Friday, November 30, 2012

What, Me Worry About the Fiscal Cliff?

      A few weeks ago I wrote a piece about the fiscal cliff for the U. S. News retirement site. I saw that the so-called "fiscal cliff" was on the horizon and thought people should know about it. But in all honesty, I figured that the fiscal cliff was kind of a manufactured crisis and that it would go the way of Y-2K after the election was decided and politicians in Washington came to their senses.

     Now I'm not so sure. Perhaps I'm giving people in Washington too much credit.

     The term "fiscal cliff" is shorthand for a series of federal spending cuts and tax hikes that will automatically go into effect in January, if Congress and the President don't get together and act to override them. The measures originated in Congress last year as part of a compromise to pass the Budget Control Act of 2011.

tax hikes include ending the temporary reduction in the payroll tax (which funds Social Security), ending some tax breaks for businesses, changing the alternative minimum tax and inaugurating some taxes to start paying for the Affordable Care Act. They will also affect certain tax credits for college tuition and low-income families. 

     At the same time, the White House has detailed a whole list of budget cuts that will affect over 1,000 government programs, including $55 billion in defense cuts and $11 billion in lower Medicare payments.

     The fiscal cliff presents a giant air pocket for the entire economy. But there are a few ways in which it would affect us seniors in particular.

     For example, if you rely on stock or mutual fund dividends to help fund your retirement, you can expect to take a "pay cut," as those dividends, currently taxed at maximum rate of 15%, will be taxed at ordinary income rates, up to about 40%.

     Do you have any capital gains on investments you might have made five or ten or twenty years ago? Again, the tax rate would go up on them. The maximum tax rate on long-term capital gains (investments held longer than a year) will increase from 15% to 20%. Meaning, again, if you plan to cash in some investments to help fund your retirement, you will be forced to take a pay cut.

     And if you do own any investments, either in your IRA or elsewhere, the value of those assets will likely go down. In theory, the value of an investment consists of the after-tax sum of all future returns. If as most experts predict, the economy suffers after going over the fiscal cliff, then those returns will be lower. And to add insult to injury, those lower returns will be taxed at a higher rate.

     It only makes sense that the stock market, as well as private business investments, would deflate to a lower level. High-dividend stocks, defense stocks and banking stocks might be the biggest losers. But even more stable investments in health care, energy and agriculture would probably be a bad bet, since going over the fiscal cliff would leave everyone black and blue.

     And then there's your home. No one knows how the fiscal cliff will influence mortgage rates. But with less government spending, less employment, less after-tax income, and a less robust economy in general, it's hard to see home prices rebounding in any meaningful way. In fact, the fiscal cliff could rachet down value of your house yet again, as funds are squeezed out of the housing market to shore up the rest of the economy.

     And if all this isn't enough, there are the cutbacks. The government spends a lot of money, and if it spends less, then there will be across-the-board cutbacks to government programs, bringing hardships to beneficiaries as well as lower revenues to the thousands of companies that do business with the government.

     More particularly, the fiscal cliff aims to cut some $11 billion out of Medicare, in part by lowering payments to doctors. This could mean individual patients will have to pay the difference. Alternatively, it could put cost pressures on medical facilities, forcing them to reduce staff. Lower payments could also lead doctors to limit the number of Medicare patients they will see. The fiscal cliff could make it harder for some people to find a doctor, and could mean longer wait times and lower quality of service for those who do.

     There is arguably one benefit to the fiscal cliff. Social Security. No, your benefit will not get any higher. But the fiscal cliff automatically ends the 2% payroll tax "holiday" enacted under President Obama in 2010. Since the payroll tax funds Social Security, restoring the higher tax rate will repair some of the damage done to the funding of the program.

     But is that worth all the other pain and suffering that will be brought to you by the fiscal cliff? I doubt it.

      To be sure, there's no reason why Congress couldn't do both:  Reinstate the payroll tax to shore up Social Security and then also make some kind of deal to avoid all those other economic problems. But that would require them to grow up and act like adults. What are the chances of that? 

     P. S. To see what's currently going on in Congress, to witness all that your representatives are doing on your behalf, to view all the frenetic activity going on in Washington to save the situation, check out the Capitol webcam.



Douglas said...

I know this sounds cold and unkind but I say... "let's go over that cliff."

But I know the wrong people will be blamed and so I do not expect that to happen. Dammit!

Stephen Hayes said...

I think Congress and the White House are both posturing right now. I think we WILL go over the cliff and that's not necessarily a bad thing. The Republicans are never going to play ball here and allow taxes to go up on the uber wealthy, they just won't. So over the cliff we go and the unpaid Bush tax cuts are gone. Then Congress can lower taxes on the lower 98 percent and if the Republicans refuse they'll again be decimated in 2014.

Dick Klade said...

Yeah, I don't think going over the cliff would be so bad. It might be one of the rare opportunities to lower the inflated military part of the budget. Then other essential could be factored back in.

Don't doctors take a pledge to heal people who need healing? How in hell can they justify not taking a Medicare patient, or any other patient?

Olga said...

What happened to all the money? I looked into a "high-yeild" savings account at my credit union. A whole .3% until the account reaches 25,000, when it goes to .4%
And then I saw a commercial for a bank that was so sorry for not being able to give customers a return on their money that they were donating 5% of their profits to community programs this holiday season. Hello??

Bob Lowry said...

The part of all this that is overlooked is the irony of Congress and the president trying to undo something they agreed to just last year.

The whole point was a series of steps that no one wanted to have occur, so our brightest minds would figure out a compromise.

Now that Washington is faced with exactly what they designed to never occur everyone seems desperate to rewrite the "rules."

Personally I am sick and tired of never being able to make concrete investment and spending plans because everything is either a last minute patch or a "kick the can down the road" approach. Can't these bozos act like adults, agree on solutions and stick to their decisions?

Apparently not.

Barbara Torris said...

I have a there anything at all we can do about this? It is a bit like telling a 5 year old that their plane might crash in the ocean. They will worry but not be able to do anything about it.

If there is something we can do, let me know. Does out social media help? Can we tweet the legislature and tell them how worried we are? Will it do any good?


Janette said...

I've been writing my congressman.
Fix the TAX CODE!!!!! Now is the time since people are ready for just about anything.
I am ready for the cliff...not in a negative way. My understanding is that dividends and capital gains tax will go up ---but only on the people making more than $100,000 off of them. Sounds fair.
I also can see some of the cuts in Medicare...there are some major abuses out there for people who know the loops in the system (think power chairs). I find it amazing that a place that the average senior has a million in the bank has plenty of Medicare paid for power chairs--and yet the place I volunteer at has none!
AS for the military- start with the contractors!!!!! Get rid of most of them. Those are the Rumsfield cronies who are being made rich off of our troops!
I'm ready for the fall. It will be worth a spurt of unknown IF it really gets fixed (doubtful--- but there is always hope.)

Tom Sightings said...

I feel the frustration, but I think going over the cliff will be cutting off our nose to spite our face. And while I agree there isn't a whole lot we can do, it certainly can't hurt to talk about it and, yes, write your congressperson.

Raising taxes only on dividends and capital gains of over $100,000 sounds fair and reasonable to me, to tax the rich but protect retirees -- but unfortunately for us, the fiscal cliff affects everyone. The $100K limit would be a compromise that would have to be made.

And Olga . . . I feel your pain!

Linda Myers said...

We met with our financial planner today. One of the topics was the fiscal cliff. She said it might not be much of an effect, but it could be more serious. Wanted to make sure we have enough liquidity for a couple of years without having to tap investments (we're lucky to have pensions). She expects the market to come roaring back once the current foolishness passes.

schmidleysscribblins, said...

Having studied this problem for a long time, I am convinced (almost) that falling off the cliff would not be a huge problem.

1.Reinstating the payroll tax would help Social Security recover a bit;

2.Congress and the president could lower taxes next year if the expiration of the 'Bush' tax cuts occurs and we could call them the Obama tax cuts which would make the Dems look like tax heroes;

3.Various departments of government would be forced to examine how they spend money.

I still maintain the Bowles-Simpson plan is the way to go.

Washington Post has a piece on the impending fiscal cliff today (12/2).


As for Oliver Stone -- he ain't no historian.