New President, New Economic Priorities

President-elect George W. Bush’s impact on an array of touchy pocketbook issues--from Social Security reform to tax cuts--is likely to be muted by the narrowness of his victory margin and the near equal party-line split in Congress.

“There are basically two choices in situations like these--compromise or an absolute absence of action,” said James Delaplane, vice president of retirement policy at the American Benefits Council in Washington.

If Bush can find areas of agreement between oft-warring parties, he may be able to make some significant, although possibly subtle, alterations in the nation’s laws and social programs.

What are likely to be the highest priorities, and where might Bush find compromise?

Here’s a look at some of the top pocketbook issues of the campaign, where Republicans and Democrats appear to differ, where they seem to agree and how you might best take advantage of any change.

Taxes: Federal income taxes were one of the primary themes of the presidential campaign, with Al Gore promising middle-class tax cuts and George W. Bush promising much broader reductions.

Now that the economy appears to be slowing down, tax cuts are even more important as a means of jump-starting the country’s finances, said Ray Sullivan, Bush’s press secretary.

However, with Congress tightly divided on the issue, sweeping measures are a tough sell. Instead, experts predict that Bush will propose a major tax cut--he wants to reduce marginal tax rates, cutting the top rate to 33% from 39.6%; make charitable contributions deductible for everyone regardless of whether they itemize; and make several other changes. But he may settle for narrower cuts in areas where the spade work has already been done. Specifically:

* Marriage-penalty relief. Two-income married couples have long complained that they pay more taxes than they did as singles. But eliminating the so-called marriage penalty would be difficult and costly and could lead to other inequities, such as big “marriage bonuses” for single-income couples.

What to do? Bush wants to reinstate a special deduction available only to two-income families, and he’d like to boost the income level at which married couples begin to lose the child tax credit. (Until 1986, two-income married couples got a bigger standard deduction than single-income marrieds. However, this dual-income deduction was eliminated in the Tax Reform Act of 1986.)

Both parties agreed this year on a proposal that would hike the standard deduction for married couples filing jointly until it’s twice the standard deduction for single filers and would widen the 15% tax bracket for married couples. This proposal arguably would increase the so-called “marriage bonus” enjoyed by single-income marrieds but might provide less relief to dual-income married couples than Bush’s plan would.

Analysis: Although it’s unclear whether the 15% bracket or the income limitations on the child tax credit will change, some adjustment probably will be made to the standard deduction for married couples. That doesn’t help couples who itemize deductions, but it should give some modest relief to those who don’t.

Advice: Remember that the real marriage penalties and bonuses have little to do with taxes.

* Estate tax reductions. Although Bush said he supports repealing the so-called “death tax,” that’s a controversial step that probably wouldn’t be supported by Democrats, who see such a repeal as a giveaway to the wealthy.

Yet there is widespread support for some estate tax relief. Congress passed legislation this year that would have eliminated by 2010. But many experts believe the bill passed easily only because Democrats knew it would be vetoed.

“I think that bill was a safe bet,” said C. Scott Boone, a Los Angeles-based managing director of Chase Manhattan Bank and editor of a monthly newsletter for estate planning professionals. “They knew darn well the president was going to veto that bill.”

Analysis: A more likely scenario would be expansion of the so-called unified credit, which allows individuals to bequeath up to $675,000 to their heirs estate-tax free.

This exemption is already rising. By 2006, you’ll be able to bequeath $1 million without any estate tax. Congress could speed up the timeline on the $1-million limit or it could raise the tax-exemption ceiling.

But here’s the rub: If you have substantial assets and die before the limits are raised, your heirs get saddled with a lot of tax.

Advice: If you have a large estate, complicated issues such as blended families or unusual planning goals, consult an estate tax professional as soon as possible.

“There’s no way that people who should be doing estate planning should suspend that” while waiting for legislative relief, said Jim Seidel, a tax attorney and editor at RIA, a New York-based provider of tax information and technology.

Social Security: Social Security has long been considered “the third rail” of American politics--touch it and you die. Bush defied that axiom by campaigning on a platform that included Social Security reform.

His idea: Give Americans a choice between remaining in the current system or opting into an alternative program in which they would be able to direct 2% of their payroll taxes into a separate account. Participants would get to make investment choices with that money, deciding whether to direct some of it into stocks or keep it in more conservative government bonds, where Social Security money is currently invested. Those who opt for the separate account would agree to take a somewhat lower Social Security benefit in the future.

Analysis: How will this play today? It probably won’t, said Delaplane of the American Benefits Council. First, many Democrats--and officials at the Social Security Administration--are adamantly opposed to partial privatization. They say diverting any money from the system would send the program into a tailspin.

“I think we will have serious discussions about it, but getting it passed through a Congress that’s so closely divided is a monumental task,” he said.

Advice: If you get a tax cut, save the money for your own retirement. No matter what happens with Social Security, government retirement benefits probably won’t be enough to support you when you’re old. Also, take some time to learn about investing.

Retirement Savings: A massive pension reform effort to significantly boost the amount Americans could save in certain tax-deferred retirement plans died during the protracted election stalemate.

Analysis: At least portions of the proposal are likely to be quickly revived under Bush’s leadership. Specifically, Americans probably would be allowed to contribute somewhat more to tax-favored retirement plans and to make even bigger “catch-up” contributions. The proposal also has several incentives for small businesses to start retirement plans, and those probably will be part of any pension reform effort.

Advice: Figure out how much money you will need for retirement and whether your current contributions and investments will provide it. (If you’re uncertain how to calculate this, there are many Web sites that can help, including https://www.quicken.com.)

Remember that retirement money is generally not available for current needs. If your contributions and investments are enough, you’ll need to weigh the benefit of having your cash more readily available against the benefit of getting tax deductions for bigger retirement plan contributions.

If your current needs are modest and your tax bracket high, it’s probably best to contribute as much as possible to a tax-favored retirement account. If your current needs are great and your tax bracket modest, you’re probably better off leaving any discretionary income in taxable accounts to have more ready access to your funds.

Health Care: There are several issues here: The 47 million uninsured Americans; Medicare health benefits, particularly for prescription drugs; and the right of individuals to sue health maintenance organizations for denying or delaying treatment.

* Covering the uninsured. Bush and Gore had similar proposals for dealing with the uninsured, said Paul Dennett, vice president of health policy for the American Benefits Council. In a nutshell, both wanted to give tax credits to individuals and families who buy insurance on their own because they lack employer-provided health care. Meanwhile, companies would be given more tax incentives to offer health insurance plans.

* Medicare prescription drug coverage. There is less agreement on what to do about prescription drug benefits in the Medicare program. Some powerful Democrats want to boost prescription drug coverage dramatically. Bush wants private health plans to offer prescription drug coverage that consumers could choose to supplement their basic Medicare benefit. Those choosing the prescription drug benefit would pay a bit more in Medicare premiums.

There is also disagreement on other areas of health policy. Many congressional Democrats would like to change federal law to allow consumers to sue their HMOs. Bush wants a patients’ bill of rights similar to the one in Texas, under which a review process is required to determine whether a health plan made the right decision before the patient is allowed to sue.

Analysis: The only reform that probably will be achieved is the tax incentive for buying health insurance. The others are unlikely, at least in the near term.

Advice: If you don’t have health insurance, start shopping, either with the help of an insurance agent or on your own.

One option is an affordable “catastrophic” health policy, which carries a high deductible. Such a policy generally requires the insured to pay the expense of routine health care--checkups, doctor visits and medicines--but starts to pay medical expenses once the costs exceed a set limit, such as $2,000 or $3,000 per year.

Although those high deductibles can appear intimidating, they may actually cost less than health insurance premiums for a comprehensive policy.

Bankruptcy Reform: Congress probably will renew its efforts to make it harder to declare bankruptcy. How far those efforts will go is unclear. Given the Senate’s 50-50 split, “it may be difficult to move any kind of controversial bill,” said Sam Gerdano, executive director of the nonpartisan American Bankruptcy Institute in Alexandria, Va.

At one point, the House was considering allowing credit card companies to tap debtors’ retirement accounts, which are now protected in bankruptcy proceedings. That provision was not part of the bill Congress recently passed and which President Clinton has threatened to veto.

Analysis: With Bush as president, the threat of a veto is reduced, so Congress could pass a bill that would be more “strongly pro-creditor,” although it’s unclear whether the bill would go so far as to allow retirement accounts to be drained, Gerdano said.

Advice: Do your best to stay out of credit trouble. Never borrow more than you can pay back promptly; pay your bills before they’re due. However, if you’re inevitably headed for bankruptcy, it may be smart to file before any reforms become law, attorneys and consumer advocates agree.

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POCKETBOOK CONCERNS

George W. Bush will face a full slate of personal finance issues when he takes office next month. Here are the most potent:

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TAXES: Bush wants to kill the so-called marriage-tax penalty, but outright repeal is unlikely. Ditto efforts to bury the estate tax.

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SOCIAL SECURITY: Bush wants to give Americans the option to invest some of their Social Security funds on their own. A long shot.

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HEALTH-CARE: Americans without health insurance may get some help. Reaching agreement on Medicare drug benefits is more problematic.

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PENSION REFORM: Look for Congress to improve existing tax-deferred retirement plans, in part by raising contribution limits.

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BANKRUPTCY REFORM: The ability to erase debts in bankruptcy is likely to be circumscribed, but probably not to the extent some in Congress want.