After two years of work, the Bipartisan Policy Center (“BPC”) has released a 146 page report1 jam-packed with ideas on how to improve our nation’s retirement plans. The report goes over everything from improving workplace retirement savings plans to modernizing the Social Security program – and we can tell you right now, high-earners are not going to like the changes.
Strengthening the Social Security Program
Some of the proposed Social Security changes from the report include raising the taxable level of earnings for Social Security, more taxation of benefits, a cap on spousal benefits, and a 0.5% hike in the employee and employer payroll tax. The following two Social Security reforms are particularly detrimental to high-earners.
Currently, the maximum taxable earnings level cap is $118,000. The report, however, recommends raising the cap to $195,000 by 2020. The justification is that currently, the maximum is indexed to average wage growth – but earnings for workers at the top of the wage distribution have grown faster than average wages meaning the number of earnings above the taxable maximum have increased. The Commission believes we are not currently taking advantage of enough of the income spectrum.
The Commission has also proposed to cap and re-index the spousal benefit, claiming that currently, spousal benefits favor the more affluent households where typically the wife does not have to work because of the husband’s high income. Their recommendation is to cap the spousal benefit at a level equal to that of a spouse of a worker in the 75th percentile earning distribution. In 2022, this new maximum spousal benefit would equal $843 per month, versus the current maximum for 2016 which is $1,320.
Facilitating Home Equity
One of the concerns mentioned in the report is the level of mortgage debt among America’s older population. To help remedy this situation, the BPC targets the federal tax deduction for mortgage interest payments – a deduction that usually applies to wealthier taxpayers who itemize their taxes. They propose that by no longer applying tax deductions when home equity decreases, it will encourage homeowners to store up home equity that can be drawn on in retirement.
Limiting Assets in Tax-Advantaged Accounts
While the previous recommendations affected a large number of wealthy Americans, this one affects those of extreme wealth. As of right now, there are no limits on how much an individual’s tax-advantaged retirement savings accounts can accumulate, and for the most part, these accounts are fairly modest for a majority of people. The report proposed that there be a limit on all individual retirement savings accounts in excess of $10 million. To give you an idea of who this would affect, here is an interesting statistic from the report:
“The Government Accountability office estimates that 314 taxpayers have more than $25 million in IRAs, 791 have between $10 million and $25 million in IRAs, and 7,952 have between $5 million and $10 million in IRAs.”
The Commission aims to keep extremely wealthy individuals from using their tax-advantaged savings accounts as tax shelters and encourage them to use the accounts for their intended purpose – to fund their retirement.
At Walsh & Associates, helping our clients get the most from their Social Security benefits is an important part of our retirement planning process – so we consistently research and keep up to date on any proposed changes to Social Security that could affect those plans.
Have any questions? Do not hesitate to reach out to us! We’re happy to help with any of your social security or retirement planning questions.