With the party conventions now over and the presidential election cycle in full swing, you may be wondering what the candidates’ plans might mean for you personally. Last week, we looked at how a Mitt Romney presidency could affect your wallet and this week we’ll do the same for a second Barack Obama term. Let’s start with the good news:
Increased health care benefits for retirees
Unlike Romney, President Obama wants to complete the full implementation of his health care plan. There are several benefits, especially for retirees. First, if you’re retiring too early to qualify for Medicare at age 65, the health care plan will forbid health insurance companies from discriminating against you based on pre-existing conditions and will limit the ability of insurers to charge higher premiums based on your age. In addition, if your income is low enough, you may qualify for premium subsidies.
For those already on Medicare, Obama’s plan increases Medicare coverage to include many preventative care services like annual physical exams, mammograms, and colonoscopies without requiring any out-of-pocket costs. Second, the gap or “doughnut hole” in Medicare coverage, where seniors are responsible for 100% of their drug expenses, will gradually be reduced and completely closed by 2020. Overall, a Fidelity study concluded that a typical 65-year-old couple without retiree health insurance will need $20k less in savings to cover health care costs in retirement as long as the law remains in effect.
Targeted tax cuts
Unlike Romney’s across-the-board tax cuts, Obama’s proposals are more of a laundry list of narrower cuts. He would retain the Bush tax cuts (currently scheduled to expire at the end of the year) for individuals making under $200k or couples making under $250k, suspend mandatory retirement plan distributions for people over 70 ½, permit taxpayers to withdraw up to $10k from their retirement accounts penalty-free, provide low-income wage earners with a $1k tax credit to offset Social Security taxes, eliminate income taxes for seniors making less than $50k, double the tax credit for college expenses to $4k, create a new 10% mortgage tax credit for people who don’t itemize their deductions, create a $1k rebate to offset high energy costs, and set the estate tax exemption to $3.5 million and a rate of 45% (currently scheduled to revert to a $1 million exemption and a 55% rate next year). Whew!
Higher taxes for higher income people
Of course, all these goodies come at a price. Part of Obama’s health care plan is paid for with increased premiums on high income Medicare recipients and for individuals making over $200k or couples making over $250k: a higher Medicare tax of .9% on wages and self-employment income and a new 3.8% Medicare tax on net investment income. (In addition, many young and healthy people in the individual health insurance market may see their premiums rise while people who don’t purchase insurance could be subject to a new tax penalty.)
Since Obama would avoid making lots of the spending cuts advocated by Romney, he would also try to reduce the budget deficit with higher taxes on high income earners. Specifically, he would let the Bush tax cuts expire for individuals earning over $200k or couples making over $250k, reverting back to the top income tax rates of 36% and 39.6% and capital gains rates of 20%. To close the funding shortfall in Social Security, he would create a new payroll tax of 2-4% on earnings over $250k but has said he would delay this for about 10 years.
However, these tax increases would not be nearly enough to pay for projected Medicare costs. That’s why while Obama has strongly opposed Paul Ryan’s Medicare reforms, his own plan targets the same lower growth rate in Medicare spending. The difference is that his lower growth rate wouldn’t be mandatory and any savings are to be recommended by an Insurance Payment Advisory Board. The goal is for this board to find inefficiencies that can save money without reducing the quality of coverage but this is as unproven as Ryan’s goal of using competition between plans to reduce costs. Basically, it’s hard to know how much Medicare may be cut.
If Medicare spending isn’t reduced much, it could lead to higher taxes and/or higher inflation as the program is projected to eat up a growing share of the national budget. If Medicare spending is reduced, recipients may need to pay more for health care out of their own pocket. This is especially true if they want to choose their doctor since lower Medicare payments are already leading an increasing number of doctors to stop accepting Medicare patients.
So what’s the bottom line for you? First, Obama’s health care plan may reduce current health care costs for retirees but you may still want to save more to prepare for any future cuts in Medicare. Second, if you’re in the targeted income zone for tax increases, see if you can use pre-tax retirement plan contributions to reduce your taxable income out of that zone. You may also want to consider Roth contributions to shield yourself from any future tax increases needed to pay for Medicare and other government spending. Obama’s plan is generally to shift as much of the tax burden of rising government spending onto higher income earners as possible but if that’s not sufficient, we may all be paying the price through a higher inflation “tax.” For this reason, consider avoiding long term bonds and keep a portion of your portfolio in investments that may act as a hedge against rising inflation like real estate, inflation-protected bonds, commodities, and precious metals.
So what do you think? Regardless of what you believe would be best for the country, do you think you’d personally fare better under Romney’s or Obama’s plans? Share your thoughts in the comments section below.