How Obama's Tax Cuts Could Affect Your Retirement
On Sept. 19th, President Obama introduced his Plan for Economic Growth and Deficit Reduction, which includes a section called "The American Jobs Act," which proposes many tax cuts he hopes will help stimulate the economy.
Of course, sweeping policy changes rarely set out to change just one aspect of our economy. While the focal points of this plan may be about creating jobs and reducing the deficit, its proposed policies could affect more than just the unemployment lines; they could affect your retirement. (TO help you find a great place to retire, read Finding A Retirement-Friendly State.)
TUTORIAL: Retirement Planning
Changing the Tax Rates Pre- and Post-retirement
One of the tax measures discussed in the proposed plan is the limiting of the deductions and exclusions for those who make more than $250,000 per year. It is possible that this could have an adverse affect on the amount contributed to retirement savings by those who make $250,000 or more, since it changes the amount of income they can afford to save. In addition, it will change the tax burden of those who are retired and have pre-tax distributions of $250,000 or more, (some retirees in this income range, such as those with Roth IRA distributions, may be unaffected).
Lower Unemployment Means More Retirement Savings
From proposed payroll tax holidays to payroll tax cuts, the President's plan discusses many ways to reduce the tax liabilities of some workers, which in turn gives them more opportunity to save money towards retirement. Not only could this extra room in the average household's budget create the opportunity for greater retirement savings, it may also increase the number of workers who contribute enough to their 401Ks to earn their employer's matching contribution.
More than that, if the plan and its incentives, such as tax cuts for businesses that increase small businesses' access to capital and tax credits for hiring, are successful in stimulating employers to hire more people, then the unemployment rate will drop and formerly unemployed individuals will have access to retirement plans, and a paycheck, that allows them to make retirement savings contributions.
Changes to Medicare
One of the biggest concerns of pre and post-retirees is that President Obama's plan will adversely affect their Social Security or Medicare. The plan overview, posted on the WhiteHouse.gov website, specifically states that any bill proposing cuts to Medicare benefits will be vetoed. However, the plan does mention measures to ensure that Medicare benefits are handled more efficiently with overpayments, those payments given to Medicare service providers that are in excess of actual amounts owed, being reduced in order to cut overall spending. (For more on Medicare, read What Does Medicare Cover?)
Absent from the plan overview is any mention of Social Security benefits. However, in the actual 80-page plan document (also on WhiteHouse.gov), the potential for a national deficit controlling "debt cap" is introduced and that phrase may concern some current and future Social Security recipients. This debt cap would include deficit thresholds that, when triggered, would result in across-the-board spending reductions, but those reductions would not affect those enrolled in Social Security or Medicare.
Retirement Plan Boosts
While the plan overview says nothing of measures toward encouraging retirement savings, the full plan discusses the potential for the creation of new automatic workplace pension systems and doubling the existing small employer pension plan start-up credit, which is outlined in IRS Publication 560. Further, the plan discusses some shortfalls in military retirement plans and mentions reviewing them for potential reforms, to make them more generous to those who stay enlisted less than 20 years.
The Bottom Line
It is unlikely that one policy change, act or reformation attempt is going to solve all the country's economic problems. The plans that end up signed into law will have unique benefits and drawbacks and may cause problems that only hindsight will make visible. Hopefully, no matter what plan the country ends up with, pre and post-retirees will find a way to work within its policies and thrive. (To gain a stronger understanding of the effect taxes have on the economy, read Do Tax Cuts Stimulate The Economy?)