How Does the “Fiscal Cliff” Debate Affect Your Retirement Plans?

Retirement & Investing
on December 10, 2012

As the fiscal cliff talks unfold and stall in the nation’s capital, some issues are taken precedence over others. Two of the issues that have captured the attention of the White House, lawmakers and the press are tax breaks for the wealthy and the mortgage interest tax deduction. One issue that seems to have taken a backseat during the discussion is how the different fiscal cliff scenarios will affect retirees.

The retirement age for individuals in the United States is emerging as an item to be negotiated among the rest of the fiscal cliff proposed solutions. As expected, the debate has turned political. The White House wants to go in one direction and the Republican Members of Congress have different ideas. The basic premise of the fiscal cliff is that if the Bush-era tax breaks are allowed to expire without reducing government spending, the overall strain on the American economy will become a greater burden than the budget deficit.

A Change in Medicare

If the negotiations end up in an impasse, the tax cuts will be allowed to lawfully and automatically expire. Taxes will be raised by $600 billion, which would normally be good news for the Internal Revenue Service (IRS). The problem is that even with the increased revenue, a number of budget cuts will still be required. This includes Medicare, a benefit utilized by many retirees.

With increasing numbers of retirees using up Medicare benefits, there is a strong possibility that quality of care will be reduced, and that taxpayers will have to contribute more dollars to make up the difference. The number of physicians participating in Medicare could become lower, thereby affecting retirees directly.

Raising the Retirement Age

It is not difficult to find workers these days who should be enjoying their retirement instead. This has prompted some discussion on whether raising the retirement age could be an item worth discussing during the fiscal cliff talks. It is clear that raising the retirement age would alleviate the debt burden in the United States, but there are multiple social issues to consider.

The first and foremost issue will always be age discrimination, followed by retraining and unrealistic expectations of construction workers in their 60s. Until such issues are thoroughly discussed and resolved, raising the retirement age should not be considered. There will always be workers who are past their retirement age, but that does necessarily mean that they want to work.

Capital Gains and Dividends

Retirees who draw income from a stock portfolio could see their earnings taxed even higher thanks to the fiscal cliff. Long-term capital gains tax rates are set to go up to 20 percent, and if dividends are included the tax rate on a stock portfolio could jump to 43.4 percent for the wealthiest retirees.

The overall effect of failing to avert the fiscal cliff could bring investor apathy to Wall Street, thereby devaluing millions of stock portfolios around the country. This is actually the greatest concern, and the world got a taste of this scenario back in 2008 at the height of the global financial crisis when portfolio values were eroded in a short time.

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