Retirement savings outlook in a Clinton or Trump administration

The speeches are over, the national political conventions are history, and the road to the White House is entering the final stretch. It is clear from the candidates’ financial disclosures that both Hillary Clinton and Donald Trump are well set for retirement. What is less clear is how a Clinton or Trump administration would affect the general taxpayer’s retirement.

The candidates and their respective party platforms both support the Social Security system and want to strengthen it, but in very different ways.

The Democratic Party’s platform calls for protecting and expanding Social Security and fighting every effort to cut, privatize, or weaken it. This would mean going against many reforms that have been proposed previously, such as raising the retirement age, cutting cost-of-living adjustments, and reducing earned benefits. Clinton has proposed raising the cap on income that is subject to the Social Security tax (currently $118,500) and expanding the Social Security tax to investment income.

The Republican Party’s platform calls for “preserving and modernizing a system of retirement security” and states that saving Social Security is “our moral obligation to those who have trusted in the government’s word.” However, Republicans oppose tax increases and look to the power of the markets to create wealth and secure the future of the Social Security system. The platform calls for all options to be considered in preserving Social Security and notes that current retirees and those close to retirement can be assured of their benefits. Trump has stated that economic growth is the key to preserving Social Security, and that having a robust economy that is growing will help secure Social Security for the future.

The candidates and their party platforms provide little detail on positions related to private retirement plans, such as defined benefit plans, 401(k) plans, and IRAs. The Democratic Party platform calls for enacting legislation to ensure that Americans’ earned pension benefits will not be cut and proposes to pay for it by closing tax loopholes that benefit millionaires and billionaires. The platform also supports the Department of Labor’s (DOL) recently released fiduciary rule, stating that Democrats “will fight against any attempt by Republicans in Congress or on Wall Street to roll back the conflict-of-interest rule.” Hillary Clinton also has publicly stated her support for the DOL’s final fiduciary rule.

It is clear from an analysis of the candidates’ tax proposals, however, that retirement plans will be affected, regardless of whether Clinton or Trump is the next president. Both have indicated that they would propose limiting the tax benefits for certain income tax deductions and exclusions (not including charitable contributions), such as deductible IRA contributions and 401(k) plan exclusions from income.

Hillary Clinton’s tax proposal would increase taxes on high-income households and implement the “Buffet Rule” that would impose a minimum tax rate of 30 percent of adjusted gross income (AGI) on filers with AGI greater than $1 million.

In addition, Clinton would cap the tax value of specified deductions or AGI exclusions to 28 percent. The tax value of the exclusion for employee contributions would be reduced to a maximum of 28 percent for defined contribution retirement plans and IRAs instead of allowing taxpayers to exclude the contributions from the full 33 percent, 35 percent, or 39.6 percent that they would otherwise owe. Taxpayers in the 28 percent and lower brackets would be unaffected.

Another Clinton proposal would limit contributions to tax-favored retirement accounts, including defined benefit plans, defined contribution plans, and IRAs, once the total of all tax-favored retirement account balances reaches the level adequate to finance the maximum annuity currently permitted for defined benefit plans. Under the proposal, the account balance limit for an individual age 62 in 2015, would be approximately $3.4 million.

Both of these proposals were part of President Obama’s final fiscal year budget proposal, as well as previous Obama administration budget proposals.

Donald Trump’s tax proposal would reduce the current seven income tax brackets—which range from 10 percent to 39.6 percent—to just three, and dramatically streamline the process. Trump initially proposed three tax brackets of 10 percent, 20 percent, and 25 percent, but has since modified his proposal, adopting the same tax brackets—12 percent, 25 percent, and 33 percent—that House Republicans have proposed.

Like Hillary Clinton’s proposal, Donald Trump’s plan also would limit the tax value of certain itemized deductions and exclusions. Trump’s campaign has not specified how it would limit certain itemized deductions and exclusions, but the expectation is that the limitation would be set at 10 percent. This would reduce the tax value for those itemized deductions and exclusions for taxpayers in all three of Trump’s proposed tax brackets.

It is still two months before the presidential election, but it is very clear that regardless of who is elected, tax reform will be on the agenda come next January, and tax-favored retirement savings incentives will be under scrutiny. Stay tuned.