House Committee Introduces Tax Reform 2.0
House Committee Introduces Tax Reform 2.0
On July 24, House Ways and Means Committee Chairman Kevin Brady, R-Texas, released a framework for what Republicans are calling “Tax Reform 2.0,” a package intended to build on the cuts enacted late last year. The bill would also make certain tax cuts (i.e., new individual rates, 20% QBI for small business entities) which are temporary and set to expire in 2025. Congress is soliciting feedback and engaging in “listening sessions” with interested parties who have constructive comments on the proposed legislation.
The tenants of Tax Reform 2.0 are to double-down on the TCJA by: (1) protecting small business and middle-class tax cuts with more permanent legislation; (2) promoting and incentivizing different forms of pre-tax family savings through a Universal Savings Account “U.S.A.” for retirement, health, and education expenses as an alternative to “mandates,” including expanded 529 education savings accounts with various new features, including allowing for pre-tax money to be used to pay off student debt; and (3) spurring new business innovation through incentives. Essentially, the Republicans seek to localize and incentivize everything the previous Democratic administration tried to centralize and mandate.
The Society for Human Resource Management (“SHRM”) was in favor of the expanded availability of health, retirement and education plans for small businesses that the legislation contemplates. Chatrane Birbal, Director of Congressional Affairs for SHRM, voiced his full-throated support for the measures, saying “"[p]ublic-policy efforts at both the federal and state levels should focus on expansion of and access to benefits, including retirement accounts and employer-provided education assistance.”
One bill that is causing a lot of chatter on Capitol Hill is the Retirement Enhancement and Savings Act (“RESA”) of 2018. In March, Senate Finance Committee Chairman Orrin Hatch, R-Utah, and ranking member Ron Wyden, D-Ore, co-sponsored the bill. RESA has a number of provisions, but a prominent feature is that it facilitates small businesses joining in on multiple employer jointly administered plans. Hatch thinks the bill is very important and shouldn’t be part of Tax Reform 2.0, because that would make it harder to pass through the Senate. SHRM also supports RESA.
Family Tax Savings Features of Tax Reform 2.0
Universal Savings Accounts
The idea of a Universal Savings Account that is funded pre-tax and grows on a tax-deferred basis is not new. This kind of incentive has been tried and has succeeded in other countries. It is a common policy prescription for a country in which the population is experiencing a “savings problem” and has high-levels of “consumer debt” to boot.
In Britain and Canada, they already have their equivalent of the Universal Savings Account (“USA”) and about 50% of their citizens contribute to one, which has done a lot to correct course and alleviate the savings problem these countries had when they experienced their own economic downturns around the time of the dot.com crash in the case of Britain and around the time of the Great Recession in Canada—while the U.S. is lagging in implementing a system to correct its catastrophic savings imbalance. The British and Canadian experiments with these accounts have been an overwhelming success in that savings rates increased dramatically after they were introduced. British Individual Savings Accounts (“ISAs”) and Canadian Tax-Free Savings Accounts (“TSFAs”) are popular with people of all ages and income levels.
Prime Minister Stephen Harper’s government implemented TFSAs have been around since 2009 and allow for tax-deferred family savings of $10,000/yr. Britain’s ISAs were introduced in April of 1999 and allow for tax-deferred family savings of about $23,000/yr. About 44 percent of Brits own ISAs and 55 percent of Canadians own TFSAs, with only 20 percent of Americans who own one of the traditional IRA or Individual Retirement Accounts offered under the U.S. Tax Code.
On top of the lack of retirement savings by Americans, families in the states have achieved downright terrible results when it comes to saving to accumulate wealth and when it comes to keeping debt in check. The United States savings rate is about 3.2% on average, and most households have an average consumer debt of 25%. So, the average U.S. household has consumer debt (excluding student loans, business loans, etc.) of about 8 times their net savings. Therefore, the average American family is insolvent or effectively bankrupt on paper.
The more you look at the situation, the America’s savings problem is truly dire. Only about 30% of families have retirement savings at all. Taking that into consideration, the average U.S. retiree has a total of between $3,000 and $8,000 saved for retirement (depending on their age group) and only about 40% of Americans even have a separate savings account. 75% of Americans having less than $10,000 of total savings.
Employee Benefit Research Institute (“EBRI”) estimates that Americans have a retirement savings deficit of $4.3 trillion, and that figure is expected to grow in parabolic fashion like a hockey stick as the Baby Boomers retire, the greying of America ramps up, and working adult wages increasingly cannot support the entitlement systems currently in place. Social security savings has not outpaced inflation and has been eclipsed by rising healthcare costs.
Social Security is not keeping pace with inflation and is thereby subject to dilution that makes the benefit virtually worthless by the time on retires. For instance, the Social Security Cost of Living Adjustment (“COLA”) in 2017 was .3% compared to 2.1%-4.0% inflation and year-over-year increases in medical care of 7% and increases in average housing costs of 5%. The Senior Citizens League recently sent a letter to every member in the U.S. Senate and House of Representatives calling for enactment of emergency relief to correct the social security payment regime/cost of living imbalance. “This year's zero COLA combined with next year's insufficient increase will have a devastating impact on the long-term adequacy of Social Security benefit for millions of Americans,” the letter said. The bottom-line is that the very idea of Social Security is flawed—there can never by sufficient redistribution of financial security payments to retirees funded by taxes unless there are a greater number of workers than retirees, unless costs of living remain static, and unless wages increase ratably (hasn’t happened since the 70’s)—and absent these conditions, the model can only run deficits.
The average social security payment to a retiree of $1,354/mo is insufficient to do much to keep a family’s economic ship afloat given the total economic picture for a retiree. The minimum medical costs for a retired individual are expected to be no less than $200,000 and a growing number of retirees, exceeding 20%, have not paid off student loan debt or student loan debt they’ve cosigned for. In a 2013 study, the average retirement account balance for those that had one was $59,000, about ¼ of the expected medical costs for that individual’s own healthcare spend in retirement. It is difficult to imagine a worse system or one that yields less desirable performance statistics than ours.
The Norway Model for Retirement
If you want to look at a retirement model that works, however, you can look to Norway. Norway was No. 1 in the 2016 Natixis Global Retirement Index, a data-driven ranking of retirement security in 43 countries. Why? First, most private-sector employees in Scandinavian countries (and most other industrialized super powers) have some form of pension, while only half of U.S. corporate workers have a pension, let alone the rest of the workforce.
“When I go to conferences in Europe and I tell them that half of American workers don’t have pensions they’re shocked,” says Anthony Webb, research director of the Retirement Equity Lab at the Schwartz Center for Economic Policy at the New School for Social Research.
Norway used to have Social Security, like the U.S., but found that it didn’t work and was too expensive. People retired, got into debt, got ill and died. The solution? Keep them working.
In 2011, Norway overhauled its private-sector pension system known as AFP in order to encourage older Norwegians to keep working. Prior to 2011 when Norwegians could retire at age 62 or wait until 67 and payouts were means tested, there was no incentive to keep working. With their reforms, means-testing was removed and older Norwegians could keep working (and paying taxes) while they were receiving their retirement benefits.
40% of U.S. workers claim Social Security benefits the first chance they get at age 62. But, the U.S. system has counter-productive penalties, reducing receipts for those that keep working. Called “progressive” or “flexible” retirement, these hybrid methods yield an increase in economic activity, reduce the strain on the system from the aging population, and is preferred by most older people.
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