A few things impacting the retirement planning world caught my eye in the past couple of days.
In France, more than a million people took to the streets of Paris and other cities Thursday to protest President Emmanuel Macron’s plan to raise the retirement age from 62 to 64.
In Davos, Switzerland this week, more than 200 millionaires including many Americans presented a manifesto to the World Economic Forum urging countries to “tax the ultra-rich” because they say it is the only way to make a real impact.
And here at home, the U.S. government hit its $34.1 trillion debt ceiling, prompting the Treasury Department to begin what the Treasury Secretary Janet Yellen called “extraordinary measures” to continue paying bills while the Republican-controlled House threatens to block what used to be a routine debt-limit increase that Democrats controlling the Senate and White House want to pass.
Here’s a little more on each of these developments.
Debt limit fight could impact 401ks, Social Security
If the U.S. were to default on its debts (which has never happened before), the consensus is that if would shatter financial markets—leveling 401(k) and other retirement accounts in the process.
While the partisan showdown boils down to Republicans wanting to use the debt ceiling as leverage to force Democrats to cut spending, the good news is there is still time to resolve the issue before a catastrophic default could occur.
The Treasury Department estimates it can use the so-called “extraordinary measures” to avoid a default until the summer, giving Congress a few months to work out an agreement to raise the debt limit. Some of those extraordinary measures are already being employed, as the Yellen announced yesterday the Treasury is unable to fully invest the portion of the Civil Service Retirement and Disability Fund (CSRDF) not immediately required to pay beneficiaries, and that a “debt issuance suspension period” began on January 19 and will last through June 5, 2023.
“With these determinations, the Treasury Department will suspend additional investments of amounts credited to, and redeem a portion of the investments held by, the CSRDF, as expressly authorized by law,” Yellen wrote in a letter to Congress. “In addition, because the Postal Accountability and Enhancement Act of 2006 provides that investments in the Postal Service Retiree Health Benefits Fund (PSRHBF) shall be made in the same manner as investments for the CSRDF, Treasury will suspend additional investments of amounts credited to the PSRHBF.”
The letter goes on to note that by law, the CSRDF and the PSRHBF will be made whole once the debt limit is increased or suspended, and federal retirees and employees will be unaffected by these actions.
As The New York Times wrote in a newsletter today, if the U.S. can no longer pay its debts and defaults, the reliability and trust that make U.S. Treasuries such a safe investment vanish. “Money once considered secure is now seen as precarious. That realization could spawn the equivalent of a bank run, as people rush to get their money out of the financial system. The system would then buckle, crushing everyone’s investments, big and small,” writes NYT’s German Lopez, who goes on to quote Mark Zandi, chief economist at Moody’s Analytics, saying a U.S. debt default “would be financial Armageddon.”
As The Hill notes, “the debt limit standoff comes as House Republicans have ramped up calls to tie spending cuts to any bill raising or suspending the debt limit… Democrats, by contrast, have instead insisted on a clean bill to address the debt ceiling.”
Speaker of the House Kevin McCarthy (R-CA) has threatened to demand spending cuts targeting Social Security and Medicare as part of the debt limit fight. As part of his list of concessions to far-right conservatives in order to be elected Speaker, McCarthy reportedly agreed to cap spending for the next year at fiscal 2022 levels, which would amount to over $130 billion in cuts from last month’s $1.7 trillion government funding bill (which included SECURE 2.0).
The Huff Post pointed out in a Jan. 9 article that the Republican Study Committee proposed a budget for fiscal 2023 that would gradually increase the eligibility ages for Social Security and Medicare, and change the Social Security benefit formula for people 54 and younger, while not changing it for people closer to receiving benefits.
Meanwhile, Senate Minority Leader Mitch McConnell (R-KY) said the U.S. “never has and never will” default on its debt. “Periodically the debt ceiling has to be lifted and it’s always a rather contentious effort,” McConnell said while speaking to reporters in Kentucky. “In the end, I think the important thing to remember is that America must never default on its debt.”
Stay tuned…
French protest raising retirement age
Speaking of potentially raising the age for receiving government retirement benefits, President Macron’s plan to push up the standard retirement age from 62 to 64 in 2030 is not sitting well with the people of France.
The million-plus protesters yesterday sparked French unions to announce new strikes and protests set for Jan. 31 as they try to get Macron to back down from the plan he says is needed to keep the French pension system financially viable. The unions say it threatens hard-fought worker rights.
Everyone received a state pension in France, a country dealing with an aging population and growing life expectancy. This is why Macron says raising the retirement age is the best way to keep the system solvent, while the unions are proposing a tax on the wealthy or more payroll contributions from employers to finance the pension system.
As The Wall Street Journal notes, the retirement age in France is lower than in most other European countries. Italians can stop working at 67, while workers in the U.K. retire at 66. In Sweden, however, the retirement age is 62.
Polls suggest most French people oppose Macron’s pension reform plan, with one cited by the WSJ showing 68% were opposed.
Ultra-rich beg to be taxed
Speaking of proposing a tax on the wealthy, a group of 200 mostly multi-millionaires and billionaires renewed their repeated calls this week for governments to impose higher taxes on the ultra-rich.
In an open letter to the corporate executives and political leaders attending this week’s World Economic Forum in Davos this week, the group “Patriotic Millionaires” says the global representatives “have to tax us, the ultra rich, and you have to start now.”
One of the most outspoken advocates for action on this from is Abigail Disney, who said in a statement in Davos, “Extreme wealth is eating our world alive. It is undermining our democracies, destabilizing our economies, and destroying our climate. But for all their talk about solving the world’s problems, the attendees of Davos refuse to discuss the only thing that can make a real impact—taxing the rich.”
A new report from Oxfam, Patriotic Millionaires, the Institute for Policy Studies and the Fight Inequality Alliance released on Wednesday says creating a federal U.S. wealth tax could raise more than $583 billion annually, revenue that could be used to boost education spending by almost half.
The group is calling for a new progressive wealth tax, which would add a 2% tax for people with net wealth of $5 million or more, 3% for those with $50 million or more and 5% for those with $1 billion or more.
This comes at a time when The Washington Post reports that groups of lawmakers in seven states plan to introduce bills this week that would raise taxes on the rich. The states include California, Connecticut, Hawaii, Illinois, Maryland, New York and Washington.
SEE ALSO:
• Millionaires Want Billionaires to Pay More Taxes
• 11 Best Places to Retire in the World in 2023: International Living
• Retiring (Much) Later: Average Age Up Big Since 1991