Now that Mitt Romney is officially the Republican nominee, polls are showing a tight race between him and President Obama. Given the state of the economy and Obama’s relatively low approval ratings, Romney has a fairly decent chance of being sworn in as our next President in January. Regardless of how you feel about this possibility, you may be wondering what a Romney presidency could mean for you and your wallet.
I’m not a professional economist and I don’t want to wade into the debate between Keynesians and Supply-Siders as to how Romney’s plans will affect the overall economy. Nor do I want to make any judgments as to the wisdom of those policies. I’ll leave that up to you as a voter. Instead, I want to address how they could directly affect the financial future of you and your family.
Higher health care costs in retirement
Let’s start with the bad news. By now, you’ve probably heard about the budget plan of Romney’s running mate, Paul Ryan. While Romney hasn’t officially endorsed all the details, he’s made it clear his own plan would be pretty similar. The most discussed part of the Ryan plan is the proposal to block grant Medicaid to the states, gradually increase Medicare eligibility to age 67, and replace the traditional Medicare program for those currently under age 55 with premium support payments to help recipients purchase into either traditional Medicare or a private insurance alternative.
The goal of the plan is to reduce government spending by growing the block grants and the premiums support payments lower than the rate of health care inflation. The hope is that competition between insurance plans can hold down rate increases, but there is no guarantee that would work. If not, Medicare recipients would need to make up the difference out-of-pocket. The Congressional Budget Office has estimated that under a previous but similar version of the Ryan plan, the share of health care costs paid for by seniors would increase from 49% to 61% by 2022 or about $6,400 a year per person.
Both Romney and Ryan have also explicitly called for the repeal of Obama’s health care plan. This could mean lower health care costs for the young and healthy, but many of those retiring before they’re eligible for Medicare would find it harder to afford health insurance, especially if they have pre-existing conditions. In addition, there would be higher out-of-pocket prescription drug costs for Medicare recipients. (This is one of the reasons that after Obama’s health care plan passed last year, a Fidelity study reduced the estimate of how much a typical 65-yr old couple would need to spend on health expenses in retirement from $250k to $230k, but that number has since increased to $240k or $10,750 per year).
All of these changes add up to higher expected future health care costs in retirement for both Medicare recipients and for early retirees too young to qualify. What does this mean for us? Save more (the total of the CBO and Fidelity studies above is about $1k per month per person in total retiree health care expenses). If you have access to an HSA, it’s a great place to start since that money can grow tax-free for health care expenses.
The good news is that Romney’s tax plan would make that saving easier in several ways. First, repealing the Obama health care plan would eliminate the 3.8% tax on investment income for high-earners and could lower health insurance costs for many young, healthy people in the individual market. Second, he wants to cut individual income tax rates across the board by 20%. Third, he would reduce the top corporate income tax rate from 35% to 25%, which would increase the after-tax return on your stock investments. That includes stocks in your retirement accounts, which are shielded from taxes at the individual level but not the corporate level. Fourth, he would eliminate taxes on interest and investment earnings in non-retirement accounts for individuals earning less than $200k and couples earning less than $250k, essentially turning every investment account into a Roth account (but without the restrictions) for people below those income limits. Finally, you’d be able to pass on your estate to your heirs without having to worry about the gift or estate tax (and possibly save legal fees trying to avoid those taxes too.
Of course, there’s always a trade-off. To pay for his tax cuts, Romney has said that he would reduce tax breaks for high income individuals. While the specific breaks haven’t been specified, some of the ones that have been mentioned are the tax exemptions on municipal bond interest and life insurance cash values. After all, there’s not much of a policy benefit in encouraging these investments over others and neither are as popular as “sacred cows” like the home mortgage interest deduction.
Social Security reforms
While Romney hasn’t outlined a specific plan to reform Social Security, he has discussed indexing the growth of Social Security benefits for higher income workers under age 55 to price inflation rather than wage inflation. Since wages tend to rise faster than prices, this is another reason for higher income workers to save more. However, once again, Romney suggests a way to make it easier to save. In this case, he has mentioned the possibility of allowing workers to divert some of their payroll taxes into a private individual retirement account that would be invested in a combination of stocks and bonds that should grow faster than Social Security benefits. This could actually lead to higher retirement incomes for today’s workers.
So what’s the bottom line? A Romney presidency could mean you’d have to save more for health care in retirement, but some of that could be offset with private Social Security accounts and tax cuts that make it easier to save (as long as you don’t invest those savings in municipal bonds or cash value life insurance). In other words, we’d be relying less on government and more from ourselves and the private sector.
Next week, we’ll look at what a second Obama term could mean for your wallet.