The Candidates on Retirement, Part 1: Joe Biden
Election season is officially underway! To kick it off, we’re analyzing the retirement platforms of the leading candidates: Former Vice President Joe Biden, Senator Bernie Sanders, Senator Elizabeth Warren, Mayor Pete Buttigieg, and President Donald Trump. For each candidate, we’ll look at their positions on Social Security, retirement savings, and tax code, to get a better understanding of how their policies might impact retirement savings and strategies in 2021 and beyond.
It’s no secret that Social Security is on shaky ground. Without intervention, the trust funds that pay for the program could dry up as soon as 2035. Biden and his Democratic competitors want to make sure it doesn’t happen.
To secure Social Security’s long-term solvency, the Biden plan calls for increasing taxes on the highest earners. While the campaign hasn’t released specifics, the plan could involve a hike in the Social Security wage base. Currently, only the first $137,700 of an employee’s annual earnings are subject to Social Security payroll taxes. In a February town hall, Biden suggested this ceiling should be raised to $400,000.
The Biden plan also rejects privatizing Social Security or developing a “means test” where only low-income Americans could be eligible for the program’s benefits.
Beyond this, Biden is also campaigning to expand Social Security. First, his plan would institute a new minimum benefit, 125 percent of the poverty level, for individuals who have worked at least 30 years. Second, the plan increases monthly benefits for certain retirees. Widows and widowers would receive a 20 percent increase. Older retirees who have received Social Security benefits for at least 20 years would also receive an (unspecified) increase to make up for their depleted savings and higher healthcare costs.
Saving for Retirement
Though Biden has pledged to stabilize and even expand Social Security, his plan doesn’t skimp on emphasizing the importance of saving: “In the modern retirement landscape, a sound retirement begins with years of diligent saving.” In other words, Biden’s campaign concedes that putting money aside in a 401(k) or IRA isn’t just sound advice, it’s requisite for a comfortable retirement.
First, the Biden plan addresses tax deferrals. These allow traditional 401(k) account holders to grow their accounts faster with pre-tax contributions. When it comes time to retire and tap into those funds, the tax owed is dependent on the recipient’s annual earnings at that time. Under the current system, pre-tax 401(k) contributions are a great option for those who expect to retire in a lower tax bracket.
Biden argues that this model puts low and middle-income workers at a disadvantage because they can’t afford to earn less than they already are. His plan calls to “equalize benefits across the income scale” but doesn’t specify how, though it likely entails a revamp of how 401(k) distributions are taxed.
Employer and Employee Incentives
Small businesses account for over 40 percent of the U.S. economy. Unfortunately, they’ve also been slow to offer retirement benefits due to perceived costs and administrative hassle. Building on the recently-passed SECURE Act, the Biden plan looks to give additional tax breaks to small businesses that invest in their employees’ futures and start a retirement plan.
To further encourage saving, Biden also calls for an “automatic 401(k)” for employees who don’t have access to an employer-sponsored plan. The candidate’s current plan is light on details — but surmising from a Biden campaign pledge in 2007, it could involve requiring businesses to automatically enroll employees into a “401(k)-type” plan or IRA. The same proposal also called for these retirement accounts to automatically rollover as individuals move from employer to employer.
Under current law, individuals are permitted to defer up to a certain amount into their retirement accounts each year. For example, the 401(k) contribution limit for 2020 is $19,500.
Unfortunately, when individuals need to temporarily leave the workforce to care for a child or a loved one, they effectively miss out on their window to contribute that amount. The Biden plan gives these individuals an opportunity to “catch up” when they return to the workforce by raising their annual contribution limit. A similar, bipartisan proposal was introduced in the House last summer but has stalled in committee.
Biden’s tax proposals have been seen as “less aggressive” than his peers. Still, his 2020 plan involves raising revenue primarily by increasing taxes on the wealthy. Rather than enact a standalone “wealth tax,” Biden plans to raise income taxes on the highest earners from 37 percent to 39.6 percent, reversing a change made by the Tax Cuts and Jobs Act of 2017. This only accounts for a small share of the $3.2 trillion in tax increases planned by the Biden campaign, however.
To close the gap, Biden has proposed a big change in how capital gains are taxed. Capital gains are the proceeds from the sale of real estate, stock, or any other investment that grew in value. Like other income, the tax rate for capital gains is influenced by how much the individual earned that year. For those earning over $1 million, the current tax rate is 23.8 percent. The Biden plan calls for nearly doubling it to 43.4 percent.
What’s that mean for your retirement savings? Keep in mind that 401(k) and IRA withdrawals are only taxed as regular income and are not subject to capital gains taxes. But if you rely on other non-qualified investments for retirement and are lucky enough to have a million dollars in income, it may be prudent to delay potential withdrawals until you stop working to stay clear of the threshold. Again, Biden’s changes impact those who earn over $1 million annually—in other words, not the typical American worker.
So how do the former vice president’s views differ from the competition’s? Quite a bit. In Part 2 of our series, we’ll look at the retirement platform of Senator Elizabeth Warren.