AARP Home » AARP Blog » AARP »Bulletin Today »How the Fiscal Cliff Could Affect You

How the Fiscal Cliff Could Affect You

Posted on 11/19/2012 by | Washington Watch | Comments

Bulletin Today | Politics Print Print

You’ve probably been hearing a lot about the “fiscal cliff” — the mammoth confluence of tax increases and spending cuts that will take effect after Jan. 1 unless President Obama and Republicans agree on a new deficit-reduction deal. It’s complicated stuff, and you might be wondering what it’s all about.

Here’s a breakdown and a look at some of the ways it could affect you.

Spending cuts

  • Across-the-board spending cuts, (the so-called sequestration) were mandated by the budget deal struck last year to end the standoff over raising the nation’s debt limit.
    • The good news is that benefits for Social Security, Medicare and Medicaid are exempt.
    • The administrative sides of those programs, however, aren’t exempt. That could mean slower processing times, and for Medicare service providers — doctors, hospitals, skilled nursing, and so forth — it means a 2 percent cut in payments.
    • Other programs that you might rely on for delivered meals, food, transportation and housing are subject to cuts
  • Medicare payments to doctors will fall 27 percent. By law, when Medicare costs outpace economic growth, Congress has a choice: cut doctors’ pay or appropriate additional funds. Since 2003, Congress has passed temporary “doc fixes” to keep reimbursements stable. Failure to do so again means a major cut for doctors on top of the 2 percent cut from sequestration.
  • Emergency unemployment benefits, which extend compensation up to 73 weeks after state benefits run out, would end for more than 2 million people.


Tax increases

  • Bush-era tax cuts, extended by President Obama in 2010 as part of a broader package meant to protect a still-fragile economy, will expire. In effect, this increases taxes across all income levels, though the biggest increases would be on the highest earners.
  • The “payroll tax holiday,” a 2-percentage-point cut in Social Security withholding enacted in 2010 to help stimulate consumer spending, will end. An average-income worker will take home about $20 less a week.
  • The number of people subject to the Alternative Minimum Tax, an income tax device designed to snare rich people, would rise from 4 million to 30 million, including many middle-income taxpayers.


Economic slowdown

Some predict a fall from a fiscal cliff, others a softer tumble down a fiscal slope. In any case, if the government is spending less and taxing more, there’s less to stimulate the economy. The nonpartisan Congressional Budget Office warns of a return to recession. Here’s the CBO’s projected toll for 2013:

  • 9.1 percent unemployment rate, up from the current 7.9 percent
  • a 0.5 percent drop in the gross domestic product, a rough measure of the economy

Gridlock is by no means unprecedented in Washington. One thing Republicans and Democrats can agree on: If they can’t get their act together and find common ground for a better plan to cut the budget deficit, there will be serious consequences for the economy.

tell us whatYOU THINK

Please leave your comment below.

You must be signed in to comment.

Sign In | Register