By John Wasik
NEW YORK Feb 17 Peter Orszag, former
budget director for the Obama Administration and now vice
chairman of global banking for Citigroup, sees a "trifecta" of
mega financial woes coming toward the end of the year that are
unlikely to be tackled by Congress before election day.
Speaking at the Executives' Club of Chicago on Wednesday,
Orszag said he sees this moment as a collision between
dysfunctional national politics and the ongoing economic
malaise. It is "a rare moment in economic history -- a tectonic
plate shift," he says.
I prefer to call what he identifies as the trifecta as a
triple-strength witch's brew: The expiration of Bush-era income
and estate-tax cuts and $1.2 trillion in automatic budget cuts
triggered by the debt-limit compromise passed last year.
If the Bush-era tax cuts expire -- a move endorsed by the
proposed White House 2013 budget proposal -- then millions may
find themselves in higher tax brackets. Estate taxes would also
revert from a $5 million exemption and 35-percent rate to 55
percent with a $1 million exemption.
There's more bad news if Congress remains at loggerheads:
The $1.2 trillion in triggered cuts would impact everyone from
the Pentagon to Medicare recipients, although specific program
parings haven't been identified. It may put the brakes on a U.S.
economy still lumbering along in recovery mode.
Orszag estimates that the budget cuts and tax increases
could clip up to 4 percent from gross domestic product. By my
back-of-the-napkin math, that potentially triggers another
What will Congress do to avoid this caldron?
Orszag, who once had a seat among the inner circle of White
House policy planners, says Congress may choose the "fall over
the cliff" strategy and not do anything during the lame-duck
period between election day and when the new Congress is seated
Despite the recent compromise reached in extending the
payroll-tax cut and jobless benefits, Congress is expected to do
little else of substance for most of the year.
Orszag says congressional action is stymied by
"hyperpolarization" -- where there is political center in which
to forge compromises on major tax, social program and spending
issues. In the interim, Americans are left wondering how to plan
for their financial future, a mass uncertainty that is
contributing to the dismal poll ratings for Congress these days.
As you prepare your 2011 taxes, it's an excellent time to
talk to your advisers to see what you can do to avoid huge
surprises 10 months from now. Here are four ways to prepare:
* Talk to your financial, tax and estate planners about
several scenarios. What will you need to do if the tax cuts
expire? Will you need to start rounding up more deductions for
2013? What about your estate plan? There are a number of
strategies involving trusts, gifting and life insurance that can
reduce its taxable value.
* Review your European exposure. Orszag's biggest concern
about the European sovereign debt crisis is a "contagion" to
U.S. stocks. Are you exposed to some of the largest lenders to
the most imperiled countries like Greece, Italy, Portugal,
Ireland and Spain? If so, how can you reduce your stake in these
* Where's your volatility insurance? Every portfolio needs
it these days. You can hedge large stock-market risks with
bonds, inverse exchange-traded funds or put options. Work with a
fiduciary adviser to run a fine-tooth comb through your
* Keep on saving. If Medicare or Social Security cuts
surface, you can be prepared for them by boosting contributions
to your retirement accounts or other savings. Enroll in
automatic savings plans through your employer, if you haven't
At the very least, educate yourself about worst-case
scenarios and decide what you need to do. An investment policy
statement outlining goals, risk and portfolio allocation is a
good start. That way, when Washington's toil and trouble starts
bubbling again, you'll be prepared.