In the lead up to the 2020 election, Guideline is hitting the campaign trail to analyze the retirement platforms of the leading candidates: Former Vice President Joe Biden, Senator Elizabeth Warren, Senator Bernie Sanders, 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.
If you missed Part 1, check out our analysis of Joe Biden’s retirement platform.
Super Tuesday has come and gone, and two Democratic contenders remain: former Vice President Joe Biden and Vermont Senator Bernie Sanders. Ahead of this summer’s Democratic National Convention, Guideline is highlighting the leading candidates’ positions on Social Security and retirement savings. We covered Biden last month—read on to learn how the “Bern” might impact your retirement.
In politics, few topics hit close to home like Social Security. Over half of US seniors rely on the benefit for most of their wages. About a quarter rely on it for 90 percent. So when the agency announced in 2018 that it may need to cut back on benefits by 2034, current and future retirees took notice—as did those vying for the Democratic nomination.
Expanding Social Security, and government entitlements in general, are key to Sanders’s message. But before he can accomplish either, Sanders will need to generate enough revenue to stabilize what’s already there. Like Biden, he intends to accomplish that with new taxes on the wealthiest Americans.
Some conservatives view increasing the retirement age from 67 to 70 as the surest way to stabilize Social Security. Others have proposed privatizing the program. Sanders is vehemently opposed to either and is instead looking at expanding taxes for a small segment of high-earning workers.
Individuals currently pay for Social Security through a payroll tax of 6.2 percent. Once their earnings for that year cross $132,700, the tax shuts off until the following year. This cut off point is called a “wage base” and is regularly updated to account for inflation and the cost of living. The wage base model means that those earning millions pay the same in Social Security taxes as someone earning $132,700 per year. The Sanders campaign sees that as unfair and a missed opportunity to raise dearly-needed revenue for the program.
Rather than raise the wage base, Sanders is proposing a new Social Security tax that triggers when someone’s annual earnings cross the $250,000 mark. These earnings would be taxed at the same rate (6.2 percent) as what workers pay below the wage base. This also means that someone earning between $132,700 and $250,000 would be exempt from paying any additional taxes. Though only 5 percent of Americans earn enough to be subject to Sanders’s new tax, their collective wages account for over $1.2 trillion in taxable income. That’s a lot of green for a government program in the red.
The Sanders plan doesn’t stop at shoring up the long-term viability of Social Security. His campaign has pledged to expand the program’s benefits across the board. His proposals closely mirror legislation that he introduced in the Senate last year.
First, Sanders has proposed increasing Social Security’s minimum monthly benefit. Currently, longtime low-wage earners are only eligible for a tiny benefit that puts them well below the poverty line. Both the Sanders and Biden campaigns have pledged to change this, setting the minimum to 125 percent of the federal poverty line for those who have worked 30 or more years. Per month, that adds up to about $1,300.
Sanders has also proposed increasing benefits wholesale, including a $1,300 a year increase for those with incomes of $16,000 or lower. Beyond this, the senator backs a 15 percent expansion of all Social Security benefits, phased over a 20-year period. Sanders views the increase as a correction, given increases in life expectancy, prescription drug costs, and medical expenses.
Today, Social Security benefits are subject to annual cost-of-living adjustments (COLA). These are usually modest (this year’s increase was just 1.6 percent). The Vermont senator has suggested that the calculus used by the IRS doesn’t account for rising healthcare and prescription drug costs. Instead, he has called for the use of a “consumer price index for the elderly” or CPI-E. Senior advocacy group AARP reports that prescription drug prices are increasing at double the rate of inflation. If that trend keeps up, there will be a $100 per month gap between the COLA and CPI-E models by 2030.
Retirement Savings and Additional Taxes
Democratic candidates have taken varying approaches to retirement. Biden (and prior to withdrawing, Pete Buttigieg) dedicates much of his platform to retirement savings proposals, like “auto” 401(k) plans and employer incentives. In her campaign, Senator Elizabeth Warren focused heavily on Social Security instead. Sanders, a fellow progressive, falls into the latter camp. Even so, he supports a number of proposals that could peripherally impact everyday 401(k) account holders.
First, Sanders has proposed instituting a financial transaction tax that would apply to all stock trades (0.5 percent), bond trades (0.1 percent), and derivatives transactions (.005 percent). In comparison, the Security and Exchange Commission imposes just a 0.002 percent fee on these transactions today. The Sanders campaign estimates that these new taxes could raise $2.4 trillion over a decade, reportedly enough to finance his student debt erasure proposal. That said, the proposal has been met with stinging criticism from conservatives and Wall Street columnists, who argue the tax would ultimately be passed down to small investors and 401(k) plan participants. Sanders has countered that middle-class Americans would be exempt from the tax through a newly-created tax credit.
Sanders has also vowed to cut some of the tax benefits enjoyed by executive retirement plans. These plans “allow select managers or highly compensated employees to save for retirement by deferring compensation and taxes,” according to the US Government Accountability Office. A report by the non-partisan agency government found that among the top 500 publicly traded companies, these plans totaled over $13 billion in value. Sanders argues that these arrangements are unfair since ordinary Americans are subject to an annual contribution limit of $19,500 for their 401(k) accounts. To make up for the difference, he’s vowed to change vesting rules so that executives pay taxes on money in these plans as they accrue—not as distributions are taken from them.
The Vermont senator’s positions would usher in big changes to Social Security and how the wealthiest Americans are taxed. While it remains to be seen whether Sanders or Biden will come out on top, it’s a safe bet that America will be watching closely—as will the Guideline team.