The Candidates on Retirement, Part 2: Elizabeth Warren
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, Mayor Pete Buttigeig, 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.
While the Democratic field disagrees on plenty of things, none claim that Social Security is in a good place. According to some estimates, the program’s cash reserves could be depleted within 15 years. This would result in lower benefit payouts to retirees. Considering that most retirees rely on the program for at least 50 percent of their income, that’s a problem.
Warren goes further than just saving the program. The candidate calls for an increase of Social Security benefits to the tune of $200 per month, per beneficiary. Why the increase? Warren’s campaign estimates that current benefits cover less than half of the average worker’s needs. Financial planners generally suggest that retirees need at least 70 to 80 percent of their working income to live comfortably. Warren’s proposed $200 increase is designed to serve as a “correction” and, if implemented, would be the first hike in Social Security benefits since the early 1970s.
Additionally, Warren’s plan updates the minimum benefit someone can receive under Social Security to 125 percent of the federal poverty line. Per month, this comes out to $1,301. The only requirement is that the beneficiary has spent at least 30 years working. Former Vice President Joe Biden’s campaign embraced the same kind of increase, first proposed by the National Academy of Social Insurance back in 2009.
Warren has also published a proposal to address widows and widowers who relied on their spouse’s Social Security benefits. Her plan guarantees survivors either 75 percent of their combined household benefits (capped at the national average), 100 percent of their benefits, or 100 percent of the deceased’s benefits—whichever amount is higher.
Stabilizing Social Security, let alone expanding it, will require tax revenue. Warren proposes that the funds come from new taxes on “very high earners.” Her plan stipulates that once an individual’s year-to-date income surpasses $250,000, a new 7.4% payroll tax would be triggered and paid for by both employees and their employers. Social Security taxes would remain as they are today (6.2 percent) for anyone earning under $250,000. In other words, Social Security taxes wouldn’t change for 98 percent of the population.
That’s just half of it: Warren also proposes another new tax to bolster the program. Currently, Social Security taxes are collected from work based compensation (read: your salary), and not from investment income. Her campaign calls for an additional tax of 14.8 percent on investment income for those earning over $250,000 annually. This tax would be separate from capital gains taxes, which we’ll address shortly.
Retirement Savings and Additional Taxes
Unlike Biden or Buttigieg, Warren stops short of proposing new incentives or tax benefits for those who save for retirement. Her campaign has been more focused on shoring up entitlement programs like Social Security. That said, some of her other proposals could indirectly impact individuals’ retirement savings.
First, the Warren plan calls for a new 0.1 percent tax on financial transactions involving derivatives, stocks, and bonds. In other words, a $1,000 transaction would incur a $1 tax. The campaign estimates that the new tax would generate $800 billion in revenue by 2030, funds that would go toward proposed expansions to Social Security and Medicare. The plan does not carve out an exemption for transactions tied to retirement savings and investment plans.
The potential impact of Warren’s plan remains up for debate. Critics argue that it would cost 401(k) participants as much as 5 percent of their savings over their lifetimes. But in the text of her proposal, Warren indicates that the “tax would be assessed on and collected from financial firms,” not investors. That’s an important distinction to make—if firms decide to pass along those fees to IRA and 401(k) administrators and account holders, they’ll be doing so on their own accord. Other analysts argue that even if new fees were levied on account holders, Warren’s expansion to Social Security and Medicare would result in healthcare savings that would make up the difference.
Another proposal that has caught retirement experts’ attention is a capital gains tax increase. Capital gains are the proceeds from the sale of real estate, stocks, or investments. Currently, these are only taxed at the point of sale and at a much lower rate than regular income.
Your capital gains tax bracket depends on annual earnings and tax filing status (e.g., single, married filing jointly). Today, the highest possible tax rate for long term capital gains is 23.8 percent. The Warren campaign has proposed taxing capital gains at the regular income tax rate for high-earners, or 37 percent for those earning $518,401. What’s more, these taxes would be levied year-to-year, not just at the point of sale. That would raise an additional $2 trillion in tax revenue over ten years.
It’s unclear if this proposal would have any impact on the average American’s retirement savings. While 401(k) and IRA withdrawals are not subject to capital gains taxes, other non-qualified investments are. That said, Warren has specified that these new taxes would only apply to the “wealthiest 1 percent of households.” Definitions vary, but the Tax Policy Center pins that segment’s annual income at around $800,000. Chances are you just breathed a sigh of relief.
The Massachusetts senator’s proposals are among the Democratic field’s most progressive. So how do her views compare to Pete Buttigieg? We’ll dive into “Mayor Pete’s” platform in Part 3 of our series.