How a Biden presidency might have an effect on your retirement

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How a Biden presidency could affect your retirement

Joe Biden is now the president-elect, despite President Trump vowing to fight the results in court. There are several ways a Biden presidency can impact your retirement, including lower tax breaks on 401 (k) accounts and more generous social security benefits.

Biden’s plan for older Americans includes specific details about what Biden wants to do as president to overhaul the country’s pension system, strengthen social security and health care, and combat ageism that is prematurely ousting people from the workforce. Although, because of the Senate, really big changes are actually unlikely.

Currently, the high-income tax breaks that contribute to 401 (k) and traditional IRA plans are higher than the tax breaks for middle- and low-income workers. Biden’s plan cites a study by the Tax Policy Center which found that two-thirds of the tax break on these plans went to the richest 20% of families.

Because the tax benefit of these plans is based on your tax bracket, earners in higher brackets receive more government tax breaks than earners in lower brackets. A person whose income is in the top 37% tax bracket will receive a deduction of $ 370 for every $ 1,000 contribution they make, while a person in the 22% tax bracket will only receive a tax break of $ 220 for the same contribution of $ 1,000. And if you’re a low-paid with a full-time job, you can’t get any tax breaks for putting money in an IRA while you’re still paying wage tax.

Biden’s plan would replace the current tax deferral mechanism for 401 (k) and traditional IRAs with a tax credit. This credit would work much like a flat tax, so the person in the 37% tax bracket and the person in the 22% tax bracket would receive the same $ 220 credit for their $ 1,000 contribution.

Biden’s plan provides small business tax credits to incentivize the creation of 401 (k) plans for lower-income workers. A similar proposal is already in the Strong Retirement Act of 2020, sponsored by Ways and Means Committee Chair Richard E. Neal (D-MA) and Ranking Member Kevin Brady (R-TX).

Other provisions of the Strong Retirement Act that could make it into a Biden plan include:

  • Advanced Auto-Enrollment in Workplace Retirement Accounts (Some states have advanced auto-enrollment in retirement accounts. Oregon’s OregonSaves program automatically enrolls all full-time workers in the state for free for employers. Pew says the response to the plan has been positive so far. Biden’s plan provides for the creation of a national version of Oregon’s plan.)
  • Increase in catch-up fees
  • Enable employers to help younger workers by depositing money into retirement accounts that match their student loan payments

Biden wants to lower the age for Medicare eligibility from 65 to 60.

Biden said his plan will help Americans who are retiring early and those who are unemployed or cannot find work with health benefits. “It reflects the reality that older Americans will likely find it difficult to secure jobs even after the current crisis ends,” Biden wrote in April.

Biden’s website states, “Too many Americans – and too many older Americans – can’t afford their prescriptions or long-term care.” In order to remedy this situation, Biden proposes various political solutions.

  • Consider dental, vision, and hearing costs in traditional Medicare
  • Allow Medicare to negotiate prescription drug prices that the Congressional Budget Office estimates would save $ 456 billion between 2023 and 2029
  • Set an inflation cap on drug prices
  • Allow US citizens to buy branded drugs or generic equivalents from other countries

In reality, these measures would mean that higher income retirees would spend less on Medigap and Medicare Advantage insurance plans. This could also mean that Medicare premiums for higher earners are capped or decreased.

For more information on the current state of social security and medical care, check out our article Social Security and Medical Care Changes: Little COLA and 6 More New Developments for 2021.

Biden has pledged to prop up Social Security, which could run into a budget deficit by 2028, forcing benefits cut with no bailout plan in place.

According to his website, Biden will “bolster benefits for the most vulnerable older Americans – including widows and widowers, lifelong workers with low monthly benefits, and retirees who may have depleted their other savings.” To this end, he calls for changes in the calculation of benefits by social insurance. The plan would:

  • Creation of a “real minimum benefit for lifelong workers” of at least 125% of the poverty line
  • Extend widows and widowers benefits if their spouse who receives social security benefits dies.
  • Add an additional benefit for elderly recipients who have had social security benefits for at least twenty years
  • Change the way Social Security COLA is calculated to increase benefits
  • Extension of benefits to teachers and people receiving public sector pensions

To fund these changes, Biden’s plan is to raise payroll taxes only for those who now earn over $ 400,000 annually. At the moment, while the details are not listed on the Biden plan website, it appears that Biden’s plan does not tax any income above the current income threshold of $ 137,700, creating a tax donut hole between $ 137,700 and $ 400,000.

The nonprofit Tax Policy Center believes lawmakers would seek to gradually close the donut hole over several years and expand the Social Security tax base to tax other types of income such as capital gains from investments and passive income . However, an act of Congress is required to make significant changes.

Biden’s plan promises “that all workers will have a chance to earn a living and will fight to change the law so that all people – regardless of age – get the wages they deserve.”

The main strategy for achieving this goal is to extend the Earned Income Tax Credit (EITC) to employees over 65 years of age. These employees are currently excluded from this tax benefit.

Earned Income Tax Credit (EITC) Definition: The EITC is a suitable tax credit for low-income workers. For every dollar a low-income worker makes, the government compares their income to a loan dollar up to a certain amount. For very low-income workers who may not owe taxes, it means they will be given a refund check that is similar to a grant.

For workers over 65 years of age who receive social security benefits and work part-time, the extension of the EITC would mean a large increase in income.

Biden’s plan also promises to “support bipartisan legislation protecting older workers from discrimination in the workforce”. How that would work in practice remains to be seen.

Biden’s plan depends on Congress, and if Republicans retain control of the Senate, which is likely, the new elected president will have a hard time getting his plan passed. Although social security support is bipartite, a divided Congress will not do any of the following:

  • Increase taxes. That means no new income taxes and likely no changes to tax breaks for 401 (k) s and IRAs.
  • Make significant changes to Medicare and Medicaid. Without new laws, there is no clear way to increase coverage for seniors.
  • Expand social security benefits. The U.S. deficit spiked in 2020 due to the COVID incentives, and the austerity measures could become popular again with members of Congress during a Biden presidency. No new spending would make serious social security reform difficult.

On the flip side, Biden’s proposal to extend the EITC to workers over 65 could be implemented as a compromise with the Senate Republicans, as it is a tax cut, not a tax hike.

Other policy changes that could be made by an executive order instead of legislation include asking Social Security to change the formula used to calculate the cost of living update. And a Biden administration could encourage more efficient cost sharing between Medicare programs that could limit expenses.

However, divided government means that big changes in the way things are done are unlikely. Some modest reform efforts, such as the bipartisan hard retirement law, could be passed in the coming legislature, but the status quo on retirement is likely to remain.

Correction: An earlier version of the article incorrectly stated that Social Security would run out of money in 2028. Instead, a report by the Bipartisan Policy Center (BPC) states that social security benefits will exceed their solvency in 2028.

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