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The Elections, the Candidates, Tax Policy, and Your Retirement

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April 11, 2016
The White House: Tax and policy implications for retirees

The tax and policy climate in Washington, D.C., will ultimately determine how well retirees—those in it now and those on the precipice—will financially weather their retreat from work life. But as we’ve seen from the blockade Congress has been under the Obama Administration, it is hardly business as usual on the Hill. Will that change with a new captain at the helm and, if so, how?

Given the wedge between Democrats and Republicans, coupled with the stronghold the GOP has on Congress now, it would appear that any changes a new Democrat at 1600 Pennsylvania Avenue would attempt to make would be for naught. That, of course, could be a different story if a Republican is elected and Congress keeps its party lines intact.

Let’s take a look at what’s floating around out there now, both from Obama and the candidates who hope to replace him.

Tax policies. This has been a battleground rich in artillery for both sides of the aisle. Democratic candidates widely see the current tax code as the cradle of income inequality that coddles the rich. To repair it, they are pushing to enact ways to have the wealthiest pay more—something the White House has been fixing to do throughout Obama’s entire eight-year term. They mostly favor changes and higher rates on income tax and capital gains, and hiking the current annual income cap of $118,500—to even as high as $250,000—that can go into Social Security.

Republicans, though their platforms vary, mostly favor a simpler tax code and even a flat tax, want to do away with the marriage penalty and the death tax, and cut corporate tax rates.

Raising taxes on the rich. This has been a popular theme among Democratic candidates for many years. Republicans, mindful of their perception as the party that favors the wealthy, according to a recent Pew Research poll, have talked this cycle about tactics to help the middle class. (Democrats and Republicans come together on their belief that government should do more to help middle-income earners, according to the Pew poll.) GOP contenders widely favor reducing the size of government, meaning they would reduce many taxes and programs that would cut federal revenues as much as $12 trillion over a 10-year period, according to tax policy research centers. Democrats, on the other hand, are looking to expand programs for the middle class and the poor at the expense of the wealthiest individuals through tax policies.

Either side of those policies would have lasting effects on retirees at all income levels.     

Social Security. This could be a ticking bomb for many retirees. Unlike other elections in recent memory, Social Security changes are a hot 2016 presidential potato. Why?

Because if nothing is done, the Social Security trust fund will run dry, according to government projections, and incoming payroll taxes will only be able to cover some 75% of benefit costs. That’s quite a pay cut.

For those living solely on Social Security checks—and it was never meant to be the only source of retirement income—that could be devastating as well as it can be for the average American whose Social Security payments represent about one-third of their income. That means all the dithering and procrastination surrounding Social Security the last decade needs to turn into action.

For the most part, Democrats have no interest in raising the full retirement age for Social Security and want to boost benefits. They would pay for that by raising the income cap, as noted above, and broadening the tax base. 

Republicans view it differently, with most backing a higher retirement age, slashing benefits for higher earners and jettisoning payroll taxes for older workers. Also gaining attention is the idea of allowing workers to invest a chunk of their payroll taxes in a personal account.

As disconcerting as these changes may be for those already living the retirement dream, take comfort in knowing that it’s likely you’re, yes, grandfathered into the rules you live by today. For those in the planning stages, as we’ve seen with recent changes to Social Security-filing policies, keep your eyes open. The rules can change without notice.

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