This is not a matter of economic theory, this is a reality. Employees losing their jobs will need to withdraw from their defined contribution accounts balances which have been depleted by crashing markets, pulling out whatever is left of what they have managed to save while they were employed.
Yes, at times like these, the impact of the auto-enroll efforts show their true value as there is some money there for those who would otherwise not have it but for auto-enroll. But the ugly side of things is also a reality, something that Congress avoided addressing during the Great Recession: those unemployed who must withdraw from their plan accounts just to survive will still be subject to the 10% early distribution penalty tax. As we learned in 2009 and 2010, this effect only becomes apparent come tax time, when it becomes due regardless of the application of the marginal rate or deductions. So, even if income was so little as to pay little or no tax, the 10% penalty still applies.
It is a regressive tax, on top of everything else, which had the practical effect during the Great Recession of having the unemployed fund-even if in the smallest part- the financial assistance to large financial orgs which received substantial government support. Most should have difficulty with this sort of fiscal policy.
It seems that if policy makers want to have an impactful effect, suspend this tax on the unemployed during this crisis. I would not disagree with my economist friends who may now caution against this seemingly rash move; to consider its long term impact; and to be concerned about the depletion of long term retirement savings. I am particularly sensitive to these concerns, of course, and they are valid. I would suggest, however, that the 10% penalty has little impact on a participant’s decision to withdraw retirement savings when they have little other choice but to withdraw the funds. I would also argue that there will be a significant number of unemployed participants in this position.
So come next April, those most deeply disadvantaged will be faced with an untenable choice between paying the rent, buying food, or suffering the ire of the IRS when the penalty cannot be paid. Not only is there the pure financial hit, but there is the hidden emotional burden as well- introduced to their lives through a government imposed fear at a time when there is likely little capacity to bear it.
There is also the policy question of imposing a recessive tax during a crisis like this which, like during the Great Recession, funds in part other financial assistance programs.
It becomes a question of how to balance competing (and valid) interests, but I suspect the widespread impact of that 10% penalty may weigh in favor of its temporary suspension.