Thursday, November 20, 2014

What Might Mid-Term Elections Mean for Retirement Saving?

Charles Dickens could have been describing the biennial American election cycle when he set down the opening lines to A Tale of Two Cities: “It was the best of times; it was the worst of times...”  The months leading up to the first Tuesday in November every two years remind us that we’re part of a great experiment in self-government, clearly a “best,” as many systems of government go.  But the debates, the partisan media dialogues, and the advertising of the political seasons sometimes remind us that politics can bring out the worst in us when it comes to decency, honesty, and respect for differing opinions. 
That said, when we consider the alternative – a system without citizen choice – there’s no question that our imperfect system is preferable to the alternatives.  Now that the nation’s voters have spoken, and the U.S. Congress has realigned with the Republican Party in the majority in both House and Senate, what might it all mean for legislation in general, and retirement plans and retirement saving in particular? 

Unlike a novel, we can’t sneak a peek at the final pages to see how this drama may end.  More like a TV series approaching a finale, the writers and directors – our lawmakers in Congress – are still scripting the outcome.  Even the lawmakers don’t know how things will play out.  Will we see a major overhaul of the Internal Revenue Code?  Will current tax incentives to save for retirement be maintained, or will they be cut back to provide revenue to balance a chronically strapped federal budget?  Or will stalemate continue on Capitol Hill, with a Congress controlled by Republicans and a Democrat in the Oval Office?  
Some optimists feel that a Republican Senate and a now-more-overwhelmingly Republican House may want to prove to the electorate before the 2016 presidential election that they can get things done.  In the Senate, that will require some degree of cooperation with Democrats, who can still block most actions with a filibuster, since Republicans do not hold a filibuster-proof majority of 60.  House of Representatives Speaker John Boehner, with a more solid majority in that body, may have less need to fear mutiny within his party ranks, and as a result may be willing to advance legislation that has at least some nonpartisan appeal in order to attract the support of some Democrats. 

Speaker Boehner knows that passing legislation in the House is not enough to get a bill to President Obama’s desk.  It must also pass in the Senate, and Democrats there will likely be very willing to filibuster legislation they can’t support.   President Obama, conscious of his legacy as presidents usually are in the waning days of their leadership, may want something to show for his final two years in office.  This would certainly require that he meet Republicans halfway on any legislative initiatives, foreign or domestic. 
Some are less optimistic.  Pessimists point to new Republican senators coming from solidly red states, and having decidedly conservative rather than moderate credentials.  Some of the Democrats who lost, like Senator Mark Pryor of Arkansas, were middle-of-the-road lawmakers who tended to work across the aisle.  Result?  Some feel it will be a more partisan Senate than before the election.  Reinforcing this is the fact that Republican campaigns in this cycle ran against President Obama as much as against the Democratic incumbent, and won – at least in part – by linking that incumbent to the President.  How willing will those electorate-conscious newcomers be to support legislation that might be moderate enough to attract a presidential signature, rather than a veto? 

But incumbency is a two-edged sword, and while a recent Associated Press poll showed only 30% of interview subjects were satisfied with the job being done by President Obama, only 25% said they were satisfied with the Republican Party as a whole.  The Democrats enjoy similarly low stock as a political party.  That sounds like anything but job security.  These days simply being in office is enough to make you unpopular, and those who have just been elected will have to face their constituents again in the next cycle.  That might be enough to temper uncompromising partisanship, but that remains to be seen.
Being optimistic, let’s assume that the 114th Congress being seated in January of 2015 will find it possible to work together occasionally, and bring at least some legislation to President Obama’s desk for signature and enactment.  What might that legislation look like?  If it doesn’t happen during the lame duck session between now and the 2014 adjournment, one area of likely agreement is a group of expiring tax provisions that have come to be known as “tax extenders.”  There are many, and include such things as a research and development credit, alternative energy generating incentives, and the IRA qualified charitable distribution, the latter allowing taxpayers age 70 ½ and older donate up to $100,000 per year tax-free to charitable organizations.  That has enjoyed bipartisan support in the past, and probably will again.

While many of both conservative and liberal leanings believe that a comprehensive rewrite of the tax code is needed to restore simplicity and fairness, it will be anything but easy.  Several constituencies have a big stake in maintaining major elements of the current tax code.  The home mortgage interest deduction, the exclusion for employer-provided health insurance, and deferred taxation of retirement savings – to name three of the most high-profile – are highly valued.  Giving them up, or seeing them seriously restricted, would not be readily accepted. 
In order to reduce individual or corporate tax rates – oft-stated goals of tax reform – restricting these or other targeted tax incentives has often been proposed as a way to free up the necessary fiscal resources.  The only major tax reform proposal to come out of the current Congress, proposed by retiring Ways and Means Committee Chairman Dave Camp, included major new restrictions on retirement savings tax incentives.  Curbing these incentives to some degree has been mentioned in virtually every serious discussion of tax reform.  Retirement saving  tax incentives are definitely in the budget-balancing crosshairs, even though they serve a very, very important purpose in American quality of life.  Hopefully that can be made clear to lawmakers, if they ever get to the point of deliberating tax reform.

“If” seems to be the operative word.  In a post-election analysis published by USA Today, a University of Minnesota political scientist predicted continued partisan strife in Congress, believing that we will see “…even more bitter, partisan, white-knuckle politics.”  We surely hope that he’s wrong for the sake of good governance of our country.  For retirement saving, on the other hand, perhaps the status quo is not so bad.