Bush's Second Term: Hold on to Your Wallet

Author: Mary Deibel

Published: November 5, 2004

President Bush's call for an "ownership society" in which you make your own choices on such economic issues as retirement and health care comes with a price tag: It will require you to assume more responsibility - and more risk - for your financial security.

Here's what the election will mean to your pocketbook:

Taxes. Bush campaigned on the promise he would make his tax cuts permanent, including lower rates for income taxes, capital gains and dividend income. Republican gains in Congress, especially in the Senate, should help him win permanent repeal of federal inheritance taxes.

Bush used his victory speech Wednesday and a news conference Thursday to call for a simpler tax code, too.

Some Bush aides propose taxing consumption instead of investment income, and House Speaker Denny Hastert likes a national sales tax, which the non-partisan Tax Policy Center says would require 26 cents on the dollar to replace the income tax.

Many in Congress won't take kindly to streamlining the tax code when they have invested in tax breaks for favored constituents. But Bush recognizes the problem. In calling for a fairer tax code in which "loopholes wouldn't be there for special interests," he said that overhauling the tax code will "take a lot of legwork."

Permanent extension of the Bush tax cuts will lead to $4 trillion worth of deficits in the next decade, warns Economy.com analyst Mark Zandi.

Zandi worries Bush and Congress lack the discipline to control the deficit and slash spending on popular programs. The upshot, he says: higher interest rates for consumers and business.

Retirement. Bush wants to make you responsible for retirement savings and used Thursday's press conference to announce that "we'll start on Social Security now."

Bush has campaigned since 2000 to let younger workers put some Social Security payroll tax into private investment accounts. He said the Social Security commission he appointed to study the idea developed "a good blueprint."

But the commission couldn't agree on a plan, and neither it nor Bush said where they would get $2 trillion to cover the 10-year cost of the changeover or how they would solve Social Security's long-term solvency problem.

The commission agreed that workers would not trade in Social Security accounts like they do a brokerage account. As co-chairman Richard Parsons explained it, workers would choose among a few stock and bond funds and would be limited to changes once a year to hold down costs.

Bush also told the press conference that a simpler tax code should "encourage people to invest and save." He is expected to renew previous budgets proposals for tax-free Lifetime Savings and Retirement Savings accounts. These are more generous substitutes for 401(k)s and IRAs, and as originally drafted, would let you invest $5,000 each year tax free, or $25,000 for a family of four.

Pensions are another question mark. The quasi-public Pension Benefit Guaranty Corp. is $10 billion short of what it needs to pay benefits to pensioners whose private plans go belly-up.

Like the savings-and-loan bailout that wasn't debated in 1988, pension problems went unspoken in the 2004 campaign. But the day of reckoning may come for the 30,000 traditional pension plans that cover 44 million Americans, especially if bankrupt airlines dump their pension liabilities.

Education savings. Bush proposes to make permanent the 2001 tax cuts that turned so-called 529 college savings plans into tax-free investment accounts if the money goes to education. The same cuts also paved the way for education savings accounts for younger students and allow private colleges to set up pre-paid tuition plans like state schools offer.

Health care. Be prepared to pay more out-of-pocket for medical care.

Tax-free Health Savings Accounts tied to high-deductible insurance policies were enacted last year to make patients cost-conscious. For 160 million Americans who get health coverage through work, the change gradually will shift the burden from our employer to us although business has been slow to adopt these accounts.

Medicare's prescription drug plan will replace those confusing drug cards in 2006 for people 65 and older, and efforts are under way to reform Medicare hospital insurance, which exhausts its reserves in 2019 under the weight of 76 million retiring baby boomers.

Energy. Whether it's drilling in the Arctic wildlife preserve or other proposals, don't expect Bush's energy plans to lower the price of $50-a-barrel oil. The pressure that costly gasoline, heating oil and natural gas puts on business profits and consumer wallets likely will dramatically slow growth and job prospects.

"The basic reality facing the economy is that we'll have a recession next year if oil stays at the current price," warns John Makin, a Wall Street trader and energy economist at the American Enterprise Institute, a conservative think tank.

Worse, Makin predicts, Americans won't adjust: "Households will run up their credit-card balances at the gas pump filling up their SUVs, and businesses won't adjust products on the assumption the problem goes away, but postponement just makes crisis inevitable later."