42 INVESTMENT ADVISOR OCTOBER 2020 | ThinkAdvisor.comhold annuitizes its 401(k) balances as wellas 50% of its other financial wealth, taxesfor all groups, except those one percenters who are married, go up almost by 1%.
Overall, it rises to 6.5% (versus 5.7%).Singles as a whole would pay an averageof 8% (versus 6.5%) and those marriedwould pay 6% (vs. 5.4%).
Married couples in the top 1% seetheir tax rate drop to 19.1% from 21.0%.
In the highest tax rate quintile, thestudy states, it’s “important to considerthe economic circumstances.” They aremore likely than less affluent households to be married, with average combined Social Security benefits of $33,130,401(k)/IRA balances of $180,790 andfinancial wealth of $87,500.
The researchers note that these people would not normally be consideredwealthy, but that “most households donot have a lot of money in retirement.”
Why taxes in retirement matter.The study points out that even withoutconsidering taxes, “40% of households inthe top third of the income distributionare at risk of not being able to maintaintheir standard of living [in retirement].”So taxes do make a difference, especiallyfor those in higher income brackets.
That said, the decumulation strategies in the study did not yield much difference in tax rates. Further, this studydid not include state taxes, which couldraise tax burdens by 25%.
WOMEN & RETIREMENT
In a separate study, researchers looked at
why women get the short end of the stick
when it comes to retirement and outlined
policy changes to address these issues.
“Public policies that aim to boost women’s
status in retirement should focus on the
ways women participate in the labor mar-
ket and in wealth accumulation programs
as well as on specific retirement programs
and benefits,” authors Grace Enda and
William G. Gale wrote in the Brookings
Gender Series paper, “How Does Gender
Equality Affect Women in Retirement?”
There are several reasons for women
earning less over their lifetimes, includ-
ing interrupted careers due to caregiving
or childbearing, or part-time or low-
wage work to maintain flexibility for
those responsibilities, the paper states.
The median earnings of women whoworked full time were 81% of their malecounterparts’ in 2018. When controllingfor “age, education, job tenure, occupation, job title, location, and industry, thefigure rises to 94.6%,” the authors said.They credit the difference in those figuresto “social constraints and biases” pressuring women into lower-paying jobs.
Taxation also takes its toll, the studyexplained: “By taxing the first dollar of asecond earner’s income at the same marginal tax rate as the last dollar of theprimary earner’s income, the tax systemdiscourages work among married women.”Due to the reduction in lifetime wages,Social Security benefits are, on average, forwomen 80% of men’s benefits, the paperstates, noting that benefits are determinedby a worker’s 35 highest earning years.
The “motherhood penalty” is applicable here as well. According to theauthors, the first child reduces SocialSecurity benefits to women by 16%. Eachchild thereafter increases the gap by 2%.
Not working or reduction in working also can lead to lower payouts fromdefined benefit programs, such as pensions, or defined contribution plans, suchas 401(k) plans. Defined benefit plans typically favor long-term workers — a problemwhen women step out of the workforce forcaregiving. The authors found women aretwo-thirds less likely to be in a program,and those who are receive one-third lessin benefits than their male counterparts.
DC plan accounts can be moved
between jobs, and workers’ own contribu-
tions are immediately vested. That said,
Vanguard data showed “that in 2016 the
average account balance for women was
two-thirds the average for men, but almost
all of this difference was the result of wage
differences rather than saving behavior
given earnings,” according to the report.
Women also tend to live longer thanmen: In 2020, average life expectancy atage 65 is 21. 1 years for women and 18. 6years for men, the paper adds.
CLOSING THE GAP
Policies need to change, the report concludes. First, working should be mademore attractive to women, and thisincludes implementing “a robust federalpaid family and medical leave program[that] would let people save for retirementand earn Social Security credits whileproviding care to children and relatives.”As women make up a majority ofthose in the workforce not covered by anemployer-sponsored plan, adoption of anationwide automatic IRA program couldmake them “eligible to participate in a tax-preferred workplace retirement program.”
In addition, the social safety netmust be strengthened, the authors state.“For example, boosting SupplementalSecurity Income benefits to close thegap between Social Security income andthe poverty threshold could lift nearly5 million elderly people, a majority ofwhom are women, out of poverty.”
Increasing support from Medicare andMedicaid for end-of-life care could helpwidows. In addition, the authors suggest,there should be a reexamination andreform of divorce laws that could helpwomen be more adequately prepared tomeet their own financial needs.
Ginger Szala is executive managing editor ofInvestment Advisor. She can be reached email@example.com.