How the debt deal may affect you
Look for changes to retiree income and health care, as well as impacts to homebuying, student loans, and the best places to invest your money.
This post comes from Catey Hill, Jonnelle Marte and Sarah Morgan at partner site SmartMoney.
After much drama, lawmakers have finally settled on a deal to raise the nation's debt ceiling. But for everyone from the retirees figuring out their future to students paying off their debt loads, the work and the headaches have just begun.
Financial advisers and other experts say the full impact of the headline-grabbing bill may not be known for weeks or months, especially with so many more details of the legislation passed Tuesday still being worked out and interpreted. But many think it's going to force many folks to rethink everything from their portfolio allocations to their tax movements.
Two areas of concern already have emerged: Social Security and Medicare beneficiaries have been spared so far, for example, but experts say seniors could still be hit in phase two of the deficit-reduction plan. Investors, meanwhile, worry that the deal will further drag down the sputtering economy -- and take the stock and bond markets with it.
From the standpoint of economic growth, the cuts are "one more thing going in the wrong direction," says Chad Stone, chief economist for the Center on Budget and Policy Priorities.
In general, most pros recommend against any knee-jerk moves. Still, there are certain areas that are more likely to be impacted than others. Below are seven -- from retirement planning to the fate of the dollar -- that could require new strategies in the months ahead. These are by no means definitive, but think of them as a starting point for how to adjust your portfolio and finances. Post continues after video.
Retirement planning. It's not what the bill did -- it's what it didn't do. Namely, it failed to extend the payroll tax cut passed in 2010, "which means unless separate legislation is enacted, workers will see their paychecks shrink in January when they have to start paying an additional tax of 2% on their earnings," says James Horney, vice president of federal fiscal policy for the Center on Budget and Policy Priorities. (The cut was a one-year relief measure, so take-home pay ought to be about where it was a year ago.)
In recent times, strapped workers have made up for their income shortfalls by taking out 401k loans: Vanguard reported a 14% uptick in 401k loans from 2009 to 2010; T. Rowe Price an 11% increase. And it might also be tempting to make up for that cash shortfall by contributing less to your 401k, but that can be a big mistake, says Michael Wall, founder of Wall Financial Group in Altoona, Pa. "It's a compounding effect, so not saving that extra money can have a big impact on your total retirement savings," he says.
Retirement income. For retirees who rely on municipal bonds for income, the cuts are a cause for concern. Any decrease in federal spending will mean less aid for states and local government -- making many already-weak states even more vulnerable to downgrades, budget deficits and layoffs, says Matt Fabian, managing director of Municipal Market Advisors, an independent research group.
And while the U.S. dodged a default on its debt, a downgrade by the major credit rating agencies hasn't been ruled out. Such a move would likely lead to lower ratings for several states that are dependent on the federal government, says Chris Ryon, managing director for fund company Thornburg Investment Management. Investors would be smart to spread their bets across all kinds of municipal bonds, focusing less on state general obligation bonds, which are more dependent on federal aid, and more on essential service revenue bonds, or those funded by revenue from water, sewer and electric services, he says.
The dollar. The resolution of the debt crisis brought an immediate rally in the dollar, with the U.S. dollar index rising 0.49% on Monday as a deal seemed imminent, but the rally was already slowing down by Tuesday morning, and the longer-term picture for the greenback isn't so great. For one thing, the deal doesn't appear likely to produce the kinds of savings that Standard & Poor's had said were necessary to avoid a downgrade, according to a report by Camilla Sutton, chief currency strategist for Scotiabank.
The work that remains to be done on the debt problem combined with weak economic growth suggests the dollar will continue to weaken through the end of the year, Sutton writes. That's bad news for travelers, but it could help some investors, says Kate Warne, U.S. investment strategist at Edward Jones. Investors who own stocks or funds in other currencies will see the dollar value of those investments rise if the dollar falls against other currencies, Warne says.
Student loans. The deal is good news for undergrads -- they can still get subsidized federal student loans, which allow them to pay no interest on their loans as long as they're currently enrolled in school more than half-time -- but not such good news for grad students, who can no longer get them as of July 1, 2012. It also went a long way toward funding the shortfall of the Pell Grant program, which helps low- and moderate-income students.
But "we're not out of the woods yet," says Pauline Abernathy, vice president of the Institute for College Access and Success. In fact, the Pell Grant program is still facing a $1.3 billion deficit, she says. To make up for this, Congress may consider changing eligibility for the grants from up to 18 semesters to just 12 semesters, or by increasing enrollment requirements, says Mark Kantrowitz, publisher of FastWeb.com and FinAid.org.
Mortgages and housing. The passage of the debt deal is likely to keep mortgage rates low for now, says Keith Gumbinger, vice president of HSH.com, a mortgage information website. But prospective homebuyers could soon find themselves with fewer incentives once the details of the debt deal are ironed out.
Lawmakers have been debating a simpler tax system with lower tax rates and fewer tax breaks that could include reducing the generous mortgage tax deduction as part of the long-term spending cuts that must be agreed on this fall, says Brian Gardner, senior vice president at Keefe, Bruyette & Woods. The takeaway for prospective homebuyers: Act soon.
"Right now you're working in known market conditions rather than tomorrow's unknown market conditions," says Gumbinger.
Your portfolio. Wherever the actual cuts come from, the debt deal is likely to be a drag on the economy: Most estimates suggest that the deal will reduce economic growth by about one-tenth of 1%. Investing pros say the deal itself doesn't radically change their asset-allocation recommendations, but reinforces the need to diversify your portfolio with international stocks and debt.
"In a world where growth seems challenged everywhere, we still think diversification is a good thing to do," says Warne, who recommends investors have at least 30% of their stock portfolio in foreign markets, mostly developed, with about a 5% allocation to emerging markets.
Stephen Wood, chief market strategist for Russell Investments, urges even more weighting to international: Investors should match their portfolios to the overall makeup of the global economy, which would mean keeping only about 45% of assets here at home.
Health care. Medicare will be protected in the first round of the debt deal, but it looks more vulnerable in phase two, in which a special joint committee is tasked with finding at least $1.2 trillion in additional savings. If the committee cannot do this, Medicare provider payments are scheduled to be automatically cut by up to 2%.
If this happens, consumers may find that some doctors will stop accepting Medicare patients and that hospitals will close units, says Mary Johnson, a senior policy analyst for the Senior Citizens League, a nonprofit seniors rights advocate. And in looking for savings, the committee may consider plans like lifting the Medicare eligibility age from 65 to 67 or increasing co-pay amounts, says Joe Baker, president of the Medicare Rights Center.
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I agree RE congressional wages. Why is it that the elected official earns more than the median salary of the constituency from which they were elected? Is it to attract the type of talent that got us into this mess?
Avg wage of Senate/House members is ~$175K/yr plus expenses and benefits bringing their total compensation to about $250K/yr. Voters average ~$35K/yr. Are these schmucks in office really 7x more talented then the average voter? Why do we only hear about cutting Soc. Sec. (which workers have paid for) but we don't hear about cutting congressional pensions (which workers have paid for)? How come we hear about cutting medicare (which workers have paid for) but we don't hear about cutting the Cadillac health care plan enjoyed by our elected reps but paid for by workers?
A blind person can see that the American Gvt. has declared themselves an elite ruling class excluding the rest of us from the riches that the world's most productive workers (Americans) can create.
I just feel really bad for senior citizens. It looks like they will be the worse off. I know many senior citizens that were already struggling with payments of medicine. Oil companies will continue receiving subsidies. Why is this country taking away from them, and not the other guys?
They can not, for the most part, go back to work. Some are, but some are too old and too ill. I am afraid that some senior citizens may get depressed, and loose all interest in things.
I want all to remember some history of Social Security.
Franklin Roosevelt, a Democrat, introduced the Social
Security (FICA) Program. He promised:
1.) That participation in the Program would be
No longer Voluntary
2.) That the participants would only have to pay
1% of the first $1,400 of their annual
Incomes into the Program,
on the first $90,000
3.) That the money the participants elected to put
into the Program would be deductible from
their income for tax purposes each year,
No longer tax deductible
4.) That the money the participants put into the
independent 'Trust Fund' rather than into the
general operating fund, and therefore, would
only be used to fund the Social Security
Retirement Program, and no other
Government program, and,
Under Johnson the money was moved to
The General Fund and Spent
5.) That the annuity payments to the retirees would never be taxed
Under Clinton & Gore
Up to 85% of your Social Security can be Taxed
Since many of us have paid into FICA for years and are
now receiving a Social Security check every month --
and then finding that we are getting taxed on 85% of
the money we paid to the Federal government to 'put
away' -- you may be interested in the following:
------------ --------- --------- --------- --------- --------- ----
Q: Which Political Party took Social Security from the
independent 'Trust Fund' and put it into the
general fund so that Congress could spend it?
A: It was Lyndon Johnson and the democratically
controlled House and Senate.
------------ --------- --------- --------- --------- --------- --------- --
Q: Which Political Party eliminated the income tax
deduction for Social Security (FICA) withholding?
A: The Democratic Party.
------------ --------- --------- --------- --------- --------- --------- -----
Q: Which Political Party started taxing Social
A: The Democratic Party, with Al Gore casting the
'tie-breaking' deciding vote as President of the
Senate, while he was Vice President of the US
------------ --------- --------- --------- --------- --------- --------- -
Q: Which Political Party decided to start
giving annuity payments to immigrants?
AND MY FAVORITE:
A: That's right!
Jimmy Carter and the Democratic Party.
Immigrants moved into this country, and at age 65,
began to receive Social Security payments! The
Democratic Party gave these payments to them,
even though they never paid a dime into it!
------------ -- ------------ --------- ----- ------------ --------- ---------
Then, after violating the original contract (FICA),
the Democrats turn around and tell you that the Republicans want
to take your Social Security away!
Now that I hope your really worked up, You now should realize that the government is stealing your money every pay period. You are taxed when SS is taken out of your pay and is taxed when you receive SS benefits. It's not even the governments money.
If folks can't earn a living there is no tax base to support retirees, the poor, and the unfortunate regardless of any fancy accounting tricks so where do the fancy accounting tricks get us?
Since we run ~$1T/yr in deficit and best case this bill saves ~$2.5T over ten years with most of that back loaded then if we make it 10 yrs w/o borrowing more we'll be ~$7.5T deeper in the hole (best case with everything going as planned). Since we're only raising the debt limit by ~$2.5T we expect to be having another debt debate in a year or two.
Cut 1 job from every office in government, all others take a $5 dollar a week paycut - done - budget balanced - took me 1 minute - and it was free.....!!!!!!!!
The net result will be a further devaluation of the dollar causing higher inflation.
I am a expat living in SA. I live down here because there is simply no way to afford to live in the US. Since I moved to CO the dollar has fallen by 30% against the Peso. It is an all time low and it looks like it will continue to fall.
I live on my SS which I paid into for 40 years. Now I am searching for some way to augment my measly income as I have in effect taken a 30% pay cut during the Obama administration.
It isn't all Obama's doing it is the doings of every administration for the last 60 years.
But Obama's "stimulus" QE2 and now QE3 have cut the value of the dollar more than anything before his term.
I didn't vote for Obama, I didn't vote for Bush in fact I haven't voted for a Republican or Democrat since I voted for Nixon in 72.
Neither if these parties represent anything but corruption, waste and special interest.
History doe repeat itself. To bad our government has become like banks and big business-Greedy.
None of these people will vote for anything that will hurt their pals income. Tax is just a big pool of money to spend.
Nixon was the last President with any guts. Everyone screamed with wage and price controls--Then the economy fixed itself. No politician today will mention this, the rule is tell the stupid people anything to get them off our back.
I pray the voting people of this country remember to fire everyone now in office.
It wasn't the Hoover Dam, WPA , SS or any of the other programs of the 30's that pulled us out of the Great Depression. It was WWll, a 90% tax bracket for the wealthy, frozen prices, the GI Bill, the Marshal Plan, higher education based on ability instead of money, consumer protection government spending and a host of other actions that promoted economic growth. History is important.
come on people, no one seems concern with 1.) the BILLIONS we give to all the other countries. 2.) the UNFAIR tariffs that are put on American products, also known as PROTECTIONISM, TRADE IMBALANCES ,china: about 270 BILLION ?? france :and limits on the amount of products coming in to there country (TARIFF: that is the import taxes that put on products coming into a country ) THIS IS A WAR ON AMERICA, AND YA`LL IN THE HOUSE AND SENATE AND YOU TOO PRESIDENT , THIS A GOVERNMENT FOR THE PEOPLE THIS WHERE YOU LIVE !!! IF anyone can forward this to Mr. Obama PLEASE do
my name isTom Donofrio
a military vet, and someone that wants this country to be here for my grandchildren
Exactly what are we NOT being told. Why are we in such a crisis when the trillions if dollars we "loaned" the banks to bail them out, SUPPOSEDLY, has been paid back - or was it ?????? Was it a "gift" for votes? I smell RATS here. They are called POLITICS. Democratic & Republican.!!!!!!!!!!
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