A respected investment strategist said this week that consumers will, in time, “adjust” to the tax increases and spending cuts and economic slowdown all about to be triggered from Washington.
Unless you consider “adjusting” to be reacting the way someone does when they get burned by getting too close to a hot stove or a radiator, there’s not really much adjusting to be done here.
It’s more like bad medicine, where you choke it down and hope the situation gets better.
Consumers should be playing “What if?” games on sequestration the exact same way they daydream when they buy a lottery ticket.
The difference is that this situation will highlight your personal financial nightmares, and some sort of Congress-initiated bad news is far more likely to happen than a win in the lottery.
The sequester that began Friday did not make $85 billion in across-the-board spending reductions immediately. It’s not a flick-the-switch, lights-out deal.
But experts expected air-traffic and airport-security disruptions, possible teacher layoffs, massive cuts to state programs – because federal spending makes up as much as one-third of many state budgets – and more. And that was just if the problem was brief.
Those cuts – and the bigger ones that happen if the problem lingers — will hurt the economy at the time when it needs a stimulus to keep going, and there’s no telling just where the trickle-down impact of a sluggish economy with recessionary drop-offs in gross-domestic product would go. As the old saying goes, it will be a recession if it hits your neighbor, and a depression if it hits home.
Americans want to believe trouble can be avoided. They have become accustomed to those in Washington, D.C., dragging everything out to the last minute and then finding a fix.
They’re acting like it will be the same way this time, and they may be right.
And with Social Security, Medicaid, veterans benefits and the pocketbook programs that matter the most exempt from the sequester, you could argue that they won’t feel any real loss of security or safety so long as the problem is solved quickly.
However, savvy consumers should be worried about what happens if it isn’t settled. They should wonder how, once the government gets through this debacle, it will get a budget deal done before the expiration of current government funding at the end of March.
Failing an agreement there, the government faces a forced shutdown, and that immediately affects Social Security, Medicaid and the rest.
In fact, it hits them hard and fast, as in anyone expecting a Social Security payment say, at the beginning of April might find themselves having to wait for their money.
Social Security was built to be part of a three-legged stool, where seniors are propped up in retirement by their savings, a pension from work, and Social Security. For many Americans, the pension is gone, replaced by a retirement-savings plan that for the average American is woefully underfunded.
There’s an irony in the sequester coming to roost during what has been designated “America Saves Week,” because studies by the Consumer Federation of America and the Employee Benefit Research Institute revealed this week that only half of all Americans believe they are properly prepared for their financial future. That number would be a lot lower if they thought it might not include their Social Security benefits arriving in a timely fashion.
For people living paycheck-to-paycheck – and nearly two-thirds of Americans felt that way studies done by MetLife – a furlough, a delayed paycheck, an uncovered medical bill or a Social Security benefit that arrives a month late would all be very real, financially destabilizing problems.
With the sequestration and budget issues looming, retirees should see what happens if they simply set aside their next Social Security payment and act like it didn’t come. For people who are still working, stress-test your finances against furlough and layoff by setting aside the next paycheck.
In short, stick the paycheck in a drawer and see how long you can go without needing the money. Considering how many people have said they feel the pinch of the return of Social Security payroll taxes – a 2 percent levy that was reinstated in the fiscal cliff settlement – missing a full check is likely to feel more like a panic.
Now, answer the following questions:
• Do I have sufficient resources to weather a storm that lasts longer than this test? If missing a Social Security check or a pay period had you feeling tapped out or, worse, you don’t have enough cushion from Congress.
• How do I avoid the problem? The tempting answer would be the “throw the bums out” in Washington, but there’s no guarantee replacements would be better, so use this crisis as a litmus test, and then work on improving your savings and investments so that when the next crisis comes after this one – and it will – you can re-take the test and measure your progress.
• If I can survive without one check, what’s stopping me from increasing my savings?
Truthfully? Nothing, so set aside a few more bucks each week into a retirement account or an emergency fund.
And if you needed more motivation on why you have to test your finances and protect yourself now, just read the headlines coming out of Washington, D.C., this week.Chuck Jaffe is senior columnist for MarketWatch. He can be reached at firstname.lastname@example.org or at Box 70, Cohasset, MA 02025-0070.