At Last: My Post-Election Joe Biden Retirement Policy Predictions
Yes, Joe Biden won the presidential election in November. But it seemed all a bit meaningless to speculate on how that would impact retirement-related matters when it was still unknown whether Democrats or Republicans would control the Senate. Now we know: it’s the former, with the election victories of Jon Ossoff and Raphael Warnock. At the same time, Democratic Senator Joe Manchin of West Virginia, considered the most conservative member of that party, has been unequivocal: he will not assent to the elimination of the filibuster, a Supreme Court packing scheme, or other such proposals, which suggests that Democrats will have more latitude to enact their priorities, but only insofar as they can entice a sufficient number of Republicans.
As a separate wrinkle, there are some opportunities for Democrats to take advantage of the reconciliation process, in the same manner as Republicans did with the 2017 tax cuts. In reconciliation, Congress can pass certain types of bills related to tax and spending without needing a filibuster-proof majority (see the Committee for a Responsible Federal Budget for an explainer), but it’s a one-time shot (once per budget), and there are limits: no Social Security changes (it’s technically off-budget), no changes with no or only incidental fiscal impacts, and no fiscal impacts beyond the 10 year budget window (hence the sunsetting in the Bush and Trump tax cuts).
What’s this mean for retirement?
Joe Biden has a Social Security proposal . . . that doesn’t actually solve the Social Security Trust Fund’s pending insolvency. It defers the projected insolvency date from 2035 to 2040 (based on pre-pandemic projections) and decreases the 75 year financing gap by 25%, because the tax increase in his plan, a tax on income over $400,000, not adjusted for inflation (that is, so that over time, all income is taxed), is largely spent on benefit increases including a change in the CPI calculation that would boost annual increases, substantial boost in the minimum benefit, caregiver credits, surviving spouse benefit boosts, the elimination of the Windfall Elimination Provision/Government Pension Offset, and more. Biden also promised increases to Supplemental Security Income (SSI), that is, to the program for the disabled and elderly for whom Social Security benefits are too low to lift them out of poverty.
Is any of this likely to come to pass? It would be foolish to make any sort of absolute statement at this point, but I doubt there are enough Republicans (or even moderate Democrats) who are on board with the abandoning of the old principle of a benefit cut/tax hike compromise in favor of a the progressives’ favored benefit boost.
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This one is much easier. After all, the key issue which has stymied the resolution to the financing crisis facing multiemployer pensions is the inability of both sides to come to an agreement on exactly how much of the funding necessary to remedy pending insolvencies in multiemployer pensions should come out of government coffers and how much out of the multiemployer pension system, through increases in PBGC premiums/contributions and through benefit cuts on insolvent plans’ pensions or across the board. A secondary issue is to what extent, if at all, there should be reforms in the pension plan funding requirements, that is, whether plans should be mandated to be funded more conservatively going forward. The extreme side of the Democrats’ approach — all bailout, no cuts, hikes, or reforms — seems tailor-made for inserting into budget reconciliation. That’s unfortunate because the system truly does need a mix of both, but the billions for a “pure” bailout are of the magnitude increasingly perceived of as peanuts, at least relative to the pending proposal for $2,000 per person “stimulus” checks and all the rest of the Covid-19 spending.
Ending 401(k) tax deductibility
Would Biden be able to peel off 10 Republicans to support a plan to remove tax deductibility* from 401(k) plans and replace it with tax credits to provide greater relative benefits to low-income workers?
(*Remember, it’s not actually about the deduction, but the ability to defer taxes until retirement and pay them on total effective income rather than with the top marginal tax rate.)
Trying to somehow limit this change only to those with income above $400,000, as he’s promised to do, and to use the revenue gained as people switch to Roth plans, is not going to provide particularly much money for a tax credit when the CBO does the actual math. Perhaps the Biden team will massage the numbers by omitting the cost of Roth plans years in the future when people withdraw their money tax-free, which, yes, would be bad but not out of the norm considering other games Congress has played. (Remember the long-term care program that was supposed to be a part of the Affordable Care Act? It was touted as being a net revenue boost because they measured contributions, which started right away, but not benefit payments, which escalated year after year in the future.) If Biden backs away from his promise to preserve deductibility for those earning under $400,000, he’ll get more money to “spend” on tax credits, but less support.
What will happen instead? Given the current free-spending mindset, I find it much easier to believe that Biden will succeed in offering workers a choice of the better of tax credits or tax deductibility/deferral with a “pay-for” somewhere else in the budget (e.g., the promised tax hikes for the rick) or not at all, again, on a reconciliation basis or potentially in a stand-alone fashion. Would this bump up against too many other spending promises, of which, to be sure, there are a great many? This remains to be seen.
Yes, at long last I arrive at an issue where I do think it’s possible for moderate Republicans to align with Democrats: Biden’s promise of an “automatic 401(k).” An “auto-IRA” such as the OregonSaves program, in which all employers who don’t otherwise offer a retirement savings option must send payroll-deduction contributions to a state (contractor)-managed IRA, with the ability for individual employees to opt out, offers too much appeal, and its opponents’ worries are generally too abstract for supporters to heed them.
I’ve laid out some of these concerns in the past. If the TRS, the Thrift Retirement System which is the 401(k)-equivalent for federal workers, were used to manage retirement savings for every American without an alternate plan, there is a real risk that it would be too vulnerable to political games such as the banning of fossil fuel investments. Would Americans at even the lowest income levels, for whom Social Security may well provide adequate benefits, find themselves in debt or struggling financially due to the money being diverted to retirement savings? Would Americans be at risk of Congress deciding, after-the-fact, that these savings must be annuitized, or, on the other hand, would taxpayers be at risk if a future Congress decides that savers must be made whole and protected from market crashes? There’s no way to know.
But the auto-enrollment option, with the ability to opt-out, offers a tantalizing easy fix, and promises a middle-of-the-road fix at that, at least in comparison to occasional proposals to boost Social Security benefits to make up for lost traditional Defined Benefit pensions or to mandate employer contributions to 401(k)s. Add it up and it seems very likely that at least the requisite number of Republicans will support such a proposal.
Am I right or wrong? Time will tell!
As always, you’re invited to comment at JaneTheActuary.com!