Stimulus Bill Projections May Impact Long-Term Savings

As industries across the U.S. anticipate the next round of pandemic relief aid, discussions are being held on Capitol Hill on potential changes that could affect long-term savings, including retirement.

As of this writing, negotiations among Republican and Democratic lawmakers remain aloof, even as their self-imposed August 7 deadline approaches. Lawmakers already have delayed their scheduled congressional August recess until a bill is passed, and negotiations could continue next week. President Donald Trump has also threatened to take executive action should Congress fail to deliver a proposal by the deadline. He has said his executive order would include payroll tax cuts, unemployment extensions and student loan repayment options.

Under the Democratic-backed Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, which passed through the House in May, the federal $600 boost in unemployment compensation would extend until January 31. Additionally, individuals who receive state-administered aid by this date—and not federal assistance under the Coronavirus Aid, Relief and Economic Security (CARES) Act—would be eligible for the payment until March 31. The proposal also includes union pension partition relief and a waiver for the reinvestment of 2019 and 2020 required minimum distributions (RMDs).

The Health, Economic Assistance, Liability Protection and Schools (HEALS) Act introduced by the Senate in July decreases the weekly unemployment benefits to start at $200 per week. By October, this boost would be replaced with federal payments that, when combined with state aid, would reinstate 70% of a worker’s past wages, with a maximum cap of $500 per week.

As both proposals would pump trillions of dollars into the economy to aid staggering unemployment figures, concerns of possible inflation years down the line have surfaced.

“We don’t know what the impact will be of all this stimulus and what the federal government is doing with liquidity in the market, but it is unprecedented,” says Jason Field, a financial adviser with Van Leeuwen & Company.

The general consensus is that continued weekly enhancements would push inflation up some, but because the U.S. has seen low inflation levels in recent years, there is no immediate concern. Inflation levels have fallen in the past year alone, from 1.6% in June 2019 to 0.6% in June this year, according to the Department of Labor (DOL).

While the proposed second round of $1,200 stimulus checks that would go to many Americans is anticipated to increase spending—and thus boost the economy some—Chad Parks, founder and CEO of Ubiquity Retirement + Savings, urges individuals to use the additional cash in two ways: to pay down credit card or student loan debt, or to add to a savings vehicle, such as an emergency savings account or toward retirement. As most individuals struggled to accumulate savings prior to the pandemic, using these dollars could add a leg up for many. “This has heightened the need for at least short-term savings, and especially a long-term savings plan in place,” Parks notes.

Another important factor in the discussions is the salary cutoff for individuals who receive a second stimulus check. While the previous threshold stood at $75,000 and phased out for those making up to $99,000, several lawmakers have said they want to reduce the cap to individuals making less than $40,000 a year. The significant reduction could place a limit on those expecting to shrink down debt or add the incoming aid to a savings option.

The answer on whether a payroll tax cut will be implemented in the new stimulus package is undetermined, but both Field and Parks say they believe it is unlikely to be included in the updated proposal. Excluding unemployed individuals, current employees would see a 6% to 7% reduction in payroll taxes under the proposals that have been floated in the negotiations, and that money would go toward their income instead, Parks explains. However, this can negatively affect Social Security, which receives these funds to process claims for retirees, he explains. “What you’re really doing is putting more problems onto Social Security, because those dollars are supposed to fund it,” Parks says.