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On J.P. Morgan Call, Optimism Reigns on Election, Fiscal Cliff

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J.P. Morgan Asset Management on Thursday held a conference call with its clients discussing the impact of the fiscal cliff and President Obama’s re-election on retirement.

On the call were Lynn Dudley, senior vice president for American Benefits Council and Bob Holcomb, executive director of legislative and industry affairs for J.P. Morgan Retirement Plan Services. Michael Falcon, head of retirement for J.P Morgan, acted as moderator.

Following the election, we’re left with a “status quo” in the House and Senate, Dudley said. “For all the money that was spent, the House and the Senate look the same on the outside, but not so much on the inside. The election changed the makeup from a religious, race and gender perspective.”

Rep. Mazie Hirono currently represents Hawaii in the House, but will be the Senate’s first Buddhist when she is sworn in. She is also the first Asian-American woman to be elected to the Senate. Furthermore, her replacement in the House, Tulsi Gabbard, will be the first Hindu to serve in Congress.

The change in the demographics of Congress is important because it “can change the way dialogue is conducted and change the shape of coalitions that are formed,” Dudley said.

Holcomb said the results of the election left him feeling optimistic. “It seems more policymakers have come to the realization that now is the time to roll up their sleeves and find good policies and solutions,” he said. “I’m cautiously optimistic going into 2013.”

In the lame duck session before the new Congress takes over in January, Holcomb sees one of three scenarios playing out regarding the fiscal cliff. One, and least likely, he said, was that policymakers would reach a bargain and “march boldly into 2013.” Another possibility was for short-term extensions based on a downvpayment or caps on deductions. The most likely scenario, he said, was that “we’ll go into the end December without anything happening and the new Congress will address issues retroactively.

Dudley said that conciliatory efforts were most effective in the post-election period. “A lot of the public doesn’t fully understand” the problems at hand, she said, and neither do a lot of members of Congress. “Congressional leaders know we have to do something.”

Regarding tax reform, Holcomb said that policymakers appear to have strong positions “on the surface,” but that “we’re also hearing underlying language that shows they’re willing to look at tax rates that are lower than those under Clinton or alternative ways of raising income.”

“The first thing they’re going to have to deal with,” Dudley noted, “are the Bush tax cuts. Whose cuts are going to be extended?” She listed a host of other problems that the new Congress will have to address: expiring tax provisions, how to offset sequester issues, automatic cuts to Medicaid and Medicare, the “doctor fix,” and the debt level for 2013. “A good guide is looking at what was offered last time but wasn’t accepted,” she said.

Holcomb agreed that the “key issue is the Bush tax cuts,” but thought it would likely be put off until next year. “It’s not something that gets hammered out between Thanksgiving and Christmas,” he said. He suggested a compromise similar to Sen. Chuck Schumer’s proposal, which raised tax rates at the $1 million level were a “face-saving way to address the issue.”

Dudley suggested the possibility of returning to higher top rates on ordinary income with lower rates on capital gains, or limits on the amount of deductions.

Holcomb listed examples of suggestions to limit deductions. The Simpson-Bowles plan included a proposal to cap deductions at 25% of income, Holcomb said, and Republican presidential nominee Mitt Romney has suggested capping deductions at a dollar amount.

The president himself has proposed to cap personal deductions at 28%, he said.

That idea is “getting a lot of play,” Dudley said. “It has the advantage of working inside the tax code and targeting higher incomes and is more popular with the public as a result.”

One thing that isn’t often talked about, Dudley said, is capping contributions in any sort of retirement plan. The impact of a such a move, Holcomb said, would not only be immediate, but long-term because it would apply to all contributions: employee deferrals and employer matches. “Nowhere do you see people talking about it on an after-tax basis. It appears participants could be paying as they go into the plan and at distribution.”

One of the difficulties in talking about retirement funds with policymakers, Dudley said, is that they don’t understand “money in retirement plan isn’t lost.” Holcomb agreed: “The money isn’t leaving the system, it’s being invested.”


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