April 10, 2013

Critics Slam Obama Budget Over Entitlement Cuts, Retirement Savings Cap

Budget ‘does little to advance a grand bargain and/or tax reform,’ says Lieber of Washington Analysis

Stacks of the 2014 budget wait to be distributed. (Photo: AP) Stacks of the 2014 budget wait to be distributed. (Photo: AP)

President Barack Obama released Wednesday his $3.778 trillion spending proposal for 2014, a budget that he said was a “fiscally responsible blueprint for middle-class jobs and growth.” But critics are dediring it for cutting Social Security and Medicare benefits as well as capping individuals’ retirement savings in IRAs and 401(k)s at $3 million.

In releasing his budget, Obama said that the debate in Washington “has raged between reducing our deficits at all costs, and making the investments necessary to grow our economy. And this budget answers that argument, because we can do both. We can grow our economy and shrink our deficits.”

Obama said that he would not “do deficit reduction on the backs of the middle class,” and that he’d already “met Republicans halfway on the deficit.”

Reiterating comments made in his State of the Union address, Obama said Americans should ask themselves three questions every day: “How do we make America a magnet for new jobs? How do we give our workers the skills they need to do those jobs? And how do we make sure that hard work leads to a decent living?”

Key aspects of the budget to achieve these goals, Obama said, include:

  • "Responsibly paying" for investments in education, manufacturing, clean energy, infrastructure, and small business.
  • $1.8 trillion of additional deficit reduction over 10 years, bringing total deficit reduction achieved to $4.3 trillion.
  • More than $2 in spending cuts for every $1 of new revenue from closing tax loopholes and reducing tax benefits for the wealthiest.
  • Cutting the deficit to 2.8% of GDP by 2016 and 1.7% by 2023 with debt declining as a share of the economy, "while protecting the investments we need to create jobs and strengthen the middle class."

The budget also asks the wealthy to contribute to deficit reduction by:

  • Implementing the Buffett Rule by imposing a new “Fair Share Tax” on high-income taxpayers.
  • Limiting tax expenditures for the affluent by capping itemized deductions and certain other deductions and income exclusions at 28%.
  • Restoring the estate, gift, and generation-skipping transfer taxes to 2009 levels.
  • Taxing carried interest profits as ordinary income.
  • Eliminating a special depreciation benefit for corporate jets.

Ethan Rome, executive director of Health Care for America Now, noted in a statement that while the “good news” in Obama’s budget proposal was that it protects Medicaid and the Affordable Care Act, raises additional revenue and will help create jobs to grow the middle class, the bad news is that it includes “Republicans’ proposal to cut Social Security benefits” and “would make many seniors pay more for their Medicare.”

Joe Lieber of Washington Analysis notes that “liberals are especially concerned about the president’s inclusion of chained CPI," a different measure of the consumer price index, "as a cost savings measure.”

He continued, “This proposal would lower Social Security payments because the index rises at a slower rate than the current CPI measurement due to assumptions about purchasing.”

Using chained CPI would also “increase tax revenues because brackets would not rise as much over time,” Lieber says. Most Republicans, however, “support the measure due to the economics.”

Chained CPI would change the formula used to calculate the cost-of-living adjustment (COLA). The group Strengthen Social Security notes that the chained-CPI approach "would cut the benefits of all beneficiaries, including current retirees, disabled workers and others."

As to Medicare, the $400 billion in cuts to Medicare over 10 years proposed in the president’s budget are only $60 billion higher than the cuts he proposed in prior budgets, according to Washington Analysis. The additional $60 billion in cuts would come from clinical labs, Medicare Advantage plans and therapy services provided in physician’s offices. Analysts say there is less than a 50% chance of enactment of these cuts. The biggest cuts proposed in the budget would aimed at reducing the pharmaceutical industry’s statutory power to set the rates charged to Medicare for prescription drugs. On that front, it is projected to save $156 billion over 10 years.

There's also little chance that Obama’s budget will advance a "grand bargain and/or tax reform," Lieber says.

Obama’s budget plan also includes a new proposal that prohibits individuals from accumulating more than $3 million in individual retirement accounts (IRAs) and other tax-preferred retirement accounts, such as 401(k) plans. According to the Employee Benefits Research Institute’s (EBRI) IRA database, at year-end 2011, approximately 0.03% of the approximately 20.6 million accounts had more than $3 million in assets.

Brian Graff, executive director and CEO of the American Society of Pension Professionals and Actuaries, says the cap is a killer for small businesses.

“We were very concerned when last year’s budget included a double tax on contributions to 401(k) plans. Small business owners earning over $250,000 would have to pay tax on contributions in the year the contributions are made then pay tax at the full rate when contributions are distributed at retirement,” Graff said in a statement. “We were hoping this misguided proposal would be eliminated in this year’s budget, but instead the administration has kept the double tax proposal, and added another penalty for retirement savings.”

Graff said that if a small business owner has saved $3 million in his or her 401(k) account, they wouldn't be allowed to save any more—and would have to pull out and pay tax on any balance over that amount. “Without any further incentive to keep the plan, many small-business owners will now either shut down the plan or reduce contributions for workers. This means that small-business employees will now lose out not only on the opportunity to save at work, but also on contributions the owner would have made on the employee’s behalf to pass nondiscrimination rules.”

The proposed retirement savings cap in the president’s budget “is not closing a loophole and is not correcting some perceived abuse of the rules,” Graff adds. “Rather, small-business owners have been playing by the rules all along. They saved each year within federally dictated contribution limits and they provided matching and other contributions to their employees to comply with federally mandated nondiscrimination rules. Now these small-business owners are being punished for doing right by their workers and saving and investing successfully.”

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Read Estate Planning in the Age of Obama by William Byrnes and Robert Bloink on AdvisorOne.

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