How would you fare with President Obama’s State of the Union middle-class economics proposals to “turn the page” if you’re 50 or older? It depends.
You’d be a winner if: you work for a business without a retirement plan or have a part-time job; are half of a two-income couple or plan to enroll at a community college more than half-time.
But your family might lose out if: you die owning investments that have appreciated significantly since you bought them.
Before I go into details about these proposals and offer insights about them from retirement experts, financial advisers and sharp Next Avenue bloggers (Kerry Hannon, Chris Farrell and Nancy Collamer), let me note one gigantic caveat: These are only proposals.
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Given the Republican majorities in the House and the Senate, odds are long that many (maybe any) will become law. Only two of Obama’s 18 State of the Union proposals last year have taken effect (job retraining and funding for research), according to the PBS NewsHour Morning Line blog.
That said, here’s a rundown of Obama’s State of the Union ideas with the greatest potential implications for people 50 and older, grouped into three categories — retirement, family matters and college:
The Auto-IRA: Last year’s State of the Union brought us the myRA, a “starter savings” account like a Roth IRA, for people whose employers don’t offer retirement plans. (Firms will start offering myRAs in 2015.) This year, Obama proposed the Auto-IRA: If you work for an employer with more than 10 employees but without a retirement plan, your firm would be required to automatically enroll you in an IRA. (You could opt out if you wanted.)
Alicia H. Munnell, director of the Center for Retirement Research at Boston College and co-author of Falling Short: The Coming Retirement Crisis and What to Do About It, is a fan of this idea. “The President’s Auto-IRA proposal addresses one of the major weaknesses in the U.S. retirement system — namely that about 50 percent of private sector workers have no employer-sponsored retirement plan at their current job. As a result, about one-third of households end up with Social Security as their only source of retirement savings,” Munnell says.
Chad Parks, CEO and founder of Ubiquity Retirement + Savings in San Francisco, Calif., thinks requiring employers to offer retirement plans could be a huge win for boomers who are working in their 60s by necessity, not by choice. The Auto-IRA would give “boomers in retirement an opportunity to increase their retirement income and decrease the chances of elder poverty,” says Parks.
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Retirement plan coverage for part-timers: Odds are, if you work part-time, you can’t participate in your employer’s retirement plan; only 37 percent of part-timers can. The President has proposed broadening retirement-plan coverage to part-time workers, so if you’ve put in at least 500 hours a year for three years or more (roughly 10 hours a week), your employer would be required to let you contribute to the savings plan.
Catherine Collinson, President of Transamerica Center for Retirement Studies, calls this “one of the most important ways to expand retirement plan coverage among American workers.”
Says Collinson: “With the aging of the U.S. population, part-time work is expected to increase as more workers may choose to work part-time to help care for aging parents. Extending eligibility to part-time workers can provide them with the opportunity to save for retirement in the workplace even when they’re not in a position to work full-time.”
But Neil Krishnaswamy, a certified financial planner with Exencial Wealth Advisors in Plano, Texas, says “whether this [proposal] would have a meaningful impact is debatable,” because “most boomers [who’d meet the qualifications for coverage] are eligible to make contributions to personal IRAs of up to $6,500 if they’re over 50 and get the full income-tax deduction.”
That may be true, but there’s no employer match with a personal IRA. And, as Next Avenue blogger and Unretirement author Farrell notes: “IRA participation is low once you leave the ranks of the well-heeled.”
Farrell calls Obama’s retirement savings proposals “spot on,” because they “represent practical steps toward increasing the number of employees saving for their elder years on the job.” He’s hopeful that Congress will enact them.
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“After years of reform proposals for widening participation circulating in Washington, D.C. — and mostly going nowhere — a growing desire among politicians to do something that boosts working and middle-income Americans could well tip the scales toward action. Let’s hope so,” says Farrell.
Closing the “trust fund loophole”: Krishnaswamy says this proposal — aimed at what Forbes’ Janet Novack calls “rich heirs” — would be “a game changer for estate planning” if it became law (odds currently seem slim).
Today, if you die and own assets that have appreciated in value since you bought them, your heirs would benefit from what’s known as the “stepped-up basis” rules. They’d inherit the assets tax-free; owing no capital gains taxes upon your death on the amount the assets grew while you held them. And if they sold the assets in the future, they’d owe taxes only on the gain since they inherited them.
Obama would reverse these rules, taxing the assets when you die if you left them to an heir (but not if you left them to your spouse or a charity).
For couples, taxes wouldn’t be due until the death of the second spouse and the proposal would exempt capital gains of up to $200,000 per couple ($100,000 per individual). In addition, couples would get another $500,000 exemption for personal residences ($250,000 per individual) and “tangible personal property” such as bequest or gifts of furniture or small family heirlooms would be tax-exempt (but expensive art and collectibles wouldn’t).
Novack wryly notes that the “trust fund loophole” actually has nothing to do with trusts. In fact, she says, closing it “could actually increase the tax appeal of trusts.” And Krishnaswamy believes that the end to cost-basis step up would reduce the incentive to hold onto assets until death “and may increase the incentive to make lifetime gifts instead.”
A new, simple tax credit for two-earner families: Obama proposed a $500 “second-earner credit” that the Administration says would benefit 24 million couples.
Details about income eligibility weren’t available, but Next Avenue personal finance blogger Hannon says the credit “could have a real impact on the finances of millions of two-career families, particularly when one spouse takes time out to care for an aging parent.”
Provide two years of free community college tuition: You’d have to attend at least half-time, maintain a 2.5 GPA and “make steady progress” toward completing your program. The “America’s College Promise” proposal to cut costs at what Barbara Vacarr, Director of the Encore Higher Education Initiative at Encore.org, calls “the undersung workhorses” of higher education, would also require participation from the states to take effect.
This idea got raves from several career and college experts I consulted, especially for people 50 and older.
“The President’s free community college proposal is targeted squarely at working — often older — Americans who want to go back to school and retool skills, says Mark Huelsman, Senior Policy Analyst at the Demos think tank.
However, Huelsman says, the proposal “wouldn’t necessarily eliminate student debt for community college students — you have to pay for living expenses, books, transportation, computers and so forth.” But eliminating tuition “in some cases could mean an extra $5,000 in the pockets of older Americans who want to return to school; that could be the difference between attending and not attending,” he adds.
Collamer, a career coach who blogs for Next Avenue’s Work and Purpose channel, applauds the proposal, saying: “Community colleges offer the most convenient, efficient and affordable way to retool for a new career or opportunity. They are especially valuable for older workers who can only take classes part-time and don’t have the desire to invest in a four-year degree program.”
Hannon believes the community college plan could be a boon to women who’ve taken time off from their careers to raise kids and now want to return to school.
“The problem is the cost of adding a certificate or a degree program is often prohibitive, particularly if you have a child enrolled in college, too," she says. "Anything that can lower the price tag even a little bit is a thumbs up.”