”Macro” Management

Last week, Senate Finance Committee Chairman Max Baucus (D-MT) outlined his overall goals for comprehensive tax reform, noting that he planned to use both the Domenici-Rivlin debt reduction plan and the fiscal recommendations of the president's Simpson-Bowles Commission(1) as the “starting points for full-scale tax reform,” citing the former in commenting that “‘Everything must be on the table' when it comes to tax and entitlement reform."  The New York Times last Monday reported a “Push for a Fiscal Pact Picks Up Speed, and Power,” even as other published reports suggested that lawmakers would look to defer those votes until after the November elections.

Those headlines echoed the sense that EBRI CEO and President Dallas Salisbury outlined last month to the EBRI board of trustees at their spring meeting—a sense that broad-based tax reform would be the focus of Congress, with fiscal issues driving a focus on the macro impact of policies rather than the micro outcomes that might result.  While there’s an acknowledgement that the “devil’s in the details,” there is also a growing sense that sweeping change is needed, and that—whatever the potential negative effects at the micro level, enacting change would be supported because it was seen as “best for the nation and the economy.”

Salisbury cited a meeting at which a senior congressional staffer noted that when Congress did act, it would include changes in the tax treatment of retirement plans—“we just can’t tell you what.”  Later at that same meeting, a more senior official made it even clearer that those issues would be part of the equation, going so far as to outline about a half dozen specific provisions under consideration.   Salisbury highlighted as “the most telling words in that senior staffer’s presentation” that “the biggest roadblock to meaningful action toward a rational retirement policy was “inter-industry competition”—the competition of firms within the retirement plan industry lobbying for different provisions, all of which carry a cost to the federal government, but with no one willing to suggest ways to pay for their proposals. 

“If there is a message,” Salisbury noted, “it is that whatever the government is willing to spend on retirement in the future is less than they are now willing to spend.”  Not that there isn’t interest in broader policy objectives, such as increasing the number of individuals covered by retirement programs; however, the sense is that the expense to the government of any new initiatives (such as “automatic” IRAs) would have to come from current tax preferences for other programs.  “It’s less than a zero sum game,” Salisbury told the group.

Salisbury cited the comments made by Jim VandeHei, executive editor of Politico, at another recent event, who spoke of a dynamic of policy and party volatility in the near-term, with, at the extreme, control of at least one house of Congress changing every two years for the next decade.  VandeHei noted that with the electorate so polarized, at the margins, he expects the presidential election in a number of states to be decided by extremely narrow margins, such as 1,000 to 4,000 votes.  Moreover, because of the primary process, the extremes rule in both political parties.  The resulting political polarization means that fiscal constraints dominate all discussions on Capitol Hill.

Salisbury noted that proposals to reduce Social Security, the sole source of retirement income for 37 percent of today’s retirees—or Medicare—will widen the current retirement savings gap, as will any reduction in retirement plan tax preferences, or that of workplace-based healthcare programs.  “That diminishes an individual’s ability and/or willingness to retire—and that has an impact on employers, and workforce management,” he noted.  That also means less capacity in the retired population to consume goods and services—a potentially critical factor in the nation’s future economic growth as well.

As we approach the end of 2012, there is potential for massive political and economic chaos, Salisbury said, because of the concurrent scheduled expiration of the Bush administration tax cuts, the impact of federal budget sequestration and its automatic spending cuts due to hit at year-end, the end of the (extended) payroll tax “holiday,” and the likely need to approve an increase in the nation’s debt ceiling shortly thereafter.  The sense is that House Speaker John Boehner (R-OH) will have less control in the next Congress than the current one, assuming Republicans maintain the majority in that chamber.  Meanwhile, in the Senate, regardless of which political party wins control, “60 is the new 50”—meaning that a super-majority of votes will be needed to break a filibuster and pass  major legislation..

Salisbury suggested that “it’s all going to happen during the last breathing moments of the current Congress,” reflecting a sense that lame-duck members of the U.S. House and Senate – those who won’t be part of the next Congress - will be willing to cast otherwise politically risky votes in order to make something meaningful happen.  The strategy: Let everything “hit the fan” on December 31, which would, among other things, restore higher tax rates.  At that point, ANY change that reduces those “new” rates can be seen as a tax cut, rather than an increase.  In effect, that means that the current Congress can vote for things on January 2 that would have been tagged a tax hike on December 31, but that on January 2 will be deemed a tax cut. This would all have to occur in the narrow window between the end of the calendar year and the start of the new 113^th Congress.  Newly elected (but not yet seated) lawmakers avoid even having to vote, noted Salisbury.  (Incidentally, the New York Times reported on a similar scenario this past week, a month behind Salisbury.)

Salisbury said that the highest probability for this outcome is if the status quo emerges from the 2012 election – the Senate split 50/50, the House remains in GOP control, and President Obama is reelected—“because all three will have a huge stake in things being solved, since they are going to have to live with it over the next four years.”

On the other hand, he noted, if there is a change in the balance of power—such that one party doesn’t have to live with the consequences of it, that the result can be blamed on the other party—lawmakers might defer action.

In any event, Salisbury noted that if the 2012 election produces the “status quo” in party alignments, that by early January, we will not only know what the Supreme Court has decided on healthcare, we may know what the tax status of workplace plans and programs like Social Security and Medicare, and then we can know what we’ll be dealing with.  If action is deferred, there will be no letup from uncertainty.

“The macro, not the micro is driving policy,” Salisbury noted. “This is about saving the economy.”  But with everybody focused on macro, he added, “HR execs will have to deal with the impact on the micro.”  And, with trust in employers very high by both current workers and retirees, “individuals are likely to turn to employers even more than they do today to help them achieve health and financial security, including retirement security.”

- Nevin E. Adams, JD

Notes

(1) EBRI has run multiple simulations on these proposals, and their potential impact on retirement savings.  See EBRI Notes, March 2012, “Modifying the Federal Tax Treatment of 401(k) PlanContributions: Projected Impact on Participant Account Balances;”  EBRI Issue Brief #360, July 2011, “Employment-Based Health Benefitsand Taxation: Implications of Efforts to Reduce the Deficit and National Debt;” and EBRI Issue Brief #364, November 2011, “Tax Reform Options: Promoting Retirement Security.”