The U.S. Budget – What Will It Mean for Retirement Programs?

Earlier this week, I was fortunate to attend the “Retirement Income Summit” offered by Investment News. Sessions at the Summit included the expected topics: investments, taxes, client behavior, insurance, retirement strategies, etc. One of the sessions I found extremely informative was the Washington Insider’s View, presented by Jamey Delaplane of Davis & Harmon, a D.C. law firm I remember from my early actuarial career as very involved in helping insurers understand and implement tax strategies on behalf of the insurers they worked for and the clients served by those insurers.

It’s hard to avoid talk about federal spending these days, and much of Jamey’s presentation revolved around the retirement implications of the upcoming federal budget discussions.  Jamey referenced a survey by Matthew Greenwald & Associates on behalf of the National Institute on Retirement Security.  That survey found that “nearly 80% of Americans believe leaders in Washington do not understand how hard it is to prepare for retirement in this economy. Some 83% say government should make it easier for employers to offer pensions, and 81% believe that Washington leaders need to give a higher priority to ensuring more Americans can have a secure retirement.”

On the other hand, Jamey noted that with the current budget status, there are “no sacred cows”.  On the table are the mortgage interest deduction, reductions in the tax incentives to save for retirement and life insurance and annuity cash value accumulations, and of course Social Security and Medicare.  With respect to many of these tax benefits, he noted that many of the discussions focus on “upper income” Americans, with the possibility of phaseouts, additional taxes, and/or means testing.

He described the upcoming debt ceiling vote as “ugly and painful”, but believes that in the end the debt ceiling will be raised without a default in U.S. debt.

And so, the question is, what should you do in this climate of citizens wishing for additional government support of retirement programs, against the desire to balance an unsustainable budget deficit?  Well, I’d point back to the tax agreement reached at the end of 2010.  Remember that?  The discussion went down to the wire, the outcome was a bit surprising to some, and there were some total surprises included (such as the unanticipated and material changes to the estate tax law).  With respect to planning, it would be prudent to assume that some combination of fewer benefits and higher taxes is likely in the near to medium term.  Tax diversity – owning a combination of tax deferred and taxable assets – continues to make sense with talk of tax simplification.   However, it’s too soon to adjust current strategies without concrete guidance; as we know, individuals are affected differently by changes depending on their specific situations.

Overall, the message is, hold on for a bumpy ride, stay informed about proposals and provide feedback to your elected representatives, and be prepared to make adjustments when the environment changes.