VALERIE MACON/Getty Images
While President-elect Biden and a nation wait for President Trump to concede the election, focus turns to how a Biden administration will lead. Biden has put forth many policy initiatives, including significant changes to retirement savings and Social Security.
His ability to implement his vision depends in large part on Georgia. Two Senate races are headed to run-off elections in January. It seems likely that at least one race will go to a Republican, giving the GOP a razor-thin majority in the upper chamber. If that happens, Biden will need to negotiate with Senate Republicans to get anything passed.
Even in a divided government, however, there are potential far-reaching changes to retirement savings on the horizon. Here are five significant ways a Biden administration could make lasting changes to your retirement.
Tax Benefits of Retirement Savings
Under current law, contributions to a defined contribution plan such as a 401(k) reduce an individual’s taxable income. The tax savings of this reduction depend on the individual’s marginal tax bracket.
A taxpayer in the highest current bracket, for example, would see their federal tax bill reduced by 37% of the amount of their retirement contribution. In contrast, a taxpayer in the lowest bracket would see just a 10% reduction. This is not unique to retirement savings. Any reduction in taxable income will generate a larger tax savings for those in the higher brackets. It’s a function of a progressive tax system.
Biden wants to change this aspect of retirement savings. Rather than have retirement contributions reduce taxable income, he’s proposed a refundable tax credit that analysts say would be equal to 26% of the amount contributed. It’s been described as a matching contribution because it would be deposited into the individual’s retirement account. As a result, a $10,000 contribution to a 401(k) in a given year would produce a “matching contribution” of $2,600 regardless of the taxpayer’s marginal tax rate.
The result would be a tax reduction for low and moderate income taxpayers, and a tax increase for those in the higher tax brackets. In theory, the policy goal behind the measure is sound. It seeks to encourage lower income individuals to save more for retirement. Of course, the same policy goal could be met without increasing the tax burden on higher income individuals.
For example, the 26% tax credit could represent a floor, not a ceiling. The tax credit ceiling could extend to the taxpayer’s marginal rate. While Biden’s proposal doesn’t follow this design, a GOP-controlled Senate could push for this alternative. Absent this, higher income individuals may find Roth retirement accounts more appealing.
There is good reason to prefer an approach that doesn’t reduce the tax benefits for higher income individuals. The taxable income reduction from retirement contributions is fundamentally different than itemized deductions, such as the mortgage interest deduction. With itemized deductions, the tax savings is permanent. With a 401(k) contribution, the tax savings is temporary.
True, the tax savings can last for decades until money is taken out during retirement. Eventually, however, the taxes must be paid. That’s why we have Required Minimum Distributions (RMD) and why we call traditional retirement accounts tax-deferred, not tax-free.
Expanded Social Security Benefits
Biden also looks to expand Social Security benefits in several ways.
- Raise Social Security’s Minimum Benefit: Biden would increase the minimum benefit for those who spent at least 30 years working. The minimum benefit would be at least 125% of the federal poverty level. In 2020, that would amount to $15,950. This increase would cover only new beneficiaries beginning after 2020.
- Increase the Benefit for Older Americans: He would also increase the benefit for those who have received retirement benefits for at least 20 years.
- Enhanced Benefits for some Beneficiaries: Biden’s plan would extend or enhance benefits to certain groups. For example, he would allow a surviving spouse to keep a higher share of benefits than allowed under current law. He would also increase benefits to teachers and public-sector workers.
He would pay for these enhanced benefits be increasing payroll taxes on those who make more than $400,000. This amount, however, is not indexed for inflation. As a result, its effects will be felt by more and more taxpayers every year.
Expanded Retirement Savings Benefits for Caregivers
When a worker leaves the workforce to care for a child or family member, they lose the opportunity to contribute to a workplace retirement plan. Biden would allow caregivers to make catch-up contributions to retirement accounts, even if they are not earning an income. A similar plan has been proposed in H.R. 3078, the Expanding Access to Retirement Savings for Caregivers Act, bipartisan legislation introduced in 2019.
Expanded Earned Income Tax Credit (EITC)
The EITC helps low-wage workers by providing a refundable tax credit. The amount of the tax credit is based in part on income and the number of qualifying children. The EITC is not typically part of a retirement discussion because those over the age of 65 do not qualify. Recognizing that Americans are working later in life, Biden would extend the EITC to those older than 65.
Secure Act 2
Last month a bipartisan bill was introduced in the House that would make sweeping changes to retirement accounts. Called the Securing a Strong Retirement Act of 2020, the bill would make numerous changes to retirement savings:
- Expand automatic enrollment in workplace retirement accounts
- Increase the Saver’s Credit
- Increase catch-up contributions
- Allow employers to “match” student loan payments with contributions to the employee’s retirement account
It’s as yet unclear whether Biden will support these bipartisan measures. They do, however, appear to be consistent with his policy initiatives. They help lower income and older Americans save more for retirement.
Final Thoughts
Exactly what changes will occur to retirement savings is of course unknown. Barring complete gridlock in Washington, which is always a possibility, it does appear that changes are on the way. They will likely favor lower and middle-income individuals and families, as well as older Americans who continue to work beyond a traditional retirement age.
