The final report from the National Commission on Fiscal Responsibility and Reform was released today. Dubbed “The Moment of Truth”, the report has not yet been voted on by the full commission. Vote or no vote, it is all meaningless until Congress actually implements the recommendations. We are months if not several election cycles before that can happen. Nevertheless, it’s helpful for baby boomers to be aware of the thought processes being exercised in Washington and how they might affect our retirements.
In my opinion (and in no particular order), these are the specific proposals most relevant to me and us:
1. Cap tax-preferred contributions to retirement plans to the lower of $20,000 or 20% of income. Many upper middle class boomers are doing better than this with corporate 401k plans. This is a direct challenge to the super-savers.
2. All capital gains and dividends taxed at ordinary income rates. This would certainly affect retirement investing strategies.
3. No more itemized deductions. The mortgage interest deduction would be converted to a non-refundable 12% tax credit, with a $500K mortgage maximum and excluding second home mortgages and equity lines of credit. I think something will definitely happen in this area so get busy paying off that mortgage.
4. Repeal the Class Act. The Class Act is the new public plan for long term care insurance. It is so new, it hasn’t been implemented yet. Many observers believe the plan will be an economic disaster so the Commission wants to kill it before it even gets off the ground.
5. Restrict First-Dollar Coverage Provided by Supplemental Medicare Insurance. The Commission believes that health care costs are too high because Medicare members are too well insured and therefore over-utilize services. By limiting how much supplemental insurance can cover what Medicare doesn’t, the Commission wants us to feel more spending pain through cost sharing.
6. Decrease Social Security Benefits for High Earners. Right now, Social Security benefit levels are extremely progressive, meaning that the income replacement formula used to determine benefits is heavily weighted toward lower earners. The Commission wants to make the formula even more progressive so that high earners receive lower benefits as a percentage of their earnings. The Commission proposes that these changes be phased in over the next 40 years. Hopefully this means that baby boomers will not be affected.
7. Increase the early and full retirement ages. The Commission wants to gradually increase the full retirement age to age 69 and the early retirement age to age 64. By “gradual” I mean by 2075. I can’t see how this change will affect current boomers.
8. Create rules allowing for a phased retirement. This is very interesting. The Commission recommends that the SSA create rules that would allow retirees to claim up to 1/2 of their benefit at age 62 and the other half at a later age. This would be perfect for folks who want to phase out of working gradually rather than go cold turkey. Part of this recommendation includes elimination of the “claim now, repay benefits, claim again later” rule which the Commission deems a loophole benefiting high earners.
9. Increase the Social Security wage limit. The Commission wants SS taxes to be paid on up to 90% of income. Some form of this will happen but it will be phased in so is unlikely to significantly affect boomers.
10. Improve calculation of cost of living increases. Fortunately, the Commission understands that using the way that the standard CPI is determined for purposes of cost of living adjustments to SS benefits is bogus. This proposed change to a “chained CPI” would be beneficial to all retirees on Social Security.
What do you think of these proposals?
Here is a link to the full report.