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RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

The electorate voted for change in the November election, and it could get it in spades when it comes to retirement policy.

It is far too early to predict the agenda President-elect Donald Trump will bring to the White House—or how closely it will align with the priorities of the Republican Congress, considering that many of his campaign positions did not conform to GOP orthodoxy.

But let us try to read the tea leaves despite the uncertain environment. A big push for healthcare reform is most likely, including changes to Medicare and the Affordable Care Act. Policy affecting retirement saving is another area that could see early action. Other areas worth watching include Social Security and long-term care.

A big caveat: this is not a forecast of what will happen in Washington. Instead, it is a rundown of possible retirement policy changes that will bear close monitoring between now and the midterm elections in 2018—a time when the political apple cart could be upset again.

Healthcare
Healthcare reform is near the top of the priority list for both the new administration and Congress. That is due mainly to the GOP’s promise to “repeal and replace” the ACA, President Barack Obama’s signature legislative initiative. This will impact millions of older Americans not yet eligible for Medicare (which is available at age 65). The Commonwealth Fund estimates that the percentage of uninsured Americans ages 50-64 fell to 9.1% this year, compared with 14% in 2013. That translates to 3.1 million previously uninsured people who now have health insurance via the ACA’s private exchanges and its expansion of Medicaid.

Will the Trump administration go for complete repeal of the ACA? How would Congress regard a move to end health insurance coverage for more than 20 million people? Or, will there be a move to replace the ACA with something different? Those will be key questions for pre-retirement folks who are counting on Obamacare to get them to Medicare. Some Republicans also have advocated raising the age of Medicare eligibility from 65 to 67. Absent ACA coverage, that could force even more older Americans to at least try to work longer to keep employer-based health insurance.

House Speaker Paul Ryan aims to package Obamacare reform with changes to Medicare. Ryan is a longtime supporter of something called “premium support”—a way of capping the government’s liability for Medicare outlays. Ryan has advocated a move to premium support for years, so its basic features are well known.

Currently, when you sign up for Medicare the government pays 70% of your expenses, and you pick up the other 30%. With premium support, you would get a fixed amount of money each year to buy insurance—probably choosing between original, fee-for-service Medicare or Medicare Advantage, the managed care alternative. The initial premium contribution could be tied to the current cost of the private policies where you live, and that figure would be adjusted annually.

The impact on seniors would depend very much on the devil of details. The key questions include the level of premium support provided; whether and how it varies by region; and whether it is designed to keep up with healthcare inflation, or transfers an increasing share of cost to you. In the past, Ryan has proposed tying the index to GDP growth plus a percentage point. So, if healthcare costs outstrip general growth of the economy, a rising share of cost would be borne by enrollees.

There are also questions about whether Medicare benefits would continue to be defined and guaranteed, as they are under current law, the strength of consumer protections, and the level of help available to help people shop.

Importantly, most of Ryan’s past proposals have called for grandfathering current beneficiaries and creating a new system for people who are younger than 55. So, it is possible that Medicare reforms would have a much larger impact on generations still relatively far from retirement age.

Trump promised not to “do a big number” on Medicare during the primaries, but he was largely silent on the topic during the general election. His transition website now promises to work with Congress and the states to “modernize Medicare, so that it will be ready for the challenges with the coming retirement of the Baby Boom generation—and beyond.” As healthcare policy expert Howard Gleckman notes, “modernize Medicare” is “Washington code” [for premium support].

Retirement Saving
The financial services industry is working to implement new conflict-of-interest rules that require all financial advisers working with retirement accounts to avoid conflicts and act in the best interest of clients. The fiduciary rule is the Obama administration’s most important retirement security initiative—a consumer protection that ultimately should be good for consumers. It will be good for the industry, too, because it encourages a shift from a sales culture to one of professionalism.

Notably, a poll by The National Association of Plan Advisors in the wake of the election found that nearly three quarters of advisory firms are staying the course in preparing for the regulation, until such point that something changes. And many large players are getting ready, no matter what. Bank of America Merrill Lynch, for example, plans to eliminate all commission-based options for its retirement accounts. Beginning in April—when the rule is scheduled for final implementation—commission-based IRAs will migrate to Merrill’s advisory platform, self-directed brokerage or its robo-advisory service.

The fiduciary rule could now be at risk of repeal. Trump took no position on the DoL rule as a candidate, but he has pledged to cut government regulation aggressively. And one of his advisers promised during the campaign to repeal the DoL rule.

Financial services lobbyists have been trying to spike the rule in the courts and through legislation; Obama vetoed Republican-sponsored legislation aimed at blocking it in June.

The DoL also has played a supporting role helping states create retirement savings plans for employees at companies that do not have their own workplace retirement plan. The aim is to expand workplace retirement saving coverage in the absence of federal action. Currently, 55% of workers have access to a workplace plan, according to the National Institute on Retirement Security—a number that actually has fallen from its peak of 62% in 2000. California recently became the seventh state to enact a plan—the largest by far in the nation.

Some of the state plans rely on an exemption granted this year by the DoL to the requirements of the Employee Retirement Income Security Act. Revoking that exemption would be a major setback for these plans.

Some ERISA experts predict the Trump administration will not take that step, but it is worth noting that the state plans have faced fierce opposition from some financial services lobbying groups, and Congress has tools at its disposal to stymie these initiatives.

Finally, keep an eye on tax reform. Trump has called for major cuts to tax rates on income from wages and investments. If enacted, that could have a major impact on incentives for workers to use tax-advantaged 401(k) and IRA accounts.

Social Security
Trump said during the campaign he does not favor cutting Social Security benefits. But the GOP leadership has long favored raising the Social Security retirement age, reducing cost-of-living adjustments, and at least partial privatization of the program by allowing workers to divert part of their payroll tax contribution to a personal savings account.

This year’s Republican convention platform stated that Social Security’s solvency problems should be addressed without tax increases. That is a de facto call for benefit cuts, because there are only two ways to solve Social Security’s financial problems: cut benefits or increase revenue. The platform also contained a vague call for privatization.

Social Security reforms will be needed—at some point. The program’s retirement and disability trust funds are forecast to be depleted in 2034. At that point, benefits would be cut an estimated 21%, unless Congress takes action. But the next action-forcing date is 2022, when Congress would have to revisit the allocation of revenue between the retirement and disability trust funds. Congress moved last year to beef up Social Security’s disability trust fund by reallocating funds from the retirement fund. That extended the disability fund’s solvency to 2022, when a new funding mechanism would be necessary.

Long-Term Care
Looking at the overall retirement policy landscape, financing long-term care for a rapidly aging nation remains the biggest unsolved question. The Congressional Budget Office estimates that by 2050, one fifth of the U.S. population will 65 or older, up from 12% in 2000 and 8% in 1950. Spending on the elderly by the federal government, states, and individuals on long-term care will increase from 1.3% of GDP in 2010 to 3% in 2050.

But our current system of insuring and financing long-term care is a rickety, patchwork affair. It includes private insurance, (which has not achieved wide market penetration), Medicaid, and a very limited amount of Medicare coverage.

Congress has not addressed the problem, partly due to ideological divides. Conservatives advocate greater use of private-market insurance solutions, while liberals advocate for stronger public social insurance.

The best solution may be a compromise hybrid of both approaches. The reports were developed by a nonpartisan consortium of researchers, representing an ideological middle ground. They call for streamlining and simplifying private long-term care insurance to make it work better, but also covering the most extreme risk through a publicly financed insurance program.

Like so many other questions about politics and policy, whether ideas like these might advance in Trump’s Washington is anyone’s guess.

 

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