The topic of retirement security is a polarizing one and covers a broad range of issues including Social Security, workplace retirement plans, healthcare and long-term care costs, estate taxes, income taxes, funding of public pensions and the retirement of the baby boomer generation. In fact, a recent survey by Transamerica Center for Retirement Studies highlights that Americans are most concerned about retiring with a comfortable standard of living. Survey respondents are concerned that the often characterized “three-legged stool” of the U.S. retirement system including Social Security, workplace retirement plans and personal savings will not prepare them adequately for retirement. The survey found that 37% of workers plan to add a fourth source of income in retirement: working past normal retirement age.
What’s interesting about this election cycle is the lack of attention the topic of retirement security has received from Hillary Clinton and Donald Trump. Aside from the topics of Social Security and Taxes, neither candidate has addressed, with any substance, the issues contributing to the country’s retirement crisis. Neither candidate’s website addresses key retirement security topics. Additionally, during their August speeches highlighting their economic policies, neither Mrs. Clinton nor Mr. Trump discussed solutions for addressing Americans concerns about retirement security. The same was true during the first presidential debate held on September 26th, with the exception of one comment from Hillary Clinton about her desire for employees to share in the profits of their employers.
Some Perspective on the U.S. Retirement Crisis
Before highlighting the presidential nominee’s positions on three key retirement issues (Social Security, Estate & Capital Gains Taxes, and Retirement Savings Plans), it’s important to provide some perspective on the US retirement crisis, which has been well-documented in recent years. According to the 2016 Global Retirement Index published by Natixis Global Asset Management, the US ranks 14th among the leading nations for retirement security. The countries that ranked ahead of the US have instituted policies, in the form mandates, to ensure their citizens have access to various retirement plans. Additionally, the study found that, compared to other leading countries, the US has one of the highest levels of income inequality and a growing ratio of retirees-to-employment aged adults, resulting in fewer workers to support programs such as Social Security.
Some statistics that highlight the retirement crisis are startling:
- 40 million working-age households do not own any retirement account assets
- 45.5% of private sector employees have no access to a workplace retirement plan
- In 2013, Social Security was the major source of income for 51% of eligible couples 65 and older
- Social Security is trending towards insolvency with experts estimating that only 75% of promised benefits will be covered by 2034
- The leading edge of the baby boomer generation is entering retirement now (75+ million)
Nominees from the major political parties, Hillary Clinton (Democratic Party) and Donald Trump (Republican Party), have touted differing solutions to shore up the Social Security system. Interestingly, they both agree that the system must be saved and that privatization is not a solution. For now, Social Security is still operating well and fully funded to meet its promised benefits but this system was never intended to cover the cost of living in retirement. In fact, under the current benefit formula, Social Security only provides an estimated 35% income replacement rate, well below the desired 85% income replacement rate Americans will need in retirement.
To extend the solvency of the Social Security system, Hillary Clinton supports increasing taxes on Americans earning more than $250,000. Clinton has adamantly stated that she is against the privatization of the Social Security system, the reduction of benefits, raising the retirement age or reducing the annual Cost of Living Adjustments. She also intends to expand the Social Security benefits for women, widows and those who may have chosen to leave the workforce to provide long-term care to a family member.
Donald Trump also opposes the privatization of Social Security. He has no plans to raise the retirement age, cut benefits, raise the payroll tax cap, or reduce the annual Cost of Living Adjustments. Mr. Trump’s solution for addressing the solvency of the Social Security system is to bring back jobs that have moved overseas. He feels bringing back jobs and creating new US based jobs will generate enough payroll taxes to improve the solvency of the system. In addition, Mr. Trump has stated that he intends to reduce government waste and fraud to bolster the system. In a statement to the AARP, Mr. Trump believes that “as our demography changes, a prudent administration would begin to examine what changes might be necessary for future generations.” The changes he references may be more in line with typical Republican sentiment about remedies to the Social Security system which would include benefit cuts and raising the retirement age.
Estate & Capital Gains Taxes
Both Mrs. Clinton and Mr. Trump have proposed changes to the tax system affecting estate taxes, capital gains taxes and the contribution limits to tax-favored retirement accounts. Not surprisingly, their proposals differ greatly.
Mrs. Clinton calls for an increase in the Federal estate tax from 40% to 45% and a reduction in the threshold for which estates are taxed to $3,500,000 per individual or $7,000,000 per married couple from $5,450,000 and $10,900,000 respectively. And recently, Mrs. Clinton released additional information about her estate tax plan which includes a 50% tax rate on estates over $10 million per individual, a 55% rate for estates over $50 million per individual and a 65% tax rate for the largest estates valued at over $500 million per individual. Mrs. Clinton’s plan also proposes the elimination of the stepped-up basis when assets pass to heirs at death. If her plan is passed, elimination of the stepped-up basis would be the first time in our nation’s history the estate tax system operated this way.
To the contrary, Mr. Trump’s plan calls for an elimination of the estate tax. His estate tax proposal argues that Americans have paid taxes their entire life and therefore, should not be taxed again at death. Regardless of the amount of wealth an individual accumulates during their life, he states their estate will not be taxed at the time of death. Additionally, Mr. Trump’s proposal eliminates the stepped-up-basis for assets over $10,000,000. His plan does not specify whether this is for an individual or married couple.
Contributions to Tax-Favored Retirement Accounts:
Another component of the tax plan proposed by Mrs. Clinton would limit the contributions an individual can make to tax-favored retirement accounts including defined benefit plans, 401(k) plans and IRAs (traditional and Roth). Her proposal would restrict account holders from making contributions to any account once the sum of all account balances reaches $3.4 million, the current account balance limit for an individual as set by the U.S. Treasury. Mr. Trump has not proposed any changes to the contribution limits and taxability of tax-favored retirement accounts.
Capital Gains Taxes:
Mr. Trump’s tax plan would retain present tax rates on long-term capital gains and dividends with a maximum rate of 20%. Short-term gains, realized in 1 year or less, would be taxed as ordinary income with a maximum rate of 25% under the Trump plan. His plan also includes a repeal of the 3.8% net investment income tax enacted by the Affordable Care Act. Under Mrs. Clinton’s plan she proposes several changes to present capital gains law. First, she proposes that the holding period for short-term capital gains be lengthened from 1 year or less to 2 years or less. Short-term capital gains will be taxed as ordinary income with a maximum rate of 39.6% under the Clinton plan. Also, Mrs. Clinton intends to retain the 3.8% net investment income tax enacted by the Affordable Care Act. This pushes the maximum rate for short-term capital gains to 43.4% (39.6% statutory + 3.8% surtax). Mrs. Clinton’s plan for long-term capital gains includes a laddered tax rate approach where the longer an asset is held prior to realizing gains, the lower the statutory tax rate.
Retirement Savings Plans
As mentioned previously, the number of private-sector workers with no access to a workplace retirement program (45.5%) is startlingly high. With overall US savings rates extremely low, it would appear logical for retirement savings plans to be at the top of most public policy issues lists. However, both Mrs. Clinton and Mr. Trump have been very silent on the topic of retirement savings plans.
State Retirement Initiatives:
While there have been many bills proposed at the federal level over the past 5 years, Congress has been unable to pass any meaningful legislation aimed at expanding retirement coverage. In an attempt to close the retirement gap for many Americans, various pieces of state legislation have been proposed or passed since 2012. Front-running states including Illinois, Oregon, Connecticut, Maryland and California have mandated payroll deduct IRA programs for companies who currently do not sponsor workplace retirement programs such as a 401(k). Twenty-six additional states have enacted, proposed or considered legislation that would mandate employer participation in their program. The goal for launching these programs is twofold: 1) to help employees save for retirement and; 2) to help policymakers protect future budgets from demands for government services due to aging residents lacking retirement savings. Several states are hoping to launch their programs in the second half of 2017 or 2018.
While these programs will expand coverage for those currently without access to a workplace retirement plan, research has found that the conservative nature of the investments, use of Roth-IRAs and a modest 3% default rate only slightly improves an employees retirement preparedness. Researchers from the Urban Institute found the largest increase in retirement savings occurred when establishing a 401(k) plan coupled with specific plan design features including: high default contribution rates, auto features including auto-escalation, no income-eligibility limits, and invests in equities and fixed income.
The Fiduciary Rule:
Additionally, this year the Department of Labor (DOL) released a sweeping piece of legislation called the Conflict of Interest Rule (or Fiduciary Rule) aimed at eliminating conflicts of interest between investors and financial advisors. Mrs. Clinton and the Democratic Party strongly support the DOL’s fiduciary rule with the hope of ensuring financial advisors act in the best interest of their clients and charge reasonable fees. The Republican Party opposes the DOL’s rule stating it overreaches in scope and presents a significant risk to accountholders by limiting their access to financial advisors and creating more costly fee structures for retirement plans.
What Employers and Employees Should Consider
The lack of progress at the federal level has caused many states and some cities to begin efforts to address the retirement crisis at their level. These programs could present challenges for small business owners across the country as each program contains different nuances within its legislation, presenting administrative and financial challenges. For small business owners who do not currently sponsor a retirement plan, now may be the time to consider your options.
To fill the income replacement gap at retirement, Americans must be vigilant in their savings habits both through workplace retirement accounts and personal savings accounts. However, statistics show that with the absence of savings mandates, in the form of pension plans or other similar vehicles, many Americans are woefully prepared for retirement.
The question remains whether the next Administration takes a hard look at the current retirement crisis and partners with Congress to propose some meaningful measures to ensure all Americans can retirement comfortably. Several pieces of recent legislation in Congress, which have bi-partisan support have been aimed at promoting and or easing regulatory roadblocks for creating employer-sponsored plans. These may present an opportunity for our next President to garner a quick legislative win and help provide Americans and small business owners the tools to ensure their retirement security.