Five months before Congress faced a near-catastrophic standoff over the debt ceiling, with Republicans demanding restrictions to food and Medicaid programs to rein in spending, a bill that raised the cost of private retirement savings accounts to $282 billion per year was quietly signed into law.
In this era of deeply divided politics, the 2022 bill known as Secure 2.0 was hailed as a bipartisan success — a victory for average Americans. It had sailed through the House by a whopping 414-5 vote. It followed four other major bills passed between 1996 and 2019 that dramatically expanded taxpayer savings – all equally lauded as bipartisan victories.
But that rare issue that brought a divided Washington together also increased wealth disparities and the federal deficit. And the victory was most strongly applauded by the burgeoning financial services industry, for whom tax-advantaged retirement savings has transformed a $7 trillion retirement market in 1995 to a $38.4 trillion behemoth in 2023.
Tax-advantaged savings has become a staple of the American retirement system, with 60 million savers squirreling away $6.6 trillion in their 401(k)s, alone. But a yearlong POLITICO investigation found that Secure 2.0 and its predecessor bills have expanded the system well beyond its goal of helping the middle class. Today, wealthy taxpayers can protect up to $452,500 per year in tax-advantaged accounts in a single year, saving up to $203,600 on their taxes. And they can keep their money in tax-advantaged accounts far longer.
More striking is how these victories were achieved: A quarter-century partnership between two senators — Democrat Ben Cardin of Maryland and Republican Rob Portman of Ohio — joined more recently by the former House Ways and Means Committee Chair Richard Neal (D-Mass.). Backed by one of the most highly skilled and lavishly funded industry lobbying teams, and greased by campaign contributions, Portman, Cardin and Neal turned what could have been a deeply controversial giveback to higher-income taxpayers into a staple of the American Dream.
Their success offers an intriguing roadmap for how even the most divided Congresses can coalesce around a single issue. It includes the passionate advocacy of two quietly well-liked senators and a representative whose life story — having grown up orphaned, on Social Security — refuted any suggestion of bias toward the wealthy. They appealed to core beliefs in both parties — free enterprise for Republicans, economic security for Democrats – to enact what is arguably the most costly series of non-Defense bills in recent decades.
Indeed, that success now vexes many retirement experts, alarmed by how easily Congress acquiesces to tax breaks for retirement savings that disproportionately help the wealthy while treating the benefits relied upon by most retirees — Social Security and Medicare — as budget-busters ripe for reform.
“The 401(k) industry owns Congress,” said Daniel Hemel, a professor and tax law scholar based at NYU School of Law. “Either lawmakers were trying to pull a fast one on the American people or lobbyists were trying to pull a fast one on Congress. I don’t know which story is better. I don’t know which one I should want to believe.”
As assets in retirement accounts have exploded since the mid-1990s, so has the amount of money spent by the retirement industry on lobbying and campaign contributions to key members of both parties. A POLITICO data analysis shows that top retirement industry lobbying groups have increased their PAC spending to lawmakers between six to eight times since the early 2000s, with the PACs and executives of member companies of one industry juggernaut providing $98.6 million to lawmakers in the 2022 election cycle leading up to Secure 2.0.
Meanwhile, former administration officials, Capitol Hill aides and other people who work on retirement legislation, some of whom were granted anonymity to discuss the legislative process, told POLITICO that the industry initiated many, if not most, of the policies that became law. They described a closed-door system in which congressional aides — many of whom would later go on to work in the industry — collaborated openly and regularly sought advice from former colleagues employed by financial service companies and groups.
Secure 2.0 and its 2019 predecessor, Secure 1.0, were prime examples. Retirement trade associations succeeded in enacting multiple proposals they claimed to originate and had pushed for years.
The legislation increased the amount of money the top 16 percent of retirement account contributors could use to grow their capital tax free. And it enabled wealthy Americans to shield all their savings in tax-advantaged accounts well into their 70s, providing a boon for asset managers and insurance companies that collect fees based on the money growing in those accounts.
Tax-advantaged savings sounds “like motherhood and apple pie,” said Steve Rosenthal of the left-leaning Tax Policy Center, but in fact is “corrosive to our tax base and to equity across wealth, income, and racial grounds.”
The inequality gap in retirement accounts has grown exponentially
Defenders of the system argue that 401(k)s provide middle-class Americans with a critical additional layer of financial security, when coupled with Social Security. Secure 2.0 also included a new kind of government match program, called the saver’s credit, for the lowest-income savers — which provides a retirement savings match of up to $1,000 for people with very low incomes.
However, a slew of other data, from retirement research centers, consulting firms, the Federal Reserve and other government entities, has called into question the fundamental effectiveness of the 401(k) system for large segments of the population.
In particular, Federal Reserve data shows that the median account balance of the lowest-income savers has in fact dropped since the beginning of the retirement reform project in 1996. And according to the Organization for Economic Cooperation and Development, a global economic think tank, the U.S. has some of the highest rates of elder poverty, far behind 30 similarly developed countries and better off only than Costa Rica, Croatia, Lithuania, Bulgaria, Latvia, South Korea and Estonia.
“It does not work for a wide variety of people,” David John of AARP, who previously worked as a senior researcher at the conservative Heritage Foundation, said of the current retirement system.
Underscoring the need to make retirement plans available to more people, John pointed to AARP studies indicating that 57 million private sector workers don’t have access to any retirement program at work, while only 47 percent of Black employees and 36 percent of Hispanic employees have access to an employer-provided retirement plan.
Meanwhile, according to one estimate by the Joint Committee on Taxation — which is used by lawmakers to evaluate tax proposals and assesses the immediate loss to the government’s bottom line — the cost of retirement tax expenditures to the government is expected to nearly double in just four years from $369 billion in 2023 to $659 billion in 2027.
The statistics fly in the face of rhetoric from advocates in both parties. Republicans celebrate the private-sector nature of tax-advantaged savings, in which workers make their own investment decisions, while Democrats hail the economic boost and enhanced retirement security for American families.
“We made it easier for Main Street businesses to offer retirement plans to their workers by easing administrative burdens, cutting down on unnecessary and often costly paperwork,” said former GOP tax writer and Texas Rep. Kevin Brady .
Neal, who is now ranking member for Ways and Means, put it this way: “I think it is important to highlight that U.S. defined contribution plans have created a unique reservoir of capital in the innovation economy. That means that workers’ retirement assets are directly tying middle class workers to our national innovation economy. That certainly is a win-win for all of us.”
Growth in retirement accounts for wealthiest Americans dwarfs other income brackets
But Alicia Munnell, a former Federal Reserve economist who now directs the Center for Retirement Research at Boston College, says flatly, “I am persuaded that these are bills designed for the high-earners and stuff for middle- and low-earners gets put in along the way to make the legislation less shameful.”
The latest expansion of private retirement savings comes at a time when Social Security, which the majority of American seniors rely on to cover basic living expenses, faces insolvency in 2034. Secure 2.0 sailed through Congress shortly before lawmakers convened working groups to try to fix Social Security’s $119 billion cash shortfall, which amounted to less than half of a single year’s worth of tax benefits for retirement savings that mostly go to higher earners.
Neal says the expansion of tax-advantaged savings is essential at a time when Social Security is facing calls for reform and companies have pulled back from defined-benefit pension plans. He himself relied on Social Security after losing both of his parents and moving in with other relatives.
“I get the critique, but legislating’s really hard. And I am not aware of anything other than sort of an academic exercise that says that, all of a sudden, we can go back to a defined benefit. Because if there were, I’d be the first one to champion it,” Neal said.
“This idea that this was a legislative effort to reward wealthy people is simply not founded and untrue,” Neal added.
Cardin acknowledged that more must be done to help lower-income retirees.
“Sen. Portman and I, along with many of our colleagues, worked to find reasonable solutions to help increase access, encourage increased savings, and expand access to retirement plans for working families,” Cardin said in a statement. “Importantly, we must do more to address the existing wealth disparities in our country to be able to adequately ensure … that all Americans have the opportunity for a secure and stable retirement.”
Portman cited how he learned from his father’s small business the importance of incentives for starting retirement plans.
“There are guys who I’ve known my whole life and over my age, who have built up a nice nest egg for retirement because of these defined contribution plans,” Portman said. “And so I’ve seen it work and I know how it works. And so my goal was when I got to Congress to try to expand it.”
However, a Portman-Cardin bill from 2021 is illustrative of how highly technical changes, receiving little scrutiny, can influence federal tax collection.
The retirement arena in Congress has been dominated by two members of the Senate Finance Committee, Ben Cardin (left) and Rob Portman, who retired in 2023. | Tom Williams/CQ Roll Call via AP
Lobbyists for a coalition of six groups succeeded in getting changes into a 2021 Portman-Cardin bill governing IRS oversight of private retirement plans. Fact sheets provided to POLITICO — which a Hill staffer said the lobbyists distributed to advocate for their proposal — sold the changes as fixes that would help elderly Americans, such as retired government and factory workers, who had inadvertently put too much in their retirement accounts and could face penalties from the IRS.
But the lobbyists were also targeting benefits for a different demographic. The head of the coalition, according to his biography, specializes in tax planning for “ultra-high-net-worth clients.” The coalition also included an advocacy group that has previously been tied to the Koch network — and which engaged in a massive lobbying campaign against efforts to restructure Puerto Rico’s debt that was owned by hedge fund managers in 2015.
Tax lawyers who reviewed the statutory changes said they would in fact make it far more difficult for the IRS to penalize supersized retirement accounts where owners avoided millions of dollars in taxes.
“The lobby power of these groups is tremendous,” said Rep. Lloyd Doggett (D-Texas), a member of the tax-writing House Ways and Means Committee. “There has been little lobby effort for [low-income taxpayers] and plenty of lobbying from those people in the financial services industry that benefit from those retirement plans.”
