Advisers want Washington to let the budget ax fall

Cuts might deal the nascent economic recovery a short-term setback, but investment advisers say the medicine is necessary to start curing the nation's long-term fiscal ills

Feb 24, 2013 @ 12:01 am

By Mark Schoeff Jr.

+ Zoom

Looming automatic federal spending cuts might deal the nascent economic recovery a short-term setback, but investment advisers say the medicine is necessary to start curing the nation's long-term fiscal ills.

If Congress and President Barack Obama can't agree on legislation to avert the reductions this week, the $85 billion sequestration will go into effect Friday. After that date, federal agencies would have until Sept. 30 to implement a 5% across-the-board cut — 8% for defense programs.

“Is it going to be painful? Absolutely,” said Michael Masiello, president and owner of Masiello Retirement Solutions. “I hate the concept of doing it now. It's not a pleasant pill. But the American people need to swallow it — and hold the politicians accountable.”

Indeed, an InvestmentNews survey last week found that 66% of the more than 200 respondents support sequestration.

Among the re-spondents, 74% said the spending cuts would hurt the economy. Of those who felt that way, 73% said the short-term pain would be worth the long-term gain.

“If sequestration takes effect, it will certainly weaken the economy,” said Neal Solomon, managing director of WealthPro LLC. “The question is: Is that better or worse than continuing on a path of not addressing the problem? This problem needs to be addressed.”

The Congressional Budget Office has estimated that sequestration, combined with the tax increases that hit this year as part of the fiscal cliff deal, would reduce economic activity by 1.5 percentage points, cutting estimated 2013 GDP growth in half to 1.5%. Job losses related to sequestration have been estimated at between 1 million and 2 million, while government cutbacks could affect everything from food inspection to transportation security.

GETTING READY

Agencies such as the Securities and Exchange Commission are bracing for cuts. The SEC, which might have to trim its budget by more than $100 million, has not provided any details on how it would deal with a funding reduction, but SEC spokesman John Nester said that no staff furloughs or layoffs would result from sequestration.

Chairman Elisse Walter told reporters Feb. 14 that in the event of sequestration, it wouldn't be able to hire all the people it needed. “We won't be able to do all the things we plan to do, but we are prepared,” she said.

“Essentially, they have to operate with both hands tied behind their back and walking on crutches,” said Marilyn Mohrman-Gillis, managing director of public policy and communication at the Certified Financial Planner Board of Standards Inc.

Kevin Berenzweig, a retirement adviser at Retirement Strategies Group, has mixed feelings about the impending budget cuts. He said that although federal spending must be reined in, sequestration is a blunt instrument that would harm a fragile economy.

“It's going to have a negative psychological effect on consumer spending,” he said.

Mr. Berenzweig may see the impact of sequestration directly in San Diego, where he is based. The city is home to substantial U.S. Navy operations.

“It's definitely a concern,” Mr. Berenzweig said.

The tussle over sequestration is one of a lineup of fiscal battles in Washington. On Jan. 1, lawmakers and Mr. Obama narrowly averted automatic tax increases and spending cuts with the so-called fiscal cliff bill.

NEW DEADLINES

After sequestration, if Congress can't agree on a new federal budget — or extend the current one — by March 27, the government will shut down. And the federal debt limit ceiling is scheduled to expire in August.

Sequestration is the most easily survivable clash on the fight card, according to Barry Glassman, president of Glassman Wealth Services LLC.

“It's the least evil of the four,” Mr. Glassman said.

Sequestration was set in motion last year as an element of the plan to extend the debt limit ceiling, although both Democrats and Republicans had expected to come up with another budgetary blueprint that would not impose such across-the-board cuts. Neither side, however, has shown any willingness to compromise before the deadline. Still, it's unclear how long sequestration might last.

Even in his home region — Washington, D.C. — Mr. Glassman doesn't foresee a big sequestration impact if it doesn't last for more than a year.

“I don't think it's going to affect home prices, consumer spending and overall economic activity throughout the D.C. area,” said Mr. Glassman, who does not have any federal-employee clients.

Mr. Obama is calling on Congress to enact a package of spending cuts and tax reform, such as closing some deductions and loopholes, to stave off sequestration until lawmakers can agree to a long-term budget. Republicans counter that the fiscal cliff bill already provided tax increases on the wealthy and that Mr. Obama must offer more on the spending side.

There is some wiggle room. Under federal rules, agency employees must be given at least 30 days' notice before being furloughed — providing time for lawmakers to undo the cuts.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

INTV

Wirehouse training programs are in vogue

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Nationwide's 401(k) record-keeping fees are excessive, lawsuit claims

Plaintiffs claim practice of charging plans a percentage of assets is unreasonable.

Wealth management firms struggle with lower fees, fewer new clients

Advisers in North America earned less from clients last year and saw a decline in average fees, according to a new report by PriceMetrix.

These investors are allowed to put $500K into a Roth IRA at once

The HEART Act permits rolling all or part of life-insurance and combat-related-fatality payouts directly into the tax-free retirement plan, but few take advantage.

Labor's Alexander Acosta and SEC's Jay Clayton tell lawmakers they will work together on fiduciary rule

In separate appearances before Senate panels, the regulators stressed the cooperation that Republican legislators and opponents of the DOL fiduciary rule are demanding.

Brian Block denies cooking the books at Schorsch REIT

Former CFO claims everything he did was 'appropriate' and 'correct.'

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print