Congress is between a rock and a hard place over federal budget deficits, but as of today, it looks like there shortly will be a compromise over raising the debt ceiling. As Washington Post writer Ezra Klein wrote, both sides have a "healthy aversion to unimaginable consequences."
Even if the current debt ceiling crisis is averted, people living in retirement aren't out of the woods. Unless Republicans manage to gain control of the House, Senate and the presidency in 2012 -- an unlikely scenario -- the 15 percent tax rate on most capital gains and dividends will almost certainly end, says James Delaplane, who spoke today at a retirement income seminar sponsored by Investment News Magazine. Delaplane is a partner in the Washington, D.C., law firm of Davis & Harman LLP and a retirement policy expert.
The demise of low capital gains rates hits anybody who sells stocks they've held a long time. You don't have to be rich to be in that boat. And that's not the only potential change that could affect the retirement planning of modest earners. Delaplane says it's likely that the the Bowles-Simpson deficit reduction commission proposal to cap tax-deferred savings in 401(k) and other defined-contribution plans to the lesser of $20,000 or 20 percent of income annually is likely to be adopted. They would hit people who make more than $100,000, which may sound like a lot of money, but isn't if you live in an expensive part of the country.
Delaplane also believes that the tax-free accumulation of money within annuities and life insurance policies is likely to be on the chopping block. That could affect some very modest-earning retirees.
With a $14 trillion deficit something has to go, but discouraging people from saving for retirement doesn't seem like the smart approach.