The topic of retirement security is polarizing and covers a broad range of issues including Social Security, workplace retirement plans, healthcare and long-term care costs, estate taxes, capital gains taxes, funding of public pensions, and the retirement of the baby boomer generation. What's interesting about this election cycle is the relative 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 directly 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.
The recent annual report by the Social Security Administration highlights several concerns with the current system. According to the report, the Social Security system is trending towards insolvency; it's estimated that only 75% of promised benefits will be covered by 2034.
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." (AARP Bulletin) 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. 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-Advantaged Retirement Accounts:
Another component of the tax plan proposed by Mrs. Clinton would limit the contributions an individual can make to tax-advantaged 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-advantaged 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 the 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. Mrs. Clinton also 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).
Retirement Savings Plans
With 45.5% of private sector workers in the U.S. not having access to a workplace retirement program, the retirement crisis continues to deepen. However, both Mrs. Clinton and Mr. Trump have been 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) help employees save for retirement and; 2) 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 employee's retirement preparedness. (Butrica 45) 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. (Butrica 45).
The Fiduciary Rule:
Additionally, this year the Department of Labor (DOL) released a sweeping piece of legislation called 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 account holders by limiting their access to financial advisors and creating more costly fee structures for retirement plans.
What Employers & 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 unprepared 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.