It was my hope this week to follow up my May blog on how changes in Social Security might impact you with an update on how the debt ceiling and budget agreement in Washington would do the same.
One small problem, I was relying on Washington to actually have a deal in place by today. Serves me right, I suppose. Here we sit Wednesday morning knowing just as little, if not less, than ever. It’s still my humble opinion that some kind of deal will get done soon, but the details from there are anyone’s guess.
I’ll instead attempt to introduce some more of the latest proposals getting support in regards to this legislation. I hesitate to add to the load of information (and misinformation) on this topic. But, as these ideas get kicked around the floor of Congress, the nightly news and the internet, I think it’s important to provide a basic, centered background on what they might mean for you.
Social Security Cost of Living Adjustments
One targeted way to help slow the growing costs of Social Security is to change how it accounts for inflation. Currently, annual adjustments are tied to the consumer price index, or CPI. For example, with traditional CPI, if the cost of beef rises, the index rises accordingly. The push is to change this in favor of what’s known as a “chained” consumer index. In this case, if the price of beef rises, an adjustment is made to account for those that would simply buy cheaper cuts or choose another source of protein. This would lower the average rise in social security benefits from year to year. It is unclear how much support this has and it would not be sufficient to sustain Social Security for any length of time, but it is a term you might hear in the coming days and weeks.
Social Security Payroll Tax
Employees have been enjoying a 2% cut in the Social Security payroll tax over the last year and a half. While it seems counterintuitive when trying to determine how to get more money into the program, there is talk of maintaining that reduction and extending it to employers as a form of additional stimulus for the economy. Of course, this would likely be tied into the other Bush era tax cuts that are currently extended through 2012, setting up another major clash on tax rules not too far down the road.
Medicare Adjustments
Medicare is an area where details are few and far between as politicians remain reticent to tackle Washington’s most challenging program. The most commonly advocated tax reform measure tied to Medicare is limiting the current $1.1 million mortgage interest deduction ceiling to $500,000 and restricting the deduction solely to primary residences. This would be another drop in the bucket, but seems to have a fair amount of support.
In other words, the unknown continues to be the unknown. The good news is that most of the changes being considered are slow moving and will take 10-20 years to fully come into play. It will take much of the burden off anyone currently receiving benefits and give those who hope to in the future time to plan and adjust accordingly.
The best offense is still a good defense. Having a broadly diversified portfolio capable of responding to different market pressures and providing for what you need in the short term, maintaining spending patterns that are within your means, and combating future health care costs by eating well and staying fit are the best tools to combat whatever comes down the pike. The only other recommendations I have would be to ignore the noise as much as possible until firmer details present themselves and, if you feel strongly about it, put that venting to use by sending an e-mail to your representatives.
It is my sincere hope to have an actual update on what was passed rather than what might be passed in the near future and how the rising debt ceiling and budget agreement impact you.
Have a great week!
Chip Workman, CFP®
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