Election Day is right around the corner and depending on the outcome, big changes could be made to how Americans plan for retirement. Both candidates running for president have proposed changes to the tax code, which could have major repercussions for retirement investments, the performance of the stock market, and taxpayer funded entitlement programs like Social Security and Medicare. Other measures including foreign trade deals, tariffs, and the handling of the COVID-19 pandemic will also affect the economic recovery for the next four years and the economic policies set in place thereafter.
Today, we will be analyzing four possible scenarios: two in which Donald Trump wins re-election and two in which Joe Biden becomes the 46th President. In each victory scenario, we will also discuss what could happen depending on the outcome of key Congressional races around the country. Put more simply, we will break down the possibilities that could arise for either candidate depending on whether or not Republicans maintain control of the Senate and the Democrats maintain a majority in the House of Representatives and how this could potentially influence your retirement saving strategy.
Joe Biden’s Tax Plan
Democratic candidate Joe Biden has outlined several specific policy proposals that could impact the way you save for retirement. First, he has proposed a tax increase for individuals making more than $400,000 per year that would include income taxes, capital gains, and payroll taxes, as well as limits on itemized deductions. Capital gains would be taxed at 39.6% on income above $1 million. Biden has also indicated he would be in favor of raising the corporate tax rate to 28% and increasing the estate tax by restoring it to its 2009 levels. Under this tax plan, higher income earners would certainly have less after-tax income available to save for retirement.
If Democrats can flip the Senate and maintain control of the House, all of these proposals are likely to become law. The bulk of these tax increases are aimed at moving more of the tax revenue burden to higher income earners, although the Tax Foundation believes these changes would ultimately lead to lower take-home pay for Americans of all income levels. If that prediction turns out to be true, it would mean workers have less money for retirement investing. As a result, this could incentivize those workers to invest in tax-deferred retirement savings vehicles like traditional IRAs. Higher capital gains taxes would also impact realized gains on certain assets like stocks and bonds which may push retirement phase investors into fixed-indexed annuities, such as the vehicles in the Crash Proof Retirement ® System in order to minimize the potential effect of tax increases.
If Republicans manage to hang on to their Senate majority and pick up seats in the House, they could potentially throw a wrench into any tax legislation introduced by Democrats. Any changes to the tax code introduced by Joe Biden or Congressional Democrats would likely hit a brick wall in the Senate and our current legislative gridlock would continue for at least two more years.
Donald Trump’s Tax Plan
During his 2016 campaign, Candidate Donald Trump was clear about his intention to significantly slash tax rates. After he was elected, Congress passed his signature legislation, the Tax Cuts and Jobs Act, in 2017. Even as the COVID-19 pandemic has changed our economic outlook, he has been reluctant to revisit these tax cuts, and if he is re-elected, he would be unlikely to make any changes — such as raising taxes. At the Republican National Convention, he even proposed expanding those tax cuts, although his campaign has been light on specifics. President Trump has mentioned a tax cut to boost take-home pay for workers, capital gains tax relief, and a potentially permanent reduction in payroll taxes. Because payroll taxes are the primary funding mechanism for Social Security and Medicare, Congress would have to find a way to make up for that decrease in revenue if those cuts became permanent. He has also shown strong support for enacting new tariffs on China and on companies who refuse to move jobs back to the United States.
If Democrats manage to gain control of the Senate and keep their lead in the House, it would be difficult for Trump to enact further tax cuts and will likely handcuff any of the President’s initiatives for the next two years. If, on the other hand, Republicans maintain their Senate majority and gain seats in the House, they would have more leverage in negotiating with Democrats to further cut taxes, including those on capital gains. It would also be easier for them to pass new tariffs on foreign countries and American companies who move jobs overseas. If President Trump’s previous tariff efforts are any indication, new tariffs could create volatility in the stock market that would have a profound effect on retirement accounts that are left at risk. Absent of any specifics about what these tariffs would entail, that effect is difficult to predict. This uncertainty might encourage investors to put their nest eggs into more reliable Crash Proof Vehicles to avoid another wide-spread economic disturbance.
Handling the COVID-19 Pandemic
When the World Health Organization declared COVID-19 a global pandemic, the stock market responded by dropping sharply. As businesses closed their doors and furloughed millions of workers around the country, the economic damage only worsened. Since then, markets have mounted a recovery and two of the indexes even reached record highs. Unfortunately, stock market numbers have largely failed to remain consistent and have experienced large swings of volatility despite economic stimulus measures and intervention by the Federal Reserve. Whoever wins the 2020 election, COVID-19 related policies are bound to become a major focus of any legislation moving forward into 2021.
President Trump has said repeatedly that he feels shutting down businesses for the COVID-19 pandemic was a mistake that devastated the economy. Joe Biden has taken a different stance, supporting non-essential business closures to prevent the virus from spreading. Owners of closed businesses and out-of-work employees would be supported significantly if Congress were to pass a second stimulus bill, including direct monetary payments to individuals, expanded unemployment benefits for those out of work, and more low-interest loans for businesses. Democrats have already passed some of these measures in the House but have met resistance in the Senate, citing issues about spending and where certain budgetary items would be spent. A Biden presidency with Democratic control of the Senate would mean that a large stimulus, or multiple if needed, could easily become law. Donald Trump has stated he supports another round of $1,200 stimulus checks but Congress has gone back and forth on other stimulus measures. If Trump remains President and the makeup of Congress stays the same as it is today, this legislative sparring would likely continue until at least 2022 and the possibility of a second stimulus bill would be up in the air. All in all, those in or near retirement will be stuck in the middle of Washington’s dysfunction while addressing these pressing matters, likely continuing the string of market volatility and abysmal interest rates for investors and savers.
Planning for the Future
The scenarios listed above are based on specific policy proposals by each candidate. While the outcome of the election and other factors like the COVID-19 pandemic are difficult to predict, it is important that retirement phase investors consider the possible outcomes when it comes to their investment strategy. Regardless of what happens in November, it is bound to impact the stock market and your retirement investments if they are left at risk.
At Crash Proof Retirement ®, our mission is to protect people in or near retirement from stock market volatility and help them develop investment strategies that work regardless of tax policies, economic performance, and the rise and fall of the stock market. Every American should know about the safe, proprietary alternatives to traditional retirement investing that are exclusive to the Crash Proof Retirement ® System and specifically designed to protect your nest egg. Crash Proof Retirement ® has protected the retirement savings of over 5,000 retirees around the country and their dedicated team of licensed retirement phase experts can protect your savings with their revolutionary Crash Proof Vehicles. To find out more, call 1-800-722-9728 or visit crashproofretirement.com to find out how you can protect your nest egg no matter who wins the 2020 election.