While the CARES Act was a necessary provision to mitigate short-term financial pain, there’s also a real fear the allowances it offered may significantly impact individuals’ long-term retirement prospects. 

However, not all is lost, because retirement planning shouldn’t be the Wild, Wild West. Financial professionals are the buffer between irrational thought and financial planning decisions. The American College of Financial Services plays an important role in this relationship, educating financial professionals on many facets of retirement planning, including areas severely impacted by today’s public health crisis. 

Should my clients claim Social Security early? How can I talk to them about avoiding retirement plan withdrawals unless necessary? Where can they park money as a safe haven until the market recalibrates? 

Knowledge helps provide the expertise and confidence needed to answer these questions, and many more like them. This crisis will hit retiree and near-retiree clients differently depending on the makeup of their portfolio and their familial needs. Is long-term care on the table? Do they need to have an estate planning conversation? Again, there’s so much to know, and The College wants to be both the conveyor of that information and the platform for the big, impactful discussions the profession is having. 

There are several ways The College is living its mission in the retirement space during this unprecedented crisis: 

• We held four-part webcast series, Financial Planning During COVID-19, which included a full hour on tax and retirement planning strategies, as well as another session on reframing a goal-based wealth management plan under market stress.
• We continue to provide relevant, timely information through the Retirement Planning Series webcasts presented by the New York Life Center for Retirement Income. A recent session detailed Social Security’s perilous solvency. We assembled a lineup of thought leaders, including The College faculty Steve Parrish and Wade Pfau, along with Kent Conrad, former U.S. Senator and co-chair of the Bipartisan Policy Center Commission on Retirement Security and Personal Savings.
• Our esteemed faculty has been busy talking to journalists across America, and have been featured in over 200 stories reaching 792 million eyes through publications like The New York Times, The Motley Fool, Bankrate, Kiplinger, and so many more.
• We also surveyed Retirement Income Certified Professionals® (RICP® credential holders) on how their clients were handling market volatility. As you’d expect, the results of our second survey showed more client concern than a month earlier, yet a theme was still apparent: clients remained calm if advisors proactively communicated the importance of proper planning during market imbalance. 

We’ve been busy, but we’re nowhere close to finished. Providing a variety of free content through webcasts, interviews, surveys, and guest articles is one way to highlight the expertise of our brilliant retirement-focused faculty, led by RICP® Program Director Wade Pfau. We have a team dedicated to the data, cognizant of its framing in today’s environment, and uniquely focused on how behavior drives many of these important decisions. Retirement planning looks far different today than it did after the 2008 recession. I’m excited to determine how The College can play a part in how corporations, think tanks, and the federal government act on these issues. There will be another CARES Act. There will be emergency legislation that puts short-term interests over long-term outlooks. It’s a financial advisor’s duty to cut through the noise with sound advice and expertise, and The College will continue to play a leading role by delivering accessible, engaging, impactful insight and education.

The New York Fed published research on this topic by studying heterogeneity in economic data, to describe how the recent economic impacts differ by race and gender. To study heterogeneity is to study variance. Economic analysis is often based on averages, but an “average” or “typical” person often doesn’t capture the experience of minority populations. So, we need a different approach to studying the numbers, and related, to providing financial services. 

The Fed data tells a complex story. While the racial wealth gap narrowed between 2016 and 2019, economic insecurity among Black households remains, and is likely to worsen. Recessions historically, and today, have a larger impact on Black populations, and those communities recover more slowly. For instance, labor force data reveals divergence in Black and white labor force participation rates. While the situation during the pandemic has been bleak for all workers, there's divergence in the data: the unemployment rate rose significantly more for Black workers between the shutdowns of February to April 2020, and the recovery for white workers has occurred more quickly so far. 

The data story continues. It’s been well documented by multiple sources that COVID-19 case counts are higher among communities of color. But why? The NY Fed analysis of data from the early months of the virus’ spread reveals several factors play a role, to differing degrees. These include higher rates of essential workers, indoor crowding on public transportation as well as in homes, and access to healthcare, including pre-existing co-morbidities. The researchers determine that while some causes that contribute to disparate impacts, such as co-morbidities, are more complex to mitigate, others, like access to health care and home crowding, are amenable to policy intervention. 

Looking forward, how are we to address equality in economic recovery? And what's the role of business in the recovery? Several of my colleagues at The American College of Financial Services will offer ideas on these challenges in a multi-part insights series to be published over the coming weeks in the American College Center for Economic Empowerment and Equality®'s Resource Center.

What You Can Expect 

• Steve Parrish, JD, RICP®, CLU®, ChFC®, RHU®, AEP® writes about the disparate impacts of tax policy and whether the time is ripe to consider tax reform. He reflects on hot topics in tax, such as carried interest and the earned income tax credit, and their interplay with economic inequality. Professors Sophia Duffy, JD, CPA and Dan Hiebert, PhD, CFP® will discuss the role of financial advisors in addressing inequality. 
• On March 24, Duffy highlighted that financial planning is not just for the rich – in fact, low-income earners need strategies to protect their income and manage inter-generational wealth. She'll offer some guidance for such strategies. 
• On April 7, Hiebert focused on the small business sector – which comprises over 90% of businesses – and how minority-owned firms have fared poorly during the pandemic. He'll advocate that small business advisory services can complement individual financial planning strategies, particularly as many entrepreneurs rely on personal resources in business formation and sustainability. 

One conclusion to draw from these analyses is that those areas and people that are least able to withstand economic shocks, because of vulnerabilities prior to the pandemic, have felt the greatest impact and will likely experience the slowest recovery. Moreover, communities of color are also likely to trust the financial services sector, either because of past scandals which have disproportionately impacted them, or a dearth of products and services that are culturally relevant and addressing their needs. 

The financial services sector has a predominant role to play in helping underserved communities by narrowing the wealth gap and promoting economic justice.

This conversation came back to my mind after reviewing a blog series "Understanding the Racial and Income Gap in COVID-19" published by the Federal Reserve Bank of New York. This four-part series focused first on the role of mediating variables—such as insurance rates, co-morbidities, and health resources; then public transportation, and home crowding in the second post; social distancing, pollution, and age composition in the third; and finally the role of employment in essential services in explaining this gap. This series captured the point that if you think there’s a racial and income gap now, it’s likely to get worse because of the COVID-19 pandemic. This leads back to the family conversation on taxation.

Tax law discriminates. Presumably much of this discrimination is meant to fulfill salutary aspirations such as economic growth, encouraging retirement savings, and supporting low-income earners. Despite these goals, and according to the NY Fed, there’s a worsening racial and income gap. Now may be a good time to reexamine the value of these discriminatory tax provisions. Do they help – or do they hurt? Do they lessen the gap or exacerbate it?

Consider the wealthy. There are some tax rules that clearly favor the rich. An example includes carried interest for a general partner of an investment fund (think Warren Buffett declaring that he is in a lower tax bracket than his secretary). Carried interest, though a form of compensation for the general partner, is taxed at preferential capital gains rates. The argument is that general partners are similar to other entrepreneurs who are allowed to treat portions of their return as capital gains. A more recent example of a tax advantage targeted at the wealthy is the qualified opportunity zone tax deferral. In return for investments in “opportunity zones” (Census tracts identified for economic development), investors receive several tax benefits, including the ability to pay as little as zero taxes on potential profits. Before assuming this is one more example of the rich helping the rich, consider that this law was co-authored by Senator Cory Booker, D-N.J., who sees this tax incentive as a way to help disadvantaged communities of color grow through economic development.

Next consider the low-income earner. They, too, are the beneficiary of special tax provisions. For example, the IRS deems the earned income tax credit (EITC) “one of the Largest Antipoverty Programs,” with the average EITC amount being $2,461. This provision, along with the child care credit, lifted about 5.6 million people out of poverty, including three million children.

Another example of a significant tax break for rank-and-file earners is the saver’s credit, a non-refundable credit meant to incentivize low- and moderate-income taxpayers to make retirement contributions to IRAs and 401(k)s. This credit potentially allows a maximum in any given year of $1,000 on a retirement contribution of $2,000 (double those numbers for married filing jointly status). The challenge for low-income earners, however, is the complexity of these various tax breaks and these taxpayers’ limited access to financial advice. For example, determining eligibility for EITC requires a taxpayer to make over 20 separate determinations. This may explain why 20% of those eligible for the EITC fail to claim it. Similarly, lack of awareness of the saver’s credit likely contributes to the fact that only about 12% of eligible taxpayers actually claim it. 

What To Do 

Since it appears that tax policy is once again on the table with the new Congress and Biden Administration, this may be an appropriate time to consider tax reform. The first step in this process is typically undertaken through tax scoring. The score for any tax proposal is the difference between how much tax revenue the federal government is estimated to collect (usually over 10 fiscal years) compared to the revenue the government would otherwise have collected if the law had not been changed. 

Once scored, the debate then turns to whether the proposal will support government objectives such as economic growth, elimination of poverty, or, per the NY Fed’s blog series, narrow the income and racial gap exacerbated by COVID-19. Yet, there's an opportunity to go further. An added consideration should recognize human attitude and behavior. Tax reform should factor in: 1) how complex the law is to understand and 2) the law’s perceived degree of fairness to taxpayers. It’s not enough to say the tax provision will generate revenue and address the government’s targeted objective. It must also address what the provision means to the taxpayer – how it will be understood, and implemented. 

Consider a proposal in discussion that addresses Social Security underfunding. Since Social Security is largely funded through payroll taxes, an increase in payroll taxes has been suggested. The idea is to retain the current 6.2% FICA rate on wages up to the income cap ($142,800 in 2021), and then have the FICA rate reappear when income exceeds $400,000. While this proposal may score well for revenue purposes and help fund additional benefits for low-income retirees, it may fail the two behavioral tests I suggested above. First, it’s a form of a “tax donut” which is likely to confuse workers paying into FICA. You pay a tax; then you don’t; then you do again. Some refer to this as a 12.4% tax on the affluent – which it’s not. The second concern with this proposed tax is the perceived lack of fairness this idea may represent to both low- and high-income taxpayers. For high-income earners, this may be viewed as a blatant wealth transfer. 

Those making in excess of $400,000 will likely have maxed out how much Social Security benefit they receive at retirement. So, in their minds, they’re paying an additional 6.2% of earnings for no additional increase in benefits. Those in low-income brackets will likely cry foul as well. While they pay a 6.2% tax on all of their wages, high-income individuals (i.e. those making in excess of $142,800) pay a lower effective rate for their Social Security benefit because of the income cap. The fact that an additional tax will be imposed on those making astronomical wages may sound merely punitive rather than productive. Even the U.S. President’s salary doesn’t exceed $400,000. 

Perhaps we should not take a bad situation (hard to understand tax provisions that are underutilized) and make it worse. We’ll likely see a healthy debate in Congress over targeted new tax laws, and many Americans hope these proposals will address the ever-increasing income and racial gap. However, let’s keep the taxpayer in mind during this debate. These changes, no matter how laudatory, should be understandable and perceived as fair. Stated differently - let’s make it more likely that any family members going into the bar will argue about sports instead of tax policy.