Can a nation hold its breath for an entire year? We may find out in 2012. Rarely have economic, political, and social forces come together to produce so much momentous uncertainty and rising discontent. Will the U.S. and world economies recover or lapse back into recession? Will our government continue to be paralyzed as a brutal election fight occupies center stage? Just how far down the road can we keep kicking our enormous unemployment and deficit problems?
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For older Americans, the consequences of uncertainty are always high. People living on a fixed incom have limited ability and time to recover from periods of economic stagnation. It is easy for experts to urge retirees to save more and plan better for their later years. But doing so in 2012 will be neither easy nor obvious. Here are six issues that will affect senior livelihoods in 2012.
European economy. The European Union is under intense pressure to develop and implement a credible plan to support the national debts of its weakest members—a list that begins with Greece and extends to Italy, arguably Spain, and even others, depending on the darkening mood about the continent's prospects. Already, the Organization for Economic Development and Cooperation has reduced its forecast for European growth, and the ratings agencies are issuing increasingly dire warnings as well. If Europe slides back into recession, it could trigger a U.S. downturn and a big hit to global growth. Look to see if Germany is willing to step up and take one for the team by taking on risky European debts.
U.S. economy. Even if the European domino doesn't fall, the U.S. recovery is still very fragile. Economic growth for the third quarter of the year was just adjusted down from a modest 2.5 percent annual rate to a meager 2 percent. That's barely enough to keep unemployment from rising. And it's only about half the rate needed to create public confidence that we're finally turning things around. Meanwhile, two big sources of economic stimulus—extended unemployment benefits and reduced Social Security payroll taxes—are running out at the end of this year. Overwhelmingly, economists believe failure to extend these programs could cut that meager 2 percent growth rate in half.
Congress. After the recent failure of the supercommittee to agree on a deficit reduction package, it might take a European crisis to get Congress to agree on any short-term stimulus efforts to keep the U.S. economy from tanking. Short of that kind of jolt, there has been no sign that Republicans will agree to a meaningful stimulus unless it includes a long-term extension of the Bush tax cuts. Those cuts, which are set to expire at the end of 2012, remain the Democrats' most meaningful bargaining card. They have not seen any Republican proposals yet that come close to making it worth their while to play it. Meanwhile, two other annual fiscal headaches must be dealt with. On the tax front, the alternative minimum tax (AMT) will hammer millions of middle-class taxpayers unless Congress continues an exemption fix that expires at the end of this year. Similarly, an annual workaround for doctors' fees on Medicare services must be extended or doctors will be hit with a 30 percent cut in Medicare reimbursements. Congress has routinely extended both of these annual adjustments in past years, but there is nothing routine about Congress these days.
Inflation. Inflation has been running at an annual rate of about 3.5 percent recently. Many companies are testing to see if the economy is strong enough to absorb further price increases. With the Federal Reserve still committed to what essentially is a zero interest-rate policy, retirees and others on fixed incomes will have trouble finding investment returns that keep pace with inflation. Accordingly, real purchasing power may decline and consumers will face another challenging spending year.
Social Security. A rare bright spot in 2012 is that Social Security's annual cost of living adjustment will raise payments by 3.6 percent—more than $40 a month for typical recipients. Meanwhile, failure by the supercommittee seems to have put off possible cuts in Social Security benefits. Such cuts, however, could reappear quickly if an economic crisis puts Congress in a mood to compromise and act.
Medicare. Medicare is also a relative bright spot for retirees in 2012. Basic insurance rates for Medicare will rise only modestly in 2012 and will actually decline for popular Medicare Advantage and prescription drug plans. The Obama administration is also implementing consumer Medicare benefits under the health reform act, and marketing these moves aggressively to seniors as the 2012 election year gets underway. As with Social Security, efforts to cut Medicare have been tabled for now but would reappear should serious deficit-reduction efforts be renewed. (See Ways to Save During Medicare Open Enrollment.)