Retirement policy wasn't on the ballot in last week's midterm elections. But the new political landscape could threaten the retirement security of middle-class households.
With Republicans in full control of Congress, expect efforts to cut Social Security and Medicare benefits. And more Republican-controlled statehouses mean more efforts to curtail state and local workers' pension plans. One positive note: Congress and the White House could find common ground on some promising ideas to encourage retirement saving.
Here are five policy areas to watch that could affect your retirement security.
The midterm results boost the odds that Social Security cuts will be in the mix if the brinkmanship over the federal debt ceiling or budget resumes.
Social Security does need reform. Its retirement trust fund will be exhausted in 2034, when revenue from payroll taxes would cover just 77% of benefits. Meanwhile, the disability program will be able to pay full benefits only through 2016. If Congress doesn't act, 9 million disabled people will see their benefits cut by 20%.
Republicans have advocated higher retirement ages, less generous cost-of-living increases and means-testing of benefits. Some Democrats have fought for expansion of benefits and revenue for the program but haven't been backed by President Obama or congressional party leaders.
How deeply could benefits be slashed? If previous conservative proposals are any guide, anywhere from 15% to 20%, with young people taking the biggest hit.
The GOP has pushed Medicare reform plans that would "voucherize" the program, replacing defined benefits with a set amount of cash that beneficiaries could use to shop for coverage in a Medicare exchange. That would raise premiums for seniors in traditional Medicare by 50% in 2020 over current projections, according to the Congressional Budget Office.
AFFORDABLE CARE ACT
The ACA isn't a retirement program, but it has helped older Americans by beefing up Medicare benefits covering older people who had trouble obtaining insurance and were too young for Medicare. This year the rate of uninsured 50- to 64-year-old Americans fell from 14% to 11%, according to the Commonwealth Fund.
The percentage would be smaller if the U.S. Supreme Court hadn't given states an opt-out option on Medicaid—it has been expanded in only 27 states and the District of Columbia. Meanwhile, congressional Republicans continue to threaten funding, and the ACA faces a new Supreme Court threat. If the court rules that tax subsidies on marketplace premiums can't be offered on the federal exchange, exchange insurance marketplaces will be on life support in all but 13 states with their own exchanges.
Republicans will control 31 governors' offices and 30 state legislatures, the most since the 1920s. That means we can expect the attack on public sector pension benefits to accelerate.
The National Association of State Retirement Administrators and the Center for State & Local Government Excellence reviewed pension reforms by 29 states this year and found reductions in annual benefits ranged from 1.2% (Pennsylvania) to 20% (Alabama); the average across all states was 7.5%.
A grand bargain on the federal budget could limit pre-tax contributions to 401(k) accounts, an idea floated regularly in tax reform discussions. And ideas aimed at helping lower-income households save for retirement could gain ground. The Obama Administration has asked Congress to create a national automatic IRA option and is rolling out a limited version called the MyRA.
Meanwhile, Senator Marco Rubio (R-Florida) has called for a government-sponsored 401(k)-style account for Americans who don't have a plan at work. He would like to open up the federal Thrift Savings Plan to private-sector workers. That's attractive because the TSP boasts low costs, a short and easy-to-understand set of investment choices and options to convert savings into an annuity stream at retirement.
Another idea I like: the "baby Roth." The plan's architect projects that an initial contribution of $500 to an infant's Roth IRA, with subsequent annual contributions of $250, would grow to $131,800 at age 65, versus $35,300 for an account started at age 25.
It's disappointing that few candidates campaigned on ideas that would help the middle class build retirement security. Democrats could have boasted about how the ACA is helping older Americans. And polls show that expanding Social Security and keeping Medicare strong are winning issues across partisan divides and demographic groups.