Looking Ahead: A Post-Election Retirement Savings Outlook

by: Dennis Zuehlke, Compliance Manager, Ascensus

With just weeks to go until the November 6 presidential election, and all the polls showing a tight race, nothing is certain except that—unlike the lottery—there will be a winner. There will also be a new Congress seated in January, made up of the winners of 33 Senate and 435 House races that are up for election.

After eight years of the Bush administration that saw major changes to IRAs, the past four years under the Obama administration have seen few changes to IRAs. So what will the future bring?

If President Obama is reelected, will he pursue the same retirement savings proposals that he announced as a candidate in 2008, and included in each of his budget proposals? If Governor Romney is elected, will the retirement savings focus change? What will the retirement savings outlook be in a Romney administration?

Much of the focus in this election is on Social Security, and while both candidates have taken positions on Social Security, they have provided few details. President Obama in his Fiscal Year 2012 Budget Proposal called on Congress to strengthen Social Security. The Obama administration has stated that any reform should restore long-term solvency and maintain disability and survivors’ benefits. The administration opposes any effort to privatize Social Security or reduce basic benefits for current retirees. Governor Romney has proposed preserving Social Security and strengthening it by slowly increasing the retirement age for future generations and adjusting future growth rates for those with higher incomes. Under the Romney plan, seniors and those nearing retirement would not be affected by these changes.

Neither of the candidates has provided specific details about their retirement savings proposals, but the retirement savings outlook post-election may not be shaped by the candidate’s proposals, but by the direction of comprehensive tax reform.

The United States is facing a fiscal cliff that includes large spending cuts and tax increases that will be automatically triggered starting in 2013. The Bush tax cuts will sunset, the Obama payroll-tax holiday will expire, and billions of dollars in domestic and defense spending cuts will take effect because Congress was unable to reach a deal to reduce the budget deficit. Republicans and Democrats alike want to avoid the fiscal cliff because the spending cuts are severe and would likely trigger an economic downturn, but they have been unable to reach an agreement. The task of avoiding the fiscal cliff now falls to the lame duck Congress, which could vote to temporarily extend the Bush tax cuts for another year, to allow the new Congress to take up comprehensive tax reform.

Regardless of the outcome of the presidential election, Congress will take up comprehensive tax reform next year, and retirement savings will be under the microscope as Congress looks for ways to reduce the size of the deficit and reform the tax code. Tax incentives for retirement savings cost the Treasury more than the deduction for home mortgage interest, and are second only to the exclusion of employer contributions for healthcare. Given the cost to the Treasury, tweaking of retirement savings incentives will certainly be considered as part of any comprehensive tax reform plan.

The groundwork for comprehensive tax reform has been laid over the past year, as both the House and Senate held hearings on tax reform and retirement savings. The House Ways and Means Committee held a hearing in early April on possible reforms to tax-favored savings plans that might be considered as part of comprehensive tax reform. Ways and Means Committee Chairman Dave Camp (R-MI) stated in his opening remarks that the purpose of the hearing was to explore whether, as part of comprehensive tax reform, various reform options could achieve greater simplification and increased participation, particularly by low- and middle-income taxpayers, and whether the current tax benefits are effective and properly targeted. The Senate Finance Committee in September 2011 held a hearing on tax reform and retirement savings, specifically looking for ways to encourage greater participation in 401(k) plans and IRAs. No action was taken after either the House or Senate hearing.

The 2012 presidential election will soon be history. If President Obama is reelected, will he propose the same retirement savings initiatives he proposed in his first term? If Governor Romney is elected, will he propose new retirement savings initiatives? Or, will the retirement savings outlook be shaped not by the White House, but by Congress as part of comprehensive tax reform? Stay tuned.