How the Bipartisan Panel Recommendations to Reduce the Budget Deficit Might Affect You

Category: Financial and taxes in retirement

The Presidential blue ribbon panel on how to reduce the deficit revealed a draft of its plan earlier this month. We don’t know about you, but any time a proposal attracts both howls from the rabid right and screams from the liberal left, it has to be a pretty good thing. The draft report prompted us to write this article on how its draft proposals might affect you as an older baby boomer (born before 1956). It also includes information about how you can interactively fix the budget yourself – courtesy of the New York Times.

Here are some of the key aspects of the proposal from the commission co-chaired by Erskine B. Bowles and Alan K. Simpson.
In our opinion most of the changes being discussed will have very little effect on older baby boomers:

Changes to COLAs – These might have a slight effect on you by reducing your future cost of living increases from social security or government pension
Delay of retirement age to 68 – In all likelihood this will not affect people within 10 years of retirement
Mortgage interest – Minor impact for most retirees, since our mortgages are typically either paid off or nearly amortized
Health Care – The panel recommends various reforms to try to reduce costs, including waste and payments to health care providers. These type of changes might have the biggest affect on current retirees
Taxes on Capital gains and Dividends – Depending on your financial situation, this could have an effect. But unless you have hundreds of thousands of dollars invested in stocks, it will be negligible
Cuts in military and domestic spending – Probably won’t affect you directly
Gasoline tax – The proposed 15 cent a gallon increase will have a have a small effect tempered by the fact that it might reduce consumption
Freeze federal salaries – Probably not a factor for you
Tax increases on high earners – Usually not a problem for retirees.

If you were in charge – how would you fix the deficit?
The NY Times article published a very interesting interactive exercise last week, “Budget Puzzle – You Fix the Budget”, that lets you play benevolent dictator. It provides cost estimates for the most important fixes – either in the form of tax increases or spending cuts. You fill in the grid with your choices to fix the budget by 2030 (each square is worth $1 billion and there are 1345 of them!): the result is your personal deficit reduction plan. One of the most interesting aspects of the exercise is almost immediately realizing that your choices quickly force you to reconcile your personal interests with those of the nation (one person’s wasteful loophole is another person’s vital stimulus for the economy)! For example –if you have a big mortgage, chances are you won’t be in favor of abolishing the home mortgage interest exemption. And if you don’t invest in the stock market – who cares about the capital gain rate or taxes on dividends. We recommend you go online and take the exercise, it’s a great civics lesson.

In a followup this week.“7,000 Ways to Fix the Deficit”, the Times reported that the puzzle had received over a million page views and 11,000 people posted Twitter messages about it. The most popular budget fix solution: reduce the size of the military to pre-Iraq conflict levels. The least popular – allowing the expiration of the Bush tax cuts for people with incomes less than $250,000.

Comments
Let us know how the exercise went for you.

Posted by John Brady on November 23rd, 2010
Comments (2)
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2 Comments »
Bridgette says

Why do the people with the toughest jobs (the military), lowest paid are always targeted first. More than 50% of military families have bad credit. This is due to the fact that they are under paid. And here we go again, attacking the people that protects our country. Gotta love the USA!!

November 27th, 2010 | #

Phyllis says

There are other places besides the military to cut costs.The military enables those of us at home to go about our lives in relative peace. I, for one, truly appreciate that. First of all, take back pay raises for Congress and Federal workers. We are business owners Most businesses have required paycuts, reduced benefits, as well as reduced workforce. There are many retirees that have 401K’s that receive dividends, raised dividend tax rates or capital gains taxes will impact these. So yes, it does impact retirees. Another thing, I emphatically do not like the cuts that are effecting Medicare. There are so many doctors that are not taking any more Medicare patients or dropping it altogether. Yes, that does effect us. Also, Federal workers as well as Congress need to have their retirement and health benefits scrutinized. They are more than we can afford. In addition, any reasonable way to cut costs without targeting just certain groups should be explored. If the deficit continues to grow, we will have tremendous inflation. That certainly effects retirees cash flow and quality of life at a very vulnerable time in our lives.

November 28th, 2010 | #

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