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Retirement Planning > Saving for Retirement

Interesting Times

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There is an ancient Chinese curse that goes, “may you live in interesting times.” To an American mind, this hardly seems like such a bad thing, we tend to equate the opposite of “interesting” with “boring.” The Chinese, however, have a longer view of things, and they have known enough turmoil to appreciate prolonged quietude when it happens. And so goes the curse; may your time be troubled and turbulent. Or, as an American might say, have fun with that.

But we do live in interesting times, indeed, and they have grown ever more interesting since the global economy went pear-shaped in 2007, went really pear-shaped in the later days of 2008 (thanks, AIG), and plunged us into the Great Recession which, experts say, is not likely to end until at least 2014.

All of this, coupled with years of foolhardy spending and taxation policy by a succession of presidential administrations (the problems here are simply too large to lay on any one president) have put Washington into a severe cash crunch, the likes of which I do not think I have seen in my adult lifetime. With political discord between the GOP and the Democrats approaching Balkan civil war levels, it is not that surprising that both sides fo the aisle are playing an unusually hardball game of chicken over the federal debt limit, which if not raised by August 2 will put the U.S. government into default. That is something nobody really wants; they just don’t want to get blamed for any solutions that prove unpopular come re-election time. And the truth is, this problem is so mammoth that the only solutions that have a chance of working are the unpopular ones. And so the game of chicken goes on.

Things got even more interesting today when the American Society of Pension Professionals and Actuaries issued a release that essentially accused the so-called “Gang of Six” (the half-dozen legislators who are trying to hammer out a budget reduction plan everybody can live with) of looking to reduce the tax advantages of retirement vehicles in a bid to cut costs immediately. The problem with that, ASPPA points out, is that doing so applies short-term thinking to a long-term problem.

According to ASPPA, the Gang of Six proposal would raise $1 trillion by making retirement savings more taxable, overlooking the fact that retirement vehicles tend to defer taxes not get excluded from them, so the government’s getting its money from retirement anyway. Why put the squeeze on people even more, and with a dollop of bad math, to boot?

ASPPA has a good point, but I think what is at stake here is a much larger issue. For decades, the life and financial planning industries have relied on god economies and reason to justify creating tax advantages for things like retirement vehicles and life insurance. Nobody ever expected the government to get into such dire financial straits, and to be in a situation where it needed to raise money any which way it could. Nobody ever expected Congress to be staffed so thickly with legislators that have just about zero financial acumen. (This is something the GOP is showing off in spades, but rest assured, the Democrats will get their chance, too. I am sure there are readers who feel that the mere passage of PPACA and Dodd-Frank are proof enough of that…) And nobody ever expected that the insurance industry, which for so long has flown under the radar of the kind of federal regulation other financial services industries must endure, would lose its stealth capabilities when it needed them the most.

The result? Well, in risk management, a disaster is when three things go wrong simultaneously, each compounding the effect of the other. And this is a disaster of the first order – a potential catastrophe, really – for the life industry. Should Washington find the collective will to seriously question the tax advantages of this industry’s products, then the entire buying proposition for insurance and annuities will have to be re-thought. And sadly, one thing this industry does not do well is adapt quickly to change. One hopes that Washington can figure something out regarding the defecit without having to pull the rug out from under the feet of the insurance world. But as the reputation of insurers continues to remain low, and as politicians get ever more desperate, the temptation to do something drastic to people whose influence only goes so far might eventually prove too strong with resist. I strongly suspect that what we have here is a keystone situation…once one tax incentive is successfully scrutinized, how much longer can any others remain in place?

The saving grace I see here is the Baby Boom, which needs as many tax incentives it can get as it lurches into retirement, still nursing the wounds its collective portfolios sustained during the recent market crash. The Boomers maintain considerable political capital, and whether they are liberal or conservative, they all want to retire, and any government plan that threatens that is sure to evoke a sense of political unity among a rather powerful bloc of voters. Will Washington realize that before it is too late? Hard to say. I’d like to think that reason will prevail as a workable solution is hammered out and finalized at 11:59 pm, on august 1. but these are mainly the same people who helped us into this mess to begin with, so perhaps even that will prove too optimistic.

Interesting times, indeed.


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