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Proposed Changes to Retirement Plans

2016-06-16

Proposed Changes to Retirement Plans


The most onerous change is the increased Social Security limit proposed of $195,000 which for Small Business owners who make $195,000 will result in a 5% pay cut. Such a change should not be unexpected given the instability of the Social Security system currently and the prospect for it to worsen as more Baby Boomers retire. All-in-all, though, the recommendations seem to be based in common sense and well thought through. Of note are the following recommendations:

  1. Changes to the Social Security system
Change of the Social Security benefit calculation to improve the benefit for lower income workers (for those born in 1960 or later) and have a basic minimum benefit for such workers.
Increase in the Full Retirement Age and the maximum benefit age for those born in 1960 or later to 69 and 72 respectively (from 67 and 70 respectively). This would be a gradual increase as was the change in the full retirement age that was instituted years ago. The 69-year age will affect those born in 2001 or later.
Capping of the Spousal Social Security benefit. This benefit allows non-working spouses who have been married for at least 10 years to a working spouse (usually a high income earner, which would allow the non-working spouse to be able to afford to not work) to collect 50% of the benefit of his/her working spouse (again for those born in 1960 or later).
Raising of the cap on the taxability of Social Security from the current $118,500 to $195,000 by 2020 and then indexing the limit beyond 2020 (this increases the tax of these workers who make $195,000 or more by $4,743 under today's rates and the small business employer who pays both sides of the tax by $9,486.
Increase in the Social Security Tax rate of 1% (.5% on employees and .5% on employers) so that eventually the tax will be 13.4% (6.7% on each). This would be introduced on a gradual basis with .1% (.05% on employees and .05% on employers) added each year beginning 2017 for 10 years. Ultimately, this will cost the worker who makes the maximum limit or more about $1,000 and the small business employer who pays both sides of the tax $2,000.Increase the taxability of Social Security income for high-income beneficiaries from 85% to 100%.
  1. Changes to Retirement Plan
    1. Creation of a new "streamlined" retirement plan for small employers so that they can transfer most of the administrative burden and responsibilities for operating a retirement savings plan to a third-party expert. Good news for the brokerage firms and insurance companies! However, from my perspective, these administrative burden-free plans are already generally available.
    2. Expansion of the myRA program to help seasonal and low-earning workers who are the least likely to be offered to participate in a retirement plan.
    3. Requirement of employers of 50 or more employees to offer a retirement plan that meets certain minimum thresholds or the automatic enrollment of employees into a new plan (called a Retirement Security Plan) or a myRA plan.
    4. Creation of a Retirement Clearinghouse to help individuals consolidate their retirement accounts
    5. Limitation on over-exposure to company stock in retirement plans
    6. Integration of "easy-to-use-lifetime-income features" in retirement savings plans as well as the ability to purchase annuities that begin payments later in the retiree's life.
  2. Change to the Tax Code
    1. New tax incentives to encourage employers to automatically enroll employees in retirement plans and to increase their employees' contributions over time
    2. Improvement of the existing Saver's Credit (income tax credit) for younger workers and exemption of retirement savings from teh asset tests to qualify for federal and state assistance programs.
    3. Elimination of tax benefits for borrowing using home equity loans and the like that reduces the amount of equity individuals have in their home. This could have detrimental impacts to those who use the equity in their homes to finance the higher education of their children which may incent these individuals to borrow or draw from their retirement plans without penalty instead. This seems to be a disincentive to the goal to increase retirement savings, then.
  3. Addition of Personal Finance Education in K-2 and higher education curricula.

Proposed Changes to Retirement Plans

2016-06-16

Proposed Changes to Retirement Plans


The most onerous change is the increased Social Security limit proposed of $195,000 which for Small Business owners who make $195,000 will result in a 5% pay cut. Such a change should not be unexpected given the instability of the Social Security system currently and the prospect for it to worsen as more Baby Boomers retire. All-in-all, though, the recommendations seem to be based in common sense and well thought through. Of note are the following recommendations:

  1. Changes to the Social Security system
Change of the Social Security benefit calculation to improve the benefit for lower income workers (for those born in 1960 or later) and have a basic minimum benefit for such workers.
Increase in the Full Retirement Age and the maximum benefit age for those born in 1960 or later to 69 and 72 respectively (from 67 and 70 respectively). This would be a gradual increase as was the change in the full retirement age that was instituted years ago. The 69-year age will affect those born in 2001 or later.
Capping of the Spousal Social Security benefit. This benefit allows non-working spouses who have been married for at least 10 years to a working spouse (usually a high income earner, which would allow the non-working spouse to be able to afford to not work) to collect 50% of the benefit of his/her working spouse (again for those born in 1960 or later).
Raising of the cap on the taxability of Social Security from the current $118,500 to $195,000 by 2020 and then indexing the limit beyond 2020 (this increases the tax of these workers who make $195,000 or more by $4,743 under today's rates and the small business employer who pays both sides of the tax by $9,486.
Increase in the Social Security Tax rate of 1% (.5% on employees and .5% on employers) so that eventually the tax will be 13.4% (6.7% on each). This would be introduced on a gradual basis with .1% (.05% on employees and .05% on employers) added each year beginning 2017 for 10 years. Ultimately, this will cost the worker who makes the maximum limit or more about $1,000 and the small business employer who pays both sides of the tax $2,000.Increase the taxability of Social Security income for high-income beneficiaries from 85% to 100%.
  1. Changes to Retirement Plan
    1. Creation of a new "streamlined" retirement plan for small employers so that they can transfer most of the administrative burden and responsibilities for operating a retirement savings plan to a third-party expert. Good news for the brokerage firms and insurance companies! However, from my perspective, these administrative burden-free plans are already generally available.
    2. Expansion of the myRA program to help seasonal and low-earning workers who are the least likely to be offered to participate in a retirement plan.
    3. Requirement of employers of 50 or more employees to offer a retirement plan that meets certain minimum thresholds or the automatic enrollment of employees into a new plan (called a Retirement Security Plan) or a myRA plan.
    4. Creation of a Retirement Clearinghouse to help individuals consolidate their retirement accounts
    5. Limitation on over-exposure to company stock in retirement plans
    6. Integration of "easy-to-use-lifetime-income features" in retirement savings plans as well as the ability to purchase annuities that begin payments later in the retiree's life.
  2. Change to the Tax Code
    1. New tax incentives to encourage employers to automatically enroll employees in retirement plans and to increase their employees' contributions over time
    2. Improvement of the existing Saver's Credit (income tax credit) for younger workers and exemption of retirement savings from teh asset tests to qualify for federal and state assistance programs.
    3. Elimination of tax benefits for borrowing using home equity loans and the like that reduces the amount of equity individuals have in their home. This could have detrimental impacts to those who use the equity in their homes to finance the higher education of their children which may incent these individuals to borrow or draw from their retirement plans without penalty instead. This seems to be a disincentive to the goal to increase retirement savings, then.
  3. Addition of Personal Finance Education in K-2 and higher education curricula.

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