President-elect Joe Biden wants to help Americans save for their golden years by expanding access to retirement savings plans, making health care more affordable for seniors, and strengthening Social Security.
“These will comfort those who perhaps did not save enough or were fearful of outliving their retirement savings,” said F. Michael Zovistoski, managing director at UHY Advisors, a tax and business consulting firm. “If this plan stops the dwindling of retirement savings, it would have a direct effect of increasing the inheritance of the next generation.”
Still, Biden’s plans must pass Congress next year, which could be difficult, depending on which party controls the chamber after two special run-off elections in Georgia in January.
Here’s what Biden’s proposals entail.
Expanding 401(k) access
Biden wants lower and middle-income workers to enjoy the tax benefits of 401(k) and IRA contributions. He noted in his plan that workers get more than $200 billion a year in tax benefits from retirement saving, but two-thirds of that goes to the top 20% of households. His plan falls short of detailing how he would equalize those benefits.
“This can be done using a flat tax credit for those who save for retirement compared to allowing savings for retirement to come out of paychecks on a pre-tax basis,” Zovistoski said. “But those in higher tax brackets may see a reduction in the tax benefit relating to saving for retirement, if the flat rate is too low.”
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Biden also wants to give small businesses a tax break if they offer a retirement plan for their workers. That could help offset costs related to setting up a plan. Otherwise, workers without a pension or 401(k) from their employer will have access to an “automatic 401(k), allowing workers to save. Details on how that would work were not included.
“401(k) plans are employer trusted plans,” said Zovistoski. “It is unclear as to who would be the trustee under this automatic 401K plan proposal.”
There are additional benefits for caregivers under Biden’s plan. For instance, penalties would be removed for those who want to save for retirement. Those who were taking care of loved ones would also be able to get tax breaks for retirement savings.
Biden also hopes to give caregivers the opportunity for catch-up contributions for retirement accounts even if they aren’t earning income in a traditional full-time job.
Changing Medicare in 2 key ways
During a time when two-thirds of Americans report increases in prescription drug prices, Biden wants to rein in high drug prices and make the government healthcare program available to more older Americans.
His five-pronged plan to help control prices includes the following changes:
Allowing Medicare to negotiate lower drug prices with pharmaceutical companies,
Allowing an independent review board to assess the value of specialized biotech drugs,
Limiting price increase for all brand, biotech and abusively priced generic drugs to inflation,
Allowing Americans to buy prescription drugs from other countries,
Improving the availability of safe generic drugs.
Biden’s plan also would lower the Medicare age to 60, which would allow up to 23 million to get on the Medicare, according to Avalere Health, a consulting firm.
Strengthening Social Security
To start off, Biden plans to increase the minimum Social Security benefits to 125% of the federal poverty level. This translates to $15,950 in 2020 and will benefit 12.8% of adults over 65 who fall below this threshold.
Those who want to receive payments will still need to complete 30 years of covered employment to qualify for the full minimum. Those having worked 10 years could receive a prorated share.
Biden would also replace the inflation measure that determines cost-of-living adjustments for Social Security benefits. Instead of using the CPI-W, an index that tracks households with at least half of their household income coming from clerical or wage-paying jobs, cost-of-living adjustments would be calculated from the CPI-E, which is based on spending by adults 62 and older and accounts for more health care costs.
Among other changes, Biden would also allow caregivers who took care of children younger than 12 or family members with disabilities to get Social Security credits with earnings equal to the average national monthly wage. This would happen every time a caregiver clocked in 80 hours or more.
Widows would also receive an extra boost in Social Security. They would receive three-quarters of the total benefit received by the household before their spouse passes away. This is as long as this amount isn’t higher than the benefit an average earning couple receives.
Those who have been receiving retirement benefits for at least 20 years can expect a higher monthly check, too, under Biden’s plan, if Congress is on board.
“The individuals who did not retire early and have been retired for 20 years are probably in the third stage of retirement,” Zovistoski' said. “At that point their largest cost is typically prescription drugs and other medical cost.”
Biden also vowed to eliminate penalties associated with teachers who have earned retirement benefits from various sources and allow them to earn Social Security sooner.
Nearly one third of pension plans have reduced the share of salary a pension replaces and one-half have raised the age teachers can begin collection pensions, according to an earlier Urban Institute study this year.
“I have siblings who are teachers in Chicago and they are worried that they’ll continue to see pension cuts,” said Patrick Rush, author of Gain Big and Give Back: Financial Planning with Intention.
Paying for Social Security
The former vice president also wishes to impose a 6.2% Social Security tax on earnings above $400,000. This along with other components of Biden’s plan if enacted starting 2021 are expected to keep 1.4 million Americans out of poverty.
But experts said the chances of Congress passing this tax are unlikely. One even suggested that a middle ground would be taxing those making between $140,000 to $200,000 a year.
“You could probably get a lot more people taxed in this range and more partisan agreement,” Rush said. “You could get a lot more people behind the idea of a progressive tax that will distribute wealth.”