One leading candidate for the "most under-reported story" of 2014 is the remarkable drop in the U.S. government's budget shortfall. The final numbers announced by the U.S. Treasury for fiscal 2014 (ending September 30) shows a $483 billion deficit. That's about $1 trillion lower than the record $1.4 trillion deficit recorded in 2009. As a percentage of the U.S. Gross Domestic Product, the deficit came in at 2.8%--below the average of the last 40 years.
Digging into the numbers a bit, the government collected just over $3 trillion in the past 12 months, which comes to 17.5% of America's total GDP. That's up from $2.8 trillion last year, largely the result of a stronger economy, but also reflecting higher tax rates on higher-income Americans. Meanwhile, spending was essentially flat; rising from $3.45 trillion to $3.50 trillion, reflecting decreased defense spending and cuts in the unemployment insurance program, flood insurance and disaster relief, crop insurance, the Supplemental Nutrition Assistance Program and a variety of housing programs.
If there is bad news in this picture, it's that Social Security, Medicare and Medicaid are taking over an ever-larger share of the budget, and these costs have been rising much faster than inflation. "Entitlement" expenses are not discretionary; they are basically written contracts with the American people. Medicaid in particular is worrisome; while discretionary expenditures are down almost totally across the board, Medicaid spending growth came in at 10.2% in 2014, and is projected to rise 14.3% next fiscal year.
How does all this affect you? Notice that the partisan budget bickering has quietly faded away. Congress has extended government funding several times without fanfare, and is expected to do so again during the lame duck session after the elections. This might induce the rating agencies to give American bonds back their A+ credit rating.
We may see a tax reform bill sometime next year, which will certainly lower the U.S. corporate tax rate, and may address America's tangled individual tax code. Earlier this year, a House bill proposed to repeal dozens of tax credits, deductions and tax preferences, including the mortgage interest exemption and deductions for charitable contributions. The legislation would create two individual income tax brackets at 10% and 25%. Another proposal would replace most current federal taxes with a 23% national retail sales tax.
And you may hear more about reforming Social Security, Medicare and Medicaid. The Social Security fix is relatively straightforward; for persons under the age of 50 today, full benefits would be deferred a year or two, to reflect the fact that people are living (and capable of working) longer. Medicare proposals have ranged from giving total discretionary control to states, to creating a voucher system that would cap benefits for each participant.
Finally, all of us who are recommending Roth conversions have to pause when we see proposals that would replace income taxes with a sales tax. The premise of a Roth conversion is that you are paying, today, equal or lower taxes on the converted retirement dollars than you would be paying in the future. If future marginal tax rates go down to zero, and all government revenues are shifted to a sales tax, that dramatically changes the Roth equation. Yes, this is unlikely, but even the unlikely contingencies have to be factored into today's financial decisions. After all, who thought the budget deficits would fall below 3% of GDP so quickly?
Sources:
http://www.treasury.gov/press-center/press-releases/Pages/jl2664.aspx
http://www.forbes.com/sites/stancollender/2014/10/16/stop-and-smell-the-roses-final-2014-federal-deficit-fell-big-time/
http://kff.org/medicaid/issue-brief/implementing-the-aca-medicaid-spending-enrollment-growth-for-fy-2014-and-fy-2015/
https://www.scribd.com/fullscreen/63596104?access_key=key-16dzhu6py6idfkjml8it&allow_share=true&escape=false&view_mode=scroll
http://fas.org/sgp/crs/misc/R43060.pdf
Sincerely,
Bill Morrissey, CFP® and Tammy Prouty, CFP®
Sound Financial Planning, Inc.
Primary Office
425 Commercial St., Ste 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
info@soundfinancialplanning.net
Secondary Office
650 Mullis St., Ste 101
Friday Harbor, WA 98250
(360) 378-3022
www.soundfinancialplanning.net
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
