Government Debt Default: What Does It Mean
The news is replete with hourly coverage on the impasse reached by our Congress on just how to deal with the current debt crisis. When I refer to the current debt crisis I am writing about a problem which is neither current nor a crisis; we have faced the same Federal budgetary problems for more than 40 years and our lawmakers have still not learned how to solve them. That can hardly be considered current. At the same time, our national debt looms large at more than $14.6 trillion so the days are long past since we surpassed the crisis stage.
On the surface, it is very simple. I am writing with an educational background in accountancy and finance, but anyone who has handled their family finances with any degree of success could solve this looming, long term problem. For years, we as a country have simply spent far more money than we have taken in through taxes, fees, and other sources of income to the government. Our excesses have been driven mostly by political motivations to endear one segment of the population or another in an effort by many individuals to gain elective office. Most recently, we added $2trillion to our debt by shifting the failures of big banks and investment companies to the taxpayer; it was called the stimulus package.
Unfortunately, the simple solutions will be painful to many Americans, not only to those legislators who make the necessary decisions to get us out of this predicament. If our lawmakers do the right things, we will not face these same problems every election cycle as we have for many years. The solution: stop spending more money than we have to spend. I realize this is not a brilliant revelation, a particularly difficult concept, or something that has taken me hours of deliberation to conclude. Yet it is the only solution to the problem.
If thats what it takes, why havent we done what we need to do? Vince Lombardi used to say when the going gets tough, the tough get going. Up to this point in time we have not had tough Congressional leadership from any party, and therefore we have not solved the problem. Every legislator has a personal stake in this debate because every legislator has made various promises and commitments to his constituency which will be null and void if he makes the right decisions.
The most important aspect of the whole controversy is in determining how the eventual action taken by government will affect us as individuals. I have written often about the importance of personal savings; never has this element of personal finance been more important than now.. No matter what actions are taken by Congress, you can rest assured that social security, Medicare, and other benefits currently enjoyed by Americans will be substantially reduced. As of this writing, under consideration is again increasing the retirement age, cutting many Medicare benefits, and changing the mathematical formula used to compute cost of living increases for social security recipients. (The formula will decidedly reduce the benefit increases compared to the formula currently used.) Additionally, we can expect increasing personal income tax rates in the years ahead.
Faced with the prospect of deeper future cuts to social security retirement benefits than expected up to this point in time, it is imperative that we are better prepared to finance our own future needs as opposed to relying too heavily on social security as a subsidy to supplying those needs. Simple savings plans, 401K contributions, systematic mutual fund (equity) investments, as well as increasing the monthly payment to principal on our home mortgages are all solid means by which to improve our long term financial health. Traditional IRA contributions are good, but, with the prospect of higher income tax rates in the future, Roth IRA contributions take on a new relevance.
While there is no certainty as to the details of the final package the Congress will design, there is in fact certainty that something will be done. Further along, after the low hanging fruits of social security and Medicare are plucked, I believe we can expect substantial changes to the Federal estate tax laws once again. In recent years, the George W. Bush tax cuts had lifted many burdens from the estate tax laws with higher exclusions and lower rates. These benefits will certainly be revisited and potentially modified. All of these changes will warrant some professional advice as the new laws are put into place; I strongly recommend a visit with the BCU investment advisors to discuss your financial planning needs as we get a more clear picture of just what changes will be made.
©Patrick J. Catania 2010
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.
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