Yesterday I posted a quick blurb on an article that suggests retirement issues will stall in a gridlocked Congress. After reading Fortune’s Shawn Tulley’s article, “The cost of doing nothing for two years”, that news sounds a bit like telling Mrs. Lincoln they will only be serving white wine at intermission.
In 2010, our nation’s expenditures will exceed revenues by about 63%. This has help drive the total public debt to $9 trillion, 62% of GDP. This marks a 55% increase from $5.8 billion in just two years. Apparently, that is what happens when you “do something.”
“Doing nothing” consists of what the Congressional Budget Office, in its August report “The Budget and Economic Outlook: An Update”, identifies as the most likely outcome: extending the Bush tax cuts for all but high earners, indexing the Alternative Minimum Tax for inflation (as is tradition), and freezing discretionary, non-defense spending at 2010 levels.
The results aren’t pretty:
The deficit would rise an additional $3.5 billion between fiscal 2011 and 2013, and debt would ballon to 76% of GDP. Mr. Tulley notes that “[a]t that point, interest on the federal debt would absorb one dollar in every ten of spending, versus one in 20 today.” J.D. Foster, an economist at the Heritage Institute observes that “[y]ou’d get to 76% of GDP before the full gale winds of Medicare and Social Security arrive.” Thanks, J.D.
So how much debt can we have and still be fiscally healthy? David Walker, chief of the Peter G. Peterson Foundation, a think-tank that specializes in budget issues (not affiliated with the Major Major Institute of Silly Names), says “prudent budgeting” would require debt to be held to no more than 60% of GDP. Spotting ourselves the 2%, what would we need to do today just to tread water? According to the CBO, we would have to reduce spending by 21.5% ($730 billion a year), raise income taxes by over 80%, or enact some equally politically unattractive combination of the two that equates to 5% of GDP.
Let’s make the leap and assume magic pixies will not suddenly instill in Washington a sense of political courage and bipartisan cooperation absent for a generation, and flash forward two years to our likely future.
By 2013, we will still need to cut spending or raise taxes by 5% of GDP (though by then it will represent and annual $800 billion spending cut). We will also need to get rid of that extra $3.5 billion that accumulated while we waiting for “Decision 2012” to be decided. If we wanted to work off that little nugget in say, 7 years, Mr. Tulley informs us that would amount to another $570 million dollars a year. That would mean in 2013, we would need the fiscal equivalent of 7 years of a 38% spending decrease from current levels, followed by the fiscal equivalent of an indefinite spending freeze at 21.5% below current levels. The last bit of kosher sea salt for this wound, is that all of this would have to happen just as we begin seeing the first trickle of Baby Boomers impacting Social Security and Medicare.
So, if you are still reading, what does this mean for your retirement? Two things:
- That tomorrow’s tax rates will be higher than today’s is about the biggest “lock” in all of economics gambling. Talk to your advisor about converting your IRA to a Roth IRA. If you have asked in the past, ask again. There is no income cap for converting in 2010 and you have two years to spread the pain. (For those of you 59 1/2, the Small Business Jobs Act might allow you to convert some portion of your 401(k) to a Roth 401(k). More to come on that.)
- For those of you who manage your own fiscal house in a manner similar to how Washington manages ours, you don’t need to worry about retirement. You will be working, on average, 42.5 years after you die just to maintain your current financial position. Think about that.