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How will President-elect Obama affect your portfolio? Keep reading our special series for the lowdown.
Here are two questions for you:
- Who was William Ayers?
- How often did John McCain's votes support George Bush's policies?
Now here are two more:
- In what year will Social Security benefits paid exceed taxes collected?
- Which is more underfunded: Social Security or the prescription drug benefit for Medicare, also known as Part D?
My guess is, you knew the answers to the first two questions, but not the next two. Why? Because the campaigns and the media spent a lot of time on old acquaintances and soon-to-be-former presidents, and barely a whimper on two of the biggest items in the federal budget.
By the way, the answers to the second set of questions are:
- Social Security benefits will exceed dedicated payroll taxes in 2017.
- The unfunded future liabilities of the prescription drug benefit enacted in 2003 exceed the unfunded promises of Social Security.
Which means, in the opinion of this humble retirement newsletter editor, that the election glossed over a couple of the most important issues of our time. To some extent, it's understandable: The solutions will take sacrifice from a large part of the electorate, and "Sacrifice!" has never been a compelling campaign slogan.
But now that the campaign is over, let's take a look what President-elect Obama did propose to fix Social Security and Medicare, as well as other retirement-related changes we might see from the new administration.
Increase the payroll tax
Right now, paychecks are subject to a Social Security tax of 12.4%, up to $102,000 of income. Obama has proposed that the cap should stay in place until income exceeds $200,000 for single workers ($250,000 for married workers), at which point an additional 2% to 4% payroll tax would be levied.
Would it be enough to save the program? Probably not, especially if the economy remains weak and income growth languishes. As for other changes to the program -- such as cutting benefits or raising the retirement age -- President-elect Obama has said he doesn't prefer them, but "everything should be on the table," as he told ABC's George Stephanopoulos. Everything, that is, except any form of privatization or personal accounts. Given the recent bear market, however, there are probably a lot more people who agree with him on that one.
Obama has often cited the bipartisan Greenspan commission, which -- under the direction of you-know-who before he became chair of the Fed -- recommended in 1983 that payroll taxes and retirement ages be raised. Don't be surprised if Obama, like Reagan, also creates such a commission and implements most of the recommendations.
Increase Medicare benefits while lowering costs
Most of the adjustments proposed for Medicare involve the prescription-drug benefit, Part D. President-elect Obama has proposed closing the "donut hole," when drug costs between $2,510 and $5,726 must be covered 100% by the patient. That, of course, will add to the cost of an already alarmingly underfunded program.
How will Obama make up the difference? By using technology to cut health care costs, eliminating subsidies to private insurance companies, and by allowing the government to negotiate for lower drug prices -- something that the 2003 bill specifically prohibited. We'll see how pharmaceutical companies like Pfizer (NYSE: PFE ) and Merck (NYSE: MRK ) like that idea.
Again, these proposals will not be enough to close the gap, especially if more benefits are added. Of course, if Obama's other health-care proposals end up lowering costs, that will shore up Medicare, too.
If Obama gets in a commission-creating mood, and the first one is charged with shoring up Medicare, you'll know he's serious. It is, by far, more problematic than Social Security, and the solutions are much more complex.
Lower taxes for seniors
Obama has proposed eliminating income taxes for senior citizens earning less than $50,000. Who exactly qualifies as a "senior" isn't specified, but the Obama campaign claims this will save seven million seniors an average $1,400. Retirement security is certainly more attainable when you can shave $1,400 off your expenses.
That said, retirees already pay lower taxes because most of their income -- capital gains, dividends, Social Security, and perhaps distributions from Roth IRAs -- are tax-free or taxed at lower rates than ordinary income. Plus, people without jobs don't pay payroll taxes, and taxpayers age 65 and older receive a larger standard deduction. So, the tax bill for most retirees is pretty small already. But hey, every little bit helps.
Of course, nothing's free. Tax cuts that aren't accompanied by spending cuts mean that someone else gets a tax increase. So while this could be a break for today's seniors, it could increase costs -- and, thus, reduce money available for retirement savings -- for today's senior-wannabes. We shall see.
Boosts to retirement accounts
Two Obama proposals could increase the amount contributed to personal retirement accounts. First, he has proposed requiring the automatic enrollment of all employees into some kind of retirement plan, either the employer-sponsored retirement plan in the office or a direct-deposit IRA. Employees can opt out at any time. According to the Obama campaign, experts estimate that this program could boost the percentage of low- to middle-income workers who save for retirement from 15% to 80%. A boon for the likes of TD AMERITRADE (Nasdaq: AMTD ) , T. Rowe Price (Nasdaq: TROW ) , and Charles Schwab (Nasdaq: SCHW ) ? We'll have to wait and see how the program would be implemented.
The other proposal: Working families earning less than $75,000 a year would receive a 50% match on the first $1,000 contributed to a retirement account. Studies have shown that the presence of a match increases participation in 401(k)s, so it might have the same effect on those workers who currently don't have access to a plan at work.
And the rest …
During the campaign, then-just-Sen. Obama raised a few other issues that may enhance the retirement security of the average American, such as moving pension obligations higher up on the list of who gets what after a bankruptcy, as well as fighting harder against age discrimination for retirees who wish to work part-time in retirement. Perhaps this will persuade more companies to join the ranks of Home Depot (NYSE: HD ) and Pitney Bowes (NYSE: PBI ) , employers who have a reputation for accommodating more mature workers.
While Obama's proposals won’t provide retirement security for everyone, some people will benefit, particularly lower- to middle-income taxpayers -- often at the expense, it should be added, of higher-income taxpayers. Depending on your opinion -- and your income -- you may view this more positively or negatively. As a political independent, I see the pros and cons of just about everything.
But even if the president-elect is able to implement his entire wish list, it won’t save you if you’ve done nothing for your own retirement. You’ll still need to save a lot and invest well. Historically, the stock market performs better when a Democrat’s in the Oval Office. If history repeats itself during the Obama administration, a rebounding stock market may be the best contribution Barack Obama makes to Americans' retirement security.