Outside the Box: Why lawmakers keep trying to whack retirees
It’s one of the biggest, yet most undercovered stories of 2017: the attempt by the Trump administration and Republican leaders in Congress to take a wrecking ball to parts of your retirement. Part of the plan appears to involve you coughing up more money—in some cases a lot more—to ensure that your “golden years” are just that.
To tell this story, picture a three-legged stool. Retirement has often been compared with that stool, with a company pension comprising one leg, Social Security another and whatever you are able to save the third.
These days that stool is increasingly wobbly. Pensions have gone away for millions of Americans, making the other two legs—Social Security and personal savings—all the more important. Yet both today appear under more threat than ever before.
We recently told you of a warning—by none other than the trustees for Social Security, led by chief trustee (and Treasury Secretary) Steven Munuchin—that Social Security checks could be slashed nearly a quarter by 2034. Neither the House nor Senate tax proposals address this issue.
Read: Warning: Social Security faces a 23% cut (subscription newsletter)
So with pensions vanishing and Social Security looking at big cuts in the not-too-distant future, that would make personal savings more important than ever.
And yet the original tax plan backed by President Trump and House Speaker Paul Ryan actually proposed reducing what you can salt away each year in your 401(k) plan from the current $ 18,000 a year ($ 24,000 if you’re 50 or older) to as little as $ 2,400 a year. Under fierce pressure from a variety of groups, including asset management firms and labor organizations, lawmakers soon backed off.
That’s a relief for the 54 million Americans who, according to the Investment Company Institute, have 401(k) plans. But the fact lawmakers tried to ding them in the first place says a lot about how they think, and how much they really care about the little guy. Here’s what I mean: the median net worth of a member of Congress was $ 1.03 million in 2015—a figure that is certainly higher now, thanks to the rip roaring stock market. Let’s face it: your representative probably doesn’t have to worry about retirement like you do.
So while it’s good that Republicans backed off on their idea to crimp 401(k) accounts, retirees—and soon-to-be retirees—should not think they’re out of the woods. President Trump and House Speaker Paul Ryan are now proposing a new cash grab: wiping out the tax deduction for medical expenses (the Senate version of the tax bill proposes to retain these deductions).
This is a big deal. Investment giant Fidelity estimates that a healthy couple, with both partners age 65, will spend an average of $ 260,000 on health care. About a third of that is for Medicare premiums; the rest goes for things like copayments, deductibles, and drugs. Unless you’ve got an extra $ 260,000 lying around, being able to write off some of these expenses—which are only going to go up—can help maintain your standard of living.
Read: Here’s how the latest Republican tax plan could impact your retirement savings
In a letter to members of Congress, the AARP and 27 other organizations say: “For the past 75 years, Americans with high health care costs have been able to deduct medical expenses from their taxes. For the approximately 8.8 million Americans who annually take this deduction, it provides important tax relief which helps offset the costs of acute and chronic medical conditions for older Americans, children, pregnant women and other adults as well as the costs associated with long term care and assisted living.”
The mentality behind all this—threatened Social Security cuts, undermining 401(k) accounts, slashing health care deductions—was summed up pretty well last week by Gary Cohn, the president’s chief economic adviser. Appearing on CNBC, Cohn, the former No. 2 official at Goldman Sachs, referred to entitlements as “welfare,” and hinted that President Trump wants to do something about it. In using that word, perhaps Cohn misspoke, an excuse often wheeled out by politicians who say controversial things. But given the previous efforts outlined above to hurt retirees, I’m inclined to think otherwise.
Why on earth would Republicans even want to hurt people by lowering 401(k) limits and eliminating health care deductions, anyway? Simple: These things cost Uncle Sam billions in revenue each year, and we’re facing a growing fiscal crisis. We’re living longer, which means more demand for health care. Deficits are rising again. Entitlement spending—already about 60% of all federal spending—is exploding. The federal debt just passed the $ 20 trillion mark. Something’s got to give.
So there’s a legitimate fiscal angle here, I get it. But if that’s the case, then why are Republicans also proposing to negate these cost savings by, for example, repealing the estate tax? It’s a huge source of revenue for the federal government. The nonpartisan Tax Policy Center estimates that offspring of super-wealthy Americans could get a windfall of $ 174 billion in tax cuts over the next 10 years and $ 324.5 billion over the next 20. There’s a joke making the rounds here in Washington: the proposed elimination of the estate tax should really be called the “The Donald Jr., Eric, Ivanka, Tiffany and Barron Trump Relief Act.”
The bottom line for retirees, and anyone who hopes to become one soon: everything appears to be on the table. This means that you shouldn’t assume that your congressperson or senator’s got your back; you shouldn’t assume that you’ll be able to retire when you want, with the level of comfort that you’re expecting. You may have to work longer and/or lower your standard of living.