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A bitter pill to swallow

By Barbara Whelehan · Bankrate.com
Friday, December 3, 2010
Posted: 3 pm ET

"The Moment of Truth" has rattled a lot of special interests. That's the name of the final report issued Wednesday by the Debt Commission. Eleven of the 18-member National Commission on Fiscal Responsibility and Reform cast their votes in support of the plan this morning, short of the 14 votes needed to issue a formal recommendation to the White House and Congress. But the fact that a majority of the commission supported it should send a strong message to Capitol Hill that something must be done to address our debt problems -- sooner rather than later.

The report recommends an ambitious overhaul of the tax code in addition to massive spending cuts to trim about $4 trillion from U.S. budget deficits in 10 years. It also proposes changes to the Social Security system.

Most Americans are concerned about the trillions of dollars' of debt our nation has accumulated, and are casting sidelong glances toward Europe, thinking we will surely face a similar crisis if we don't do something soon.

The Deficit Commission implores: "America's long-term fiscal gap is unsustainable and, if left unchecked, will see our children and grandchildren living in a poorer, weaker nation."

But since its release, the report has had vociferous opposition.

"With this report the Deficit Commission once again tells working Americans to 'Drop Dead,'" said AFL-CIO President Richard Trumka in a press release. "No proposal on fiscal issues is serious that leaves the Bush tax cuts for the rich in place while raising taxes on the middle class and slashing Social Security and Medicare."

Actually, the tax rates proposed in the report are even more attractive than those put in place during the Bush administration, since the highest one is 28 percent. But disappearing tax deductions and closed tax loopholes would increase cash flow to the Treasury.

Retirement industry displeased

The limits proposed for retirement tax shelters rankles the retirement industry. In a statement to the press, Brian Graff, executive director and CEO of The American Society of Pension Professionals & Actuaries, said the recommendations in the final report "will threaten the stability of the established employer-sponsored retirement system that millions of American workers depend on," ultimately undermining our financial security.

ASPPA's main bone of contention: All the various types of tax-favorable retirement plans would be boiled down to one in which workers would be limited to annual contributions of $20,000 or 20 percent of pay -- whichever is less. Currently, some plans, such as the SEP IRA and Solo 401(k), allow for as much as a $49,000 annual contribution. Even in a regular 401(k), workers age 50 and up can save up to $22,000 of their own money, thanks to catch-up provisions passed several years ago. And the ceiling for contributions in profit-sharing plans is also $49,000.

But the fact is that most American workers don't save $20,000 per year in their retirement plans. If they did, we wouldn't be facing a retirement planning crisis. Plus, no one is preventing anyone from saving money in a taxable account.

(Just for grins, let's calculate how much you could accumulate if you stashed away $20,000 per year for 40 years, earning a conservative 6 percent average annual return, adjusted for 3 percent inflation. The answer: $1,511,738. If your account grew 7 percent a year, you'd have a little more than $1.9 million.)

Social Security addressed in report

The future insolvency of Social Security was also addressed in the final report. My first reaction upon hearing that the full retirement age would be raised to 68 in 2050 and 69 in 2075 was: "Oh, well, I'll be dead by then." (OK! I know that's selfish.)

But after doing a simple math calculation, I realized: "Oh no! My grandkids will be in their 60s in 2075!"

Then I read the host of Social Security solutions (see pages 48 to 56 in the actual final report) and found it to be a thoughtful and intelligent way to address the problems Social Security will face after 2037, when the system's trust fund is scheduled to be fully exhausted if we don't do something about it now.

I've concluded that the higher good is to preserve this very important social safety net so that all future generations can benefit by it, even if it means we all have to swallow some bitter medicine.

The problem, though, is that, even if Congress were to adopt this plan, it's doubtful it can ever be successfully implemented, thanks to an indefatigable lobbying industry.

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Follow me on Twitter: BWhelehan

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