What’s next for your retirement?
The election results could hold answers.
2020 has been a year like no other. With lawsuits being filed to investigate voting fraud and COVID-19 cases surpassing 12 million in the United States, there is still an incredible amount of uncertainty as we approach the new year.
As the results of the November elections currently stand, the Democratic party maintained a majority in the House of Representatives, and the White House flipped with former Vice President Joe Biden being named President-elect. It looks like the Republican party will control the Senate, but that will remain unclear until Georgia’s special election in January. Whether we have a divided government or a blue sweep, we stay focused on potential impacts to retirement savings.
While we prepare to close out 2020, we are closely monitoring three areas of our retirement system, corresponding to the three legs of the retirement savings stool: personal savings, Social Security and pensions.
1. A potential federal mandate for personal retirement savings: Right now, 41 states have either enacted or introduced legislation mandating retirement savings. These programs aim to close the retirement savings gap and ensure that those who don’t have access to a plan at work can still save effectively for their future.
With so many states engaged in such an effort, could we eventually see a retirement program at the federal level? We think so. In fact, Biden has alluded to it.
We are approaching the first anniversary of the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, one of the most influential pieces of retirement legislation in the last decade. Chairman Richard Neal of the House Ways and Means Committee, who made an appearance in our documentary several years back, strategically excluded a federal mandate from this bill to increase the likelihood of its passage. The day for this battle is now on the horizon.
In the meantime, the Securing a Strong Retirement Act of 2020 has been introduced to offer federal funding to state-mandated retirement plans. The bill builds upon the SECURE Act by proposing an increase to the federal government’s coverage of defined benefit startup costs from 50% to 100% for employers with up to 50 employees. The plan also clarifies that the clock starts ticking on the tax credits when a small business joins a pooled employer plan (PEP) rather than at the inception of the PEP. The resolution of this previous ambiguity could bolster popularity of PEPs.
Biden has also suggested changing how 401(k) contributions are treated by the tax code. Currently, contributions reduce a saver’s taxable income, disproportionately benefiting higher earners who fall into a higher tax bracket and can afford to contribute the maximum limit to retirement savings, thus getting a bigger tax break. Biden would like to institute a dollar-for-dollar tax credit to replace the percentage deduction, giving a bigger proportional benefit to those who are making and saving less.
2. Accelerated depletion of Social Security funds: During the pandemic, 40 to 50 million people applied for unemployment. With fewer people paying into Social Security benefits, the funds are likely to run dry sooner than the projected 2034 timeline. This projection held steady from 2019 to 2020. More disturbingly, the most recent report from the Social Security Board of Trustees does not account for potential impacts of the COVID-19 shutdowns.
In September, President Donald Trump issued a payroll tax cut, deferring collection of the 6.2% tax employees pay toward Social Security through year-end. While employers will likely be responsible for recovering those deferred taxes eventually, this has put an increased burden on Social Security. We are keeping a close eye on these readings to learn the full effects of these events.
Biden has proposed adding a new 6.2% Social Security tax for people who earn more than $400,000 and increasing minimum benefits to 125% of the federal poverty level. While this plan increases revenue, it also increases costs by expanding benefits. It is important to note that changes to entitlement programs like Social Security must be made legislatively, meaning they need the approval of Congress. In other words, they cannot be approved with an executive order. So far, lawmakers have continued to kick this can down the road
3. Trends in pension plan data: Additionally, we are closely watching pension plan activity. When administered correctly, pensions are an effective retirement savings vehicle. Unfortunately, they can be costly and burdensome for municipalities and corporations to maintain for the long term, which is why we’ve seen such drastic cuts in these programs in recent years. If you’re new to the workforce, chances are slim that you have this benefit available.
All pension plans must pay an insurance premium into the Pension Benefit Guaranty Corporation (PBGC), a federal entity offering protection in the event of insufficient funds. This barometer indicates how many plans file for assistance which gives us a sense of whether the industry is stable or experiencing turbulence.The demand on insurance companies could be a lagging indicator of the ripple effect of the current environment.
We have yet to see the full economic impact of the pandemic, which is troubling given how devastating this situation has been so far. Amid this pain, fear and uncertainty, we are staying in close contact with current and incoming lawmakers in Washington, D.C. to advocate for the passage of small-business-friendly retirement legislation. Know that, together, we will get through this. In the meantime, our retirement system must evolve and adapt to our new environment.
