July 13, 2011

4 Key Retirement Issues to Watch in Debt Negotiations

Any fiscal scorecard should contain these important items

With negotiators on both sides of the aisle locked in what appears to be a free-for-all, caged death match with political opponents and their own bases, U.S. News & World Report’s Philip Moeller points to key issues on which advisors and retirees should focus in the debate over the nation’s debt and the deficit.

“Beyond the polemics, few people have paid a lot of attention to the plain truth that it will be impossible to make significant changes to the government's largest spending and entitlement programs in only three weeks,” Moeller writes. “These are fiscal supertankers, and you can't turn them around quickly. Making major changes to Medicare, Medicaid, and Social Security are complex processes that require thorough deliberation.”

He then goes on to name the four key items that seniors should have on their “fiscal scorecards.” They are:

1) Cost of living: “Annual benefit changes tied to inflation are very important to Social Security recipients,” Moeller notes. “Changes in consumer prices also play a big role in annual adjustments to Medicare insurance premiums. And they are widely used to set annual changes in tax deductions and many other federal programs. Inflation, however, can very much be in the eye of the beholder.”

As Moeller explains, “the measures of consumer price changes used in current benefit calculations are more expensive than another measure that is gaining favor.” That measure, he adds, is the "chained" consumer price index. Briefly described, “Traditional CPI measures track the same items over time. If beef becomes more expensive, the CPI rises. However, in the real world where consumers live, rises in beef prices cause many consumers to buy less red meat and more cuts of less expensive meat.”

Not surprisingly, he writes, “senior groups aren't fans of the chained CPI. They argue that the current COLA has understated real price increases for seniors, particularly when it comes to prescription drugs and other healthcare costs. The chained CPI would be even worse.”

2) Means Testing: “Attaching benefits levels to measures of income and wealth has long been a popular method of reining in entitlements costs without punishing lower-income Americans," Moeller writes. “Don't be surprised to see lower benefits and higher taxes (sorry, I mean revenue enhancements) for wealthier Americans in any number of program changes.”

3) Medicare benefits could be capped for wealthier people: “The size of some tax benefits could be similarly capped. The most commonly advocated reduction is the current $1.1 million ceiling for mortgages eligible for the interest-deduction expense on federal taxes. Cutting it to $500,000 and restricting it to the taxpayer's primary residence has been widely advocated.”

4) Social Security payroll taxes: "There is a lot of support for extending the 2% cut in the employee payroll tax for Social Security, which has reduced the employee tab for Social Security to 4.2% of payroll, up to annual earnings of $106,800 a year,” Moeller concludes. “Weak job markets have prompted support for cutting the employer share of the tax by 2% points as well. These increases would be only for a single year and would lapse at the same time as the extension of the Bush cuts in income tax rates. Then, depending on 2012 election results, expect another huge tax fight.”

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