Thoughts on the looming fiscal crisis [Financial Perspectives]

All the Sunday talk shows this week featured segments about the looming fiscal cliff. Despite being almost one month past a hard-fought election, both the Republicans and Democrats appear firmly planted with their beliefs about how best to address the financial cliff we are about to go over.

The Republicans have offered an olive branch to the Democrats by indicating a willingness to approve a tax increase provided that any increase is matched with substantive spending cuts. They also want to address the nation’s entitlement programs, which are the biggest part of the federal budget.

Reform here is critically needed, as Medicare will become insolvent in 2024 and Social Security in 2033.

This past week, the p resident offered a fiscal program that did not seem too go nearly far enough to result in a compromise that Republicans can live with. One of the specifics of the plan included the extension of the current 2 percent payroll tax holiday (which directly affect Medicare and Social Security).

The payroll tax holiday has been in place for the past two years. The economic benefit of this tax holiday has been rather insignificant. Think about it – does having $4 more in your paycheck make you feel that much better off? I think not. On the other hand, the cumulative effect of taking $4 out of Medicare and Social Security for every working American, each week, for the past two years has contributed significantly to the already bad financial position of these two programs.

Addressing our long-term fiscal health has to include a detailed plan to thoughtfully reform Social Security and Medicare for the realities of today. The two bi-partisan commissions the president empowered came to this conclusion. The long-term viability of these programs and the financial health of our nation require it. We cannot continue to kick the can down the road because it is not politically expedient to do this.

Our politicians (Congress, Senate and the president) have to begin doing the job we are paying them to do, which is to make hard decisions and compromise. Without this leadership our children’s future is in jeopardy.

Many folks think that addressing Medicare and Social Security now will have a major impact on those currently receiving benefits. Most of the options being proposed would affect those who are under age 50. The options include raising the eligibility age, increasing tax withholding (raising income levels and the actual tax rates), and applying means testing to benefits, which is done already with Medicare.

If you are not aware of these issues I urge you to do some research. These programs serve as a key part of retirement for most people. I think we all agree we want these programs to be available for our children and grandchildren. Let’s make sure this becomes a reality.

Good luck with your planning!

The views expressed are not necessarily those of Cambridge and should not be construed as an offer to buy or sell any security.

Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC 8725 Frankford Avenue Philadelphia, PA 19136 jim@familywealthservices.net 215-332-4968

Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.