At the same time, many political pundits maintain that polling results reflect the public’s overall frustration with elected officials' inability to work together to solve a host of issues, including deficit spending and federal debt as warring political parties have been unable to strike compromises.
In addition to prolonged deficit spending and federal debt, Washington has been unable to resolve the potential funding crisis with Social Security and Medicare. The issue is critical for financial planners, as even wealthy Americans typically depend on Social Security income and Medicare during their golden years.
At the same time, advisors should be prepared to respond to clients’ inquiries about the outlook for retirement and medical government benefits. With that in mind, the potential impact of the elections on Social Security and Medicare is important to advisors.
By way of background, various reports have painted sobering pictures for the future of Social Security and Medicare. Both programs are expected to become insolvent slightly after 2030. Insolvency generally means that funding for the programs will be adequate for paying only a portion of benefits. For example, the Social Security Administration estimates that it will only have three-quarters of the funding it will need to pay Old Age, Survivors, and Disability benefits after the program becomes insolvent sometime between 2033 and 2037.
Perhaps the most visible debate over reforming Social Security centers on a prior proposal by Democrat Erskine Bowles and former Republican Senator Alan Simpson. The so called Bowles-Simpson plan sought to rein-in debt and government spending. Republicans, in theory, would support increased taxes in exchange for Democrats supporting cuts to health and retirement spending.
One proposal called for cutting Social Security benefits for well off seniors and moving the retirement age to 69 by 2075. It would also have reduced cost-of-living increases by using the chained Consumer Price Index. With the midterm elections being interpreted as a protest against dysfunction in Washington, some observers may be inclined to think that elected officials will be more likely to work together by striking compromises on long standing issues, including reforming Social Security.
Based on campaign rhetoric leading up to the midterm elections, furthermore, it appears that at least some Republicans are moving away from supporting cuts to retirement benefits. In Georgia, for example, the National Republican Campaign Committee ran an advertisement criticizing Democratic Representative John Barrow for supporting Bowles-Simpson because the legislation would raise the retirement age and cut Social Security benefits.
Conservative group Crossroads GPS, for its part, criticized Democratic candidates for supporting the proposal to raise the retirement age while a handful of Republican candidates vowed to honor retirement benefit promises to today’s seniors.
For Republicans who have campaigned on preserving Social Security and Medicare benefits, the challenge will be to address the long-term funding crisis for the programs without going against the party’s strong stance that opposes raising taxes.
Politicians, of course, do renege on campaign promises, but proposing to address the funding shortfall by cutting benefits would be highly problematic. The electorate is heavily skewed toward retirees whose wrath over potential Social Security cuts would be painful at the polls.
At the same time, many observers believe that President Obama would refuse to sign legislation that curtails Social Security benefits without Republicans agreeing to increase government revenues by increasing taxes. And even if Republicans push legislation forward to cut benefits with the hopes of overriding an Obama veto, it’s unlikely that such actions would be successful. A two-thirds majority of members in the Senate and the House is required to override a veto. Yet, next year, Republicans will fall far short of that in both chambers.
One proposal by liberal Democrats for fixing the funding shortfall is to increase revenues by requiring wealthy Americans to contribute more to the programs. Yet it’s unlikely that the Republican controlled Senate and House or Representatives would embrace such a plan.
Most observers maintain that politicians appreciate that the popularity and social importance of Social Security and Medicare means that letting the programs become insolvent isn’t an option. But with funding shortages not expected until after 2030, it’s likely that politicians will simply continue to kick the proverbial can down the road rather than expend political capital addressing the issue.
For advisors, that means little clarity over entitlement programs is likely in the foreseeable future. With that in mind, many advisors have little choice but to hope for the best and plan for the worst by encouraging clients to continue to save aggressively for their retirement years.