-trillion dollar problem of unfunded pension plans in the Land of the Free.
We’ve talked about this before a number of times– the vast majority of state, local, and even corporate pension plans in the United States (and worldwide for that matter) simply don’t have enough money to keep their promises.
Moody’s Investor Service estimated last year that the total pension funding gap in the US is $4.4 trillion. A few months ago the American Legislative Exchange Council estimated it at nearly $6 trillion.
Bottom line, it’s a big number.
Pension plans in the United States are currently guaranteed by a quasi-government agency called the Pension Benefit Guarantee Corporation.
The PBGC is sort of like an FDIC for pension funds… so that if a pension plan goes bust, the PBGC will step in with a bailout.
Problem is, the PBGC itself is nearly insolvent and will run out of money in 2025. And its balance sheet is trivial compared to the multi-trillion dollar pension problem.
So Congress came up with a solution: go into DEBT!
According to the new legislation, whenever a pension plan runs out of funds, Congress wants them to borrow money in order to keep making payments to beneficiaries.
This raises an obvious question: who would be insane enough to loan money to an insolvent pension fund?
Well, you’ll be pleased to know that your esteemed members of Congress have courageously signed you up for the task, putting the American taxpayer on the hook for this potential $6 trillion liability.
Clearly this plan is the work of genius.
If nothing else, these two laws point to an obvious conclusion: it’s more important than ever to get your house in order when it comes to retirement planning.
Pension funds aren’t going to be able to keep their promises. Even Social Security, according to its own annual report, will run out of money in 15 years.
And even when you responsibly set aside your own money for retirement, lawmakers will suddenly change the rules and impose a major tax increase on the middle class.
Just imagine the things they’ll do if the Bolsheviks come to power next year…
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