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November 11, 2020
Joe Biden is now President elect. There are several ways a Biden presidency might affect your retirement, including lower tax benefits on 401(k) accounts and more generous Social Security benefits.
Biden’s Plan for Older Americans gives specific details on what Biden would like to do as President to overhaul the nation’s retirement system, shore up Social Security and Medicare, and fight ageism that forces people out of the workforce prematurely. Although, due to the Senate, any really big changes are actually unlikely.
Currently, the tax breaks for high earners who contribute to 401(k) and traditional IRA plans are higher than the breaks for middle- and lower-income workers. Biden’s plan cites a study by the Tax Policy Center that shows two-thirds of the tax benefit of these plans goes to the wealthiest 20% of families.
Because the tax benefit of these plans is based on your tax bracket, earners in higher brackets get more government tax relief than earners in lower brackets. A person whose income puts her in the top 37% tax bracket gets a deduction worth $370 for each $1,000 contribution she makes, while a person in the 22% bracket only gets $220 in tax breaks for the same $1,000 contribution. And if you’re a low-income earner with a full-time job, you could get nothing in tax breaks for putting money in an IRA while still paying payroll taxes.
Biden’s plan would replace the current tax-deferral mechanism for 401(k)s and traditional IRAs with a tax credit. This credit would operate similarly to a flat tax so that the person in the 37% tax bracket and the person in the 22% tax bracket would get the same $220 credit for their $1,000 contribution.
Biden’s plan provides tax credits for small businesses to incentivize them to create 401(k) plans for lower-income workers. A similar proposal is already in the Strong Retirement Act of 2020 sponsored by Ways and Means Committee Chairman Richard E. Neal (D-MA) and Ranking Member Kevin Brady (R-TX).
Other provisions of the Strong Retirement Act that could make it into a Biden plan are:
Biden would like to lower the age for Medicare eligibility from 65 to 60.
Biden said his plan will help Americans who retire early and those who are unemployed or can’t find jobs with health benefits. “It reflects the reality that, even after the current crisis ends, older Americans are likely to find it difficult to secure jobs,” Biden wrote in April.
Biden’s site says “Too many Americans – and too many older Americans – cannot afford their prescriptions or their long-term care.” To fix this situation, Biden proposes several policy solutions.
In real terms, these measures would mean higher-earning retirees would spend less on Medigap and Medicare Advantage insurance plans. It could also mean that Medicare premiums for higher-earners would be capped or go down.
For more on the current state of Social Security and Medicare, read our article Changes Coming to Social Security & Medicare: Small COLA and 6 Other New Developments for 2021.
Biden has pledged to shore up Social Security, which may run into a budget shortfall by 2028, forcing a reduction in benefits, without a plan to save it.
According to his website, Biden “will strengthen benefits for the most vulnerable older Americans – including widows and widowers, lifelong workers with low monthly benefits, and old-age beneficiaries who may have exhausted their other savings.” To do that he is calling for changes in how Social Security calculates its benefits. The plan would:
To fund these changes, Biden’s plan proposes raising payroll taxes only on those now earning over $400,000 annually. Though the specifics aren’t spelled out on the Biden Plan’s webpage, at the moment it seems like Biden’s plan would not tax income above the current $137,700 income threshold, creating a tax “doughnut hole” between $137,700 and $400,000.
The non-profit Tax Policy Center thinks lawmakers would try to close the doughnut hole gradually over several years and expand the tax base for Social Security to include taxing other kinds of income like capital gains on investments and passive income. But to make any substantive changes will require an act of Congress.
Biden’s plan pledges “that all workers deserve an opportunity to earn a living and will fight to change the laws to allow all people – regardless of their age – to get the pay they deserve.”
The key policy to achieve this goal is to extend the Earned Income Tax Credit (EITC) to workers over 65. Currently, those workers are excluded from this tax benefit.
Earned Income Tax Credit (EITC) Definition: The EITC is a matching tax credit for low-income workers. For every dollar a low-income worker makes, the government matches their income with a credit dollar up to a certain amount. For very-low-income workers who may owe no tax, this means they get a refund check that is similar to a grant.
For workers over the age of 65 who receive Social Security benefits and work part-time, the extension of the EITC would mean a big boost in income.
Biden’s plan also promises to “back bipartisan legislation protecting older workers from being discriminated against in the workforce.” How that would work in practice, however, remains to be seen.
Biden’s plan depends on Congress, and if Republicans maintain control of the Senate, which seems likely, the new President-elect will have a hard time getting his plan passed. Though shoring up Social Security may have bi-partisan backing, a divided Congress will not do any of the following:
On the other hand, Biden’s proposal to expand the EITC to workers over 65 could be accomplished as a compromise with Senate Republicans because it is a tax cut, not a tax raise.
Other policy changes that could happen through executive order instead of legislation include asking Social Security to change the formula it uses to calculate its cost-of-living update. And a Biden administration could promote more efficient cost-sharing between Medicare programs that could cap out-of-pocket expenses.
But divided government means big changes to the way things are done is unlikely. Some modest reform efforts, like the bi-partisan Strong Retirement Act could get passed in the upcoming legislative session, but the status quo in terms of retirement is probably here to stay.
Correction: An earlier version of the article incorrectly stated that Social Security would “run out of money” in 2028. A report from the Bipartisan Policy Center (BPC) says instead that Social Security’s benefits will exceed its capacity to pay in 2028.
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