By Stephen Miller, CEBS – SHRM
There is not a lot of overlap among the proposals that President Donald Trump, a Republican, and his Democratic challenger, Joe Biden, have championed regarding private-sector and government retirement benefits. Below is an overview of the candidates’ proposed changes to employer-sponsored savings plans and Social Security.
Biden Favors ‘Equalizing’ 401(k) Tax Benefits
Biden’s tax plan calls for changes to the traditional 401(k), ending upfront tax breaks that grow larger as more money is saved and replacing them with flat-tax credits.
Current tax benefits for retirement savings are based on savers excluding their retirement contributions from tax in traditional 401(k) plans, and then paying taxes when they withdraw money from their account. “This system provides upper-income families with a much stronger tax break for saving and a limited benefit for middle-class and other workers with lower earnings,” according to Biden’s website. “The Biden plan will equalize benefits across the income scale, so that low- and middle-income workers will also get a tax break when they put money away for retirement.”
Roll Call reported that Biden’s plan would “equalize” the incentive system by replacing tax-deductible contributions with flat-tax credits for each dollar saved. “The campaign isn’t saying what that percentage would be, but the Urban-Brookings Tax Policy Center has estimated a 26 percent credit would be roughly revenue-neutral over the first 20 years and beyond, which the Biden campaign is aiming for,” Roll Call reported. “Under this plan, someone earning $600,000 would get the same tax break as someone making $60,000—an identical $260 tax credit for their $1,000 retirement contribution.”
The credit would also be refundable, so employees earning too little for the credit to offset their income tax liability would still receive the full value.
“By and large, it would help lower- and middle-income people save more,” said Eric Toder, co-director of the liberal Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, Forbes reported.
Alicia Munnell, director of the Center for Retirement Research at Boston College, also supports the idea, writing that “the Biden proposal is a desirable change on equity grounds and would have little effect on contribution patterns.”
But Brian Graff, CEO of the American Retirement Association, which represents plan services providers, is concerned over “how reduced tax incentives for small-business owners would impact their willingness to make matching and other contributions or, even more worrisome, to have a plan in the first place.”
Vince Morris, president of resources investment at OneDigital, an HR technology and services provider, noted that “business owners bear plan liability, the cost of employer contributions and sometimes plan administrative costs,” and they see their ability to make large tax-excluded contributions for themselves as offsetting the costs and administrative burdens of plan sponsorship.
“When offered a plan, we know that people save more for retirement than those who don’t have access to a plan,” Morris said.
“Employer-sponsored retirement plans offer more than 120 million American private-sector workers the opportunity to accumulate savings and improve their retirement security,” said Chatrane Birbal, vice president of public policy at the Society for Human Resource Management (SHRM), citing data from the nonprofit Pension Rights Center.
“SHRM believes that every American worker should be afforded the opportunity to save for his or her own retirement,” Birbal added. “Retirement reform proposals should facilitate and encourage voluntary employer-sponsored plans, as well as individual savings, through consistent tax incentives and simplified regulations.”
|Retirement Plans Snapshot|
According to the Society for Human Resource Management’s 2019 Employee Benefits survey of 2,763 HR specialists from among SHRM’s members:93 percent offer a traditional 401(k) or similar defined contribution savings plan.
74 percent match employees’ contributions.
42 percent automatically enroll new employees into the plan.Somewhat fewer but growing numbers also offer Roth 401(k) accounts, which employees fund with post-tax dollars and from which funds withdrawn during retirement are tax-free. Biden’s tax-credit proposal would not apply to Roth accounts.
Biden’s campaign website also addresses the following retirement plan issues:
AUTOMATIC ENROLLMENT 401(K)S
“Under Biden’s plan, almost all workers without a pension or 401(k)-type plan will have access to an ‘automatic 401(k),’ which provides the opportunity to easily save for retirement at work,” the website states. Although details aren’t provided, this could involve a mandate for employers to provide auto-enrollment plans with subsidies for small businesses to set them up, or possibly a government-provided defined contribution plan option, building on state-run auto-enrollment savings programs.
“Retirement plans represent an important aspect of the total compensation package used by employers to recruit and retain employees,” Birbal said. “As a result, many employers are already proactively enrolling employees into employer-sponsored retirement plans.”
MULTIEMPLOYER PENSION PLAN RELIEF
Forthcoming Biden proposals, according to his website, will include “issues related to pensions, starting with passing the Butch Lewis Act,” which would provide federally backed loans to underfunded multiemployer defined benefit pension plans.
The Butch-Lewis Act passed the Democratic-led House last year but has not been brought up for a vote in the Republican-led Senate.
Trump Targets Social Advocacy by Employer Plans
Trump has not proposed fundamentally changing how 401(k) plans operate. Among actions the Trump administration has taken regarding workplace retirement plans, the Department of Labor (DOL) recently proposed a set of rules that, if finalized, would:
- Establish new limits on using environmental, social and governance (ESG) funds as investment optionsfor defined contribution retirement plans or as investments for defined benefit pensions.
- Prevent retirement plan fiduciaries from casting corporate-shareholder proxy votes in favor of social or political positions that don’t advance the financial interests of retirement plan participants.
The DOL said it was attempting to keep fiduciaries from making decisions that further social and political aims but do not advance the goals of growing and securing plan participants’ retirement accounts.
Democrats have criticized these proposed rules, and a Biden administration could seek to replace them. Democratic majorities next year in both houses of Congress also could pass Congressional Review Act resolutions to overturn any rule finalized by a federal agency within 60 legislative days of the election.
The proposals seek “to influence corporate policy on issues that some argue are not directly related to ‘economic value,’ including with respect to [ESG] issues,” according to an overview of the DOL’s 2020 regulatory agenda by October Three, a retirement plan advisory firm. “In this regard, there has to some extent been a different ‘Republican Administration’ and ‘Democratic Administration’ position at the DOL.”
During the Obama administration, the DOL eased the way for plan sponsors to consider social issues in selecting investments.
Different Views on Social Security and Payroll Taxes
The candidates have staked out different positions on the future of Social Security.
TEMPORARY PAYROLL TAX SUSPENSION FOR COVID-19 RELIEF
In August, Trump issued an executive order that led to IRS guidance allowing employers to temporarily stop collecting Social Security payroll taxes during a “suspension period” from Sept. 1 through the end of the year for employees whose wages are less than $4,000 for a biweekly pay period. Companies that suspend collection of employees’ payroll tax would collect additional amounts from workers’ paychecks from Jan. 1 through April 30 next year to repay the tax obligation.
Trump and Treasury Secretary Steve Mnuchin have called for legislation to forgive suspended taxes. Biden criticized Trump’s executive order, calling it “a reckless war on Social Security” funding, The Hill reported.
TRUMP FLOATS THE IDEA OF REPLACING PAYROLL TAXES
Trump also suggested, but not in any formal proposal, replacing the Social Security payroll tax with funding from general tax revenues. According to Politifact, Trump said during an Aug. 10 briefing that “the payroll tax is a big deal for people … and we intend to terminate it at the end of the appropriate period of time.”
Trump “made clear … that his real goal is to replace the Social Security payroll tax with revenues drawn from the general tax fund, the vast majority of which is income taxes,” wrote Andrew G. Biggs, a resident scholar at the conservative American Enterprise Institute, who favors the idea.
Seth Hanlon and Christian E. Weller, senior fellows at the liberal Center for American Progress, wrote that “cutting Social Security’s income stream is the last thing Americans need right now,” as it could upend the Social Security system.
BIDEN WANTS EXPANDED BENEFITS AND A HIGHER EARNINGS THRESHOLD
According to Biden’s website, his administration would expand current Social Security benefits by making changes that would:
- Provide the oldest beneficiaries—those who have been receiving retirement benefits for at least 20 years—with a higher monthly check “to help protect retirees from the pain of dwindling retirement savings.”
- Implement a minimum benefit. Workers who spent 30 years working would receive a benefit of at least 125 percent of the poverty level.
- Allow a surviving spouse to keep a higher share of the benefits, raising the monthly payment by about 20 percent for affected beneficiaries.
- Provide earlier benefits for teachers and other public-sector workers.
Biden’s plan calls for having high-wage earners pay taxes toward Social Security on a higher percentage of their income. Currently, employees and employers each pay 6.2 percent from wages to fund Social Security for a 12.4 percent combined tax rate, but the tax is capped at wages of $137,700.
According to analysts at The University of Pennsylvania’s The Wharton School, the Biden plan increases Social Security taxes by creating a “doughnut hole” in the payroll tax structure. While earnings immediately above the current taxable maximum would continue to be exempt from Social Security taxes, earnings above $400,000 would be taxed at the 12.4 percent rate. However, the new taxes on earnings above $400,000 would not trigger additional benefits.
DOL Fiduciary Rule
In July, the DOL proposed guidance that would change requirements for advisors who recommend investments to retirement plan participants. The proposal would still require advisors to act in participants’ best interests and to avoid conflicts of interest when recommending specific investments, but it is less restrictive regarding how advisors are compensated than a 2016 rule by the Obama administration, which was struck down in 2018 by the 5th U.S. Circuit Court of Appeals.
The Democratic party platform says Democrats will “take immediate action to reverse the Trump administration’s regulations allowing financial advisers to prioritize their self-interest over their clients’ financial well-being.”
The fate of the new rule will likely depend on November’s presidential election.