President Elect Joe Biden and Your Retirement
During his run for President, Joe Biden released a 110-page document to shed more light on his economic plan. I wanted to explore what the implications might be on your retirement.
I’m not making any assumptions, but given that Trump’s re-election would yield more of the same chaos, I wanted to imagine what the next 4 years might look like under a Biden presidency and his plan. What would the impact be on several factors such as the tax code, Social Security, and savings for retirement?
Joe Biden’s tax policy plan, with regards to retirement, involves an increase in taxes on incomes over $400,000 in a bid to raise revenue. While most lower and middle-income taxes would remain unchanged, the taxes on the highest earners would return to 39.6% from the current 37%.
Those who realize large capital gains (more than $1,000,000) from their portfolios, or from the sale of privately held businesses or real estate, could also have their tax rates substantially increased. This would not affect most investors, but those who experience one million dollars in recognized capital gains could have their tax rates almost double - from the current 20% to about 39.6%.
Attempts have been made in the past to bring taxes on labor and capital into greater alignment, but these attempts have largely failed. I know I warn people against thinking “this time is different,” but the will to make radical tax policy changes is certainly more prevalent than I have ever seen it. So, I do not believe we should ignore this potentially major change to tax policy.
If Biden is elected, there could be 2 months in which we can recognize substantial gains at todays lower (20%) tax rates. If you are sitting on a privately held business, or large pieces of real estate – the sale of which would create $1,000,000 in capital gains – then you will want to seriously consider some tax planning before the end of 2020.
In 2020, nearly 65 million Americans will receive over $1 trillion in benefits through the Social Security Administration. And, throughout this year’s Presidential campaign, the Social Security system was in question (as it has been for many campaigns before now). Experts were stating, with ever-increasing vehemence, that Social Security is in jeopardy – that it might not survive beyond 2035. While the complete demise of Social Security has been vastly over-stated, there is a risk of reduced benefits if we don’t do something to shore it up. Because of this, Joe Biden’s policy recommendations include measures that will work to ensure that Social Security income continues uninterrupted. Biden’s approach is as follows:
Expansion of Social Security benefits
Biden’s plan resets the minimum Social Security Income benefit – for people who have worked a minimum of 30 years – to 125% of the poverty level. He also expands benefits by increasing monthly Social Security benefits for specific retirees.
Biden would establish a 20% Social Security benefit increase for widows and widowers. And, for older retirees – those who have been on Social Security for at least 20 years – he would create a 5% increase (over their full retirement age benefits) to cover their increased health-care costs, and so reduce their need to invade their savings for health care.
Terminating any kind of social cuts
One of the primary aims of the Biden plan is doing away with any expected cuts to Social Security benefits for the most at-risk recipients. This includes cases where the retirement age could be raised, or where only low-income Americans were getting benefits from the program.
The “donut-hole” approach
One of his biggest plan changes is to increase the money flowing into Social Security by increasing FICA taxes on people who earn over $400,000. Today, only the first $137,700 of annual earnings for employees are subject to Social Security payroll taxes. Under Biden’s plan, there is a donut-hole in which earnings between $137,000 and $400,000 will be exempt from payroll taxes related to Social Security. This means any payroll earnings beyond $400,000 will also be subject to a new tax.
In addition to every measure Biden puts in place to ensure that Social Security is expanded and more stable, his plan also reiterates the importance of retirement savings in either an IRA or 401(k). He plans to encourage savings through the following measures:
Creating incentives for Employees and their Employers
About 40% of the US Economy, and about 50% of new jobs, can be tied to small businesses. Many of these businesses are often reluctant to offer their employees retirement benefits, citing costs and other administrative issues. Biden has plans to alleviate both of these issues.
First, he plans on giving small businesses more tax breaks for organizing retirement plans for their employees, so they can invest in their futures. And second, Biden calls for an “automatic 401(k)” to encourage savings by employees who are not attached to any sponsored employer plans – putting the burden of administering this plan on the federal government.
Contributions of Caregivers
Workers are allowed to defer a portion of their earnings into tax-advantaged retirement programs under current law. For instance, the limit on 401(k) contributions for the year 2020 is $19,500. Sometimes, however, circumstances may subject an individual to a situation of temporary leave – to care for a sick child or aging parent.
These temporary leaves fall heaviest on mothers, daughters, and sisters. During that window of leave, an individual may be unable to make contributions to their retirement accounts (because they don’t have ‘earned’ income). The Biden plan takes care of such individuals by offering them a chance to bridge the gap when they get back to the workforce. This is achieved by ensuring that their limits for annual contributions are raised, enabling them to catch-up comfortably.
401(k) Tax Benefit Equalization
401(k) plans allow high-earners to reduce the income tax from their highest bracket by investing savings in a tax-deferred account. People who earn lower amounts, even if they save the same amount, do not benefit with the same tax deferral. In other words, the 401(k) tax-deferral benefit skews to higher earners.
The Biden plan also ensures that tax benefits for 401(k) account holders are equalized. The plan proposes using a “flat tax credit” of 26% of the contribution amount for ALL 401(k) savers, instead of giving high earners a greater tax savings. All deductible contributions will still be deductible, but the benefits will skew towards lower earners instead of higher earners.
Biden’s goals are very clear in his policy initiatives. He aims to help lower and middle-income folks plan for their retired futures, and shore up Social Security for the coming generations – with a modest increase in taxes for people who have incomes over $400,000.
The tax increases within Biden’s plan aren’t big enough to alter the basic incentives for people to: a) invest in their own ability to earn more, or b) invest in businesses that might hire the next generation of employees. If anything, Biden was over-cautious with these increases. And, I would assume that in his second term, we will see more.