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Social Security Reduction in Debt Plan

Written By Brian Hicks

Posted April 8, 2013

This week, U.S. President Barack Obama is due to propose a new budget to Congress. In a move that will undoubtedly draw Democrat ire (at least in the short term), the deficit cuts planned include slowing benefit increases for Social Security, as well as altering the way inflation is accounted for when Social Security cost-of-living expenses are calculated.

Inflation adjustment for tax brackets will likewise be limited, meaning the tax bill for most Americans will go up slightly. Moving on to Medicare, the budget proposal includes cutting payments to drug companies and care providers, while increasing the burden a bit on high-income beneficiaries.

Clearly, the reason this proposal is extremely likely to attract criticism from Democrats is the fact that Obama is actually signaling specific entitlement benefit cuts—in other words, a capitulation to Republican demands.

However, the entire package proposal includes $2.5 trillion in deficit cuts from the budget deal constructed at the end of last year, meaning over the decade, total savings would be worth about $4.3 trillion or more.

As Bloomberg clarifies, that means the overall deficit would drop to 2.8 percent of GDP by 2016 and 1.7 percent by 2023—all of which means the nation would see debt as a share of the economy decline steadily, increasing fiscal sustainability.

Moreover, the budget plan does make room for spending increases on education programs, like implementing a new Pre-K program for four-year-olds across the country. Funding for this is scheduled to come via increased taxes on cigarettes and tobacco products.

Affecting Retirement

Some $9 billion is projected to come in over ten years since individuals will now be prevented from amassing in excess of $3 million in IRAs and other tax-retirement devices, Bloomberg reports.

The new proposal means the Consumer Price Index will now become the benchmark for future Social Security increases and other tax bracket adjustments. It would mean annual benefit increases will get smaller, thus saving nearly $130 billion.

However, it would also imply that more income would be subject to higher tax rates—meaning tax revenue increases of as much as $100 billion over a ten-year period.

By 2020, the Tax Policy Center estimates that over 75 percent of households will have seen tax increases amounting to $124 on average, while 98 percent of households earning between $75,000 and $100,000 annually will definitely see increases.

All of this does come at a favorable time; the S&P 500 is up 9 percent thus far in 2013, though it dropped a bit after the latest jobs report for March, which showed hiring was less than half as much as anticipated.

What Democrats are likely to be on the lookout for is how low-income, disabled, and senior citizen groups can be protected from the worst of the increases and cuts. In 2010, the President’s debt commission made a recommendation that would implement a flat-amount increase for SS recipients past their 20th year, while lower-income beneficiaries would receive a minimum guaranteed amount. Likewise, Democrats will likely seek to increase or improve SS terms for the disabled.

While the proposals contain some elements likely to sting Democrats and the left in the short-term, this may be a politically savvy move by the President—and not just for himself, since he’s already in his second term—that could ensure the longer-term viability of Social Security and Medicare, which are vital to the nation’s social structure.

By reaching out to the Republicans and making specific cuts to benefits, he may yet pull off a more bipartisan solution than this divided Congress has so far appeared capable of.

Protect Your Retirement

Meanwhile, as a responsible citizen, you should be working to ensure your retirement plans are shipshape. That means, at the minimum, keeping track of your expenses, savings, investments…everything.

It also means trying to maximize 401(k) and similar retirement accounts offered by employers, plus individual retirement accounts like the Roth.

Should your portfolio become fairly diversified—or if you’re lucky enough to have a rather fat account—tax professionals can help manage it all.

Long story short, it’s best to be prepared as thoroughly as possible in an uncertain economic and social climate. We won’t see the results of any political adjustments to Social Security and Medicare until at least a decade or two—precisely the timeframe many people should be preparing for now. 


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