The 2022 Midterm Election's Outcome & What it Means for Today's Savers & Retirees
About the author: Chris Abts is the President & founder of Cornerstone based in Reno, NV. He helps people to better manage their wealth so they can focus more of their time on what truly brings meaning and fulfillment to their life. Abts is also the TV show host of Redefining Retirement, which airs every Sunday evening at 5:30pm on KTVN Channel 2. Chris has passed the Series 65 examination.
THE 2022 MIDTERM ELECTION’S OUTCOME &
WHAT IT MEANS FOR TODAY’S SAVERS & RETIREES
This was an interesting mid-term election. I wanted to share with you the impact I believe it will have on today’s retirees' success or the lack thereof in retirement. Prior to November’s elections, many thought there would be a big red wave that would take back the house and the senate, which is very common when one party has control of the White House, the Senate, and the House. Obviously, this did not happen. However, the important question we should be asking is, how will the election results impact today’s savers and retirees and what does this mean for taxes, which is one of the largest and most misunderstood risks of retirees today. Here are three main takeaways from this election cycle.
Number one, we are going to see continued volatility. There is incredible instability in Washington, primarily because there is not strong agreement in the American population. Many of the races in this election cycle were incredibly close. There was not one party winning a large percentage of the vote. Many races came down to less than one percent of the voting population. This shows that from the voting population, there is no strong agreement on a path forward for our country. This is pretty phenomenal when we have the highest inflation in the past 40 years, we are staring down rising interest rates, a potential recession, and massive national debt. Yet, there is no broad agreement among Americans on the direction or even which party has the right solution to move us forward.
If you look at the results of the Governors’ races, roughly 175 million Americans are governed by a Democrat, and 141 million Americans are governed by a Republican. So even state by state, we are highly divided. That means we will continue to see instability in Washington. For this reason, there is not a clear path forward and each future election cycle has the potential for a dramatic outcome. This means we can expect to see a lot of unpredictable legislation. When different parties can broker for power in very surprising ways, no one has a clear mandate on what should be done.
The second takeaway from this election is that we experienced no repudiation of the current tax and spend agenda. For several years, we have been in this cycle of proposing big spending bills. For example, the original Build Back Better bill that was introduced last September was $3.5 trillion. It was then reintroduced at $2.5 trillion. If there was ever a time that Americans could have raised their hand and said, no more tax and spending, this November was the opportunity, but it simply didn’t happen. I believe the results of this election have emboldened many elected politicians to feel that the American population will not vote them out of office if they continue to pass these large spending bills.
Now, if you are a little more fiscally conservative, that probably raises a red flag because you believe that will eventually lead to tax increases. That means that when you draw on your accounts in retirement, you will have less money for yourself because you are sending more money to the IRS and Washington. Therefore, I believe we are approaching an era of slowly rising taxes.
If you’ll recall from the Build Back Better debate, one of the things that came out of 2021 and 2022, was how much of that new tax revenue Congress is looking to generate from retirement assets. For example, in the original proposals, we saw limitations of growth in tax-deferred accounts, limitations around converting accounts to tax-free Roth accounts, and the list goes on. And as we know, tax proposals never seem to die, they just go on the shelf for future use. Clearly, this was not an election cycle that shut down these new tax ideas on retirement savings.
The third takeaway I have is that President Biden will be emboldened. While it will be a bit harder for Democrats to pass legislation on their priorities, I suspect President Biden will do what we have seen many presidents do, which is to turn from the legislative process to executive orders. If you’ll recall, during President Obama’s term, much of the health care reform act that he could not get through Congress was accomplished through executive order. We have seen executive orders used many times from past Presidents. In President Biden’s post-election speech, he said that in his eyes, the results of this election cycle showed support for the Democratic agenda, as well as support for the tax and spend priorities, and this is likely what our government will continue to do on behalf of the American people.
In President Biden’s State of the Union address earlier this year, he said, “Our problem is the previous administration has ballooned the deficit with tax cuts.” The interpretation is that Democratic leaders believe the growth of the national deficit is because we have not collected enough tax revenue. In other words, the blame for the large debt is not on the spending bills. In this mid-term election cycle, the voting population did not seem to disagree and did not vote out elected officials that made tax and spend a central part of their campaign. As a result, this will likely embolden those politicians to continue forward in that direction. In addition, I expect the election results will also encourage the progressive left to push even harder for more change because those are the races they won.
So, what does this mean for you? Well, if you remember the Trump Tax Cuts in 2017, all of those income tax rates expire in 2025. Which means that unless Congress passes a new piece of legislation, taxes will increase. Tax rates will revert to the older, higher rates in the year 2026. The results of the 2022 mid-term elections have made me more confident than ever that those tax cuts will not be extended as Americans don’t seem to mind “tax and spend,” at least not electorally. This means if you are considering changing the tax status of any of your retirement assets, and you have not acted on it yet, it is critical that you start this process before the end of the year. Starting the conversion process now will give you one more year that you can use to make that conversion under today’s artificially low tax bracket rate environment.
In addition, if Congress changes the rules, you could find yourself in a totally different tax environment than perhaps you thought when you were laying out your retirement plan. Today we are in a period of heightened legislative risk and it is now becoming that much riskier to keep deferring taxes in retirement. Addressing this issue now means less worrying about what is happening in Washington and how it might impact you.
I want to be clear, this is not a partisan discussion. This is not about picking sides. We have a two-party system in our country, where elections are held every two years. As a result, we can get a totally different government every two years, and that different government can pass wildly different legislation, every two years. The question you should ask yourself is, do you want to be worried every two years about who gets elected and how it could impact your retirement, or do you want to secure a portion of your retirement assets so they are protected from whoever is in Washington?
This is something we address for our clients here at Cornerstone. Using the Cornerstone Retirement Road Map, we will show you strategies designed to optimize your retirement income, conservatively generate returns to beat inflation, and create tax efficiencies in retirement. To have this discussion and see what your Road Map looks like, call our office at 775.853.9033.
All the Best,
Christopher K. Abts
President & Founder
Based in Reno, NV, Cornerstone is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.