The Edmond Sun

January 4, 2013

THE ASTUTE INVESTOR: Non-solution by Congress leaves taxpayers hanging

Nick Massey
Special to The Sun

EDMOND — Well, we survived the fiscal cliff fiasco. Now what? It appears that Congress must read my articles because they followed the script perfectly.

In my Dec. 8 Edmond Sun column I wrote, “Of course, I don’t know more than anyone else, but my guess is that at the very last minute, late December, they announce a compromise agreement claiming that they saved the economy and they’ll be all smiles and handshakes. It actually will be fairly minor and do nothing to solve the long-term problems. Those will just be postponed again. But the market will love it and spike to the upside because it means the party is back on — for now. By April we’ll be back to talking about the debt ceiling and Europe again. Then we get to repeat the anxiety all over again.”

“Someday Congress will have to set politics aside and finally deal with the problem. But that day is not likely now. It will finally happen when there is no other choice. In the meantime, buckle up for a wild ride.”

The truth is that nothing was changed and nothing was solved. Oh sure, we agreed to make some of those “rich” people, those making more than $400,000 a year, pay a higher income tax rate of 39.6 percent and 20 percent on dividends and capital gains, plus an additional 3.8 percent on investment income for those making more than $200,000 a year to help pay for the Affordable Care Act. But for a country running more than a $1 trillion budget deficit for the fifth year in a row, that is peanuts and does nothing to address the spending side.

Everyone who draws a paycheck will see their Social Security tax go up by 2 percent as it goes back to its normal 6.8 percent instead of the 4.8 percent we have seen during the past year. Of course, when you allow people to keep a little more of their money and then take it back, they don’t like it very much. Is it a tax-hike or not when you “temporarily” lower a tax rate and then move it back up? You decide. Either way, it doesn’t feel very good.

In any event, unless you’re making a lot of money, or have a lot of money, nothing much changes for you. But as far as the financial well-being of our country is concerned, nothing changed there either. It does nothing to address our growing national debt of more than $16 trillion. It doesn’t even make a dent in balancing the budget as we will continue to run $1 trillion plus annual deficits for years to come. And that’s if some of the economic growth projections, which are mostly “pie in the sky” wishful thinking in my opinion, are actually achieved.

There is, however, a real crisis brewing, and it ultimately will mean that taxes will rise for all of us — and not just those fortunate enough to earn more than $400,000 per year. And no, it’s not the “debt ceiling crisis” that you will soon be reading about. I’m talking about demographics. The House Republicans made a feeble attempt to make reform of Social Security and Medicare part of a fiscal cliff deal, but it never amounted to much. And that is a real shame, because it merely postpones the day that we deal with this crisis as a country.

The baby boomers are no longer the spending force they used to be. They are in a different stage of life now, with saving for retirement being a higher priority than buying that new house, car or large-screen TV they might have bought in years past. Meanwhile, millions of boomers are retiring every year and starting to draw on the Social Security and Medicare benefits they were promised.

And here lies the problem. We have a large generation leaving the workforce at a time when economic growth is weak and not looking to get stronger any time soon.

A demographic tsunami is coming, and it will be tall enough to scale even the highest fiscal cliff. As investors, this means that we need to plan on shouldering more of our retirement expenses while also suffering under higher taxes. This will involve planning — real, in-depth financial planning and honest assessments of expected portfolio returns. And it means starting now, if you haven’t already done so.

Let’s be clear here. We have a spending problem in this country far more than we have a tax problem. Until we address the spending side of the equation along with the income side, all of these “deals” will be meaningless. Eventually our leaders will need to have the guts to make the hard decisions and nobody will be happy with them. Only then will we make some progress.

I suppose though we should breathe a sigh of relief. After weeks of high drama, our fearless leaders agreed to a non-deal to resolve a non-crisis. Perhaps we should have been calling it the “fiscal slope” because there was no cliff. Now that we have postponed and bought time again, I hope this time Congress will use it wisely and begin addressing the problems instead of waiting for another midnight hour deadline to force another meaningless deal. Thanks for reading.

NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey can be reached at Securities offered through Securities Service Network Inc., member FINRA/SIPC.