How the election results could affect your finances
The aftershocks are still being felt from a contentious, polarizing election, but things might not change all that much when it comes to your finances.
Sure, the stock market could see a lot of whipsawing as traders react to new developments. Layoffs, or hiring, could accelerate in coming weeks and months as businesses assess the political climate.
But when the dust finally settles, there's a good chance your money situation down the road could be fairly similar to where it is now. The prospect of legislative gridlock in Washington is a big reason for that. Democrats appeared likely to retain control of the House of Representatives, but not take power in the Senate.
Sigh of relief for stock market
The stock market was remarkably resilient in recent weeks and rallied shortly after the election on the increasingly likely prospects of a divided Congress. Legislative inaction with perhaps some real compromise are scenarios that many on Wall Street would welcome.
Investors "take some comfort in the prospect of policy gridlock, under the assumption that nothing too damaging to the economy is likely to occur,” said David Joy, chief market strategist at Ameriprise, in a post-election commentary.
Brad McMillan, chief investment officer at Commonwealth Financial Network, was more blunt. With a divided Congress, he wrote, "The most damaging outcomes are now pretty much off the table,” citing higher tax rates and increased regulations as examples.
The bottom line: Stocks historically have trended higher regardless of whether Democrats and Republicans occupied the White House.
Employment and stimulus action
As with the stock market, the nation’s employment situation worsened earlier in the year with the onset of the COVID-19 pandemic and economyshutting means to limit the contagion. But since then, hiring has gradually improved, taking us to jobless levels associated with a mild recession. Some industries were decimated — hotels and restaurants among them — but most were not. Millions of office employees have successfully transitioned to working from home.
The employment outlook should continue to improve. The immediate issue centers around the size and scope of a new round of coronavirus relief.
With the election over, leaders of both political parties have reason to get down to serious negotiations. Democrats have pushed for a more costly and extensive stimulus package than Republicans. But with neither party receiving a clear election mandate, compromise might be in order.
Joe Biden had proposed some aggressive employment proposals, such as raising the federal minimum wage to $15 an hour (the $7.25 current minimum still applies in about 20 states). In a divided Congress, this one isn't likely to become law, though income inequality will persist as a contentious political issue.
Bonds, interest rates in the clear
Presidents and Congress don't set interest rates, which influence borrowing costs on everything from mortgages to auto loans. The Federal Reserve directly influences short-term rates, while investors in the bond market determine long-term rates. The election thus should not have much of an impact on interest rates, at least initially.
Interest rates have declined the past four decades. While the next major shift likely will be toward higher rates, it won't happen overnight, especially if the economy remains sluggish.
A low-rate scenario has helped to sustain home sales and improve the homeownership rate. Housing didn't become a lightning-rod political issue during the presidential campaign because the market is much healthier than it was in prior recent elections.
If inflation takes hold — perhaps sparked by the massive coronavirus-relief packages — that could push rates higher eventually. Bond prices, which drop when rates are rising, likely would be pressured then. But we're not there yet.
Radical tax changes unlikely
Tax policy was one area where presidential candidates Joe Biden and Donald Trump did differ significantly. Trump led a Republican charge toward comprehensive tax reform in 2017 that featured income-tax cuts for many Americans but favoring the wealthy and corporations. Biden vowed to repeal those changes and then some.
Biden's revenue-raising campaign thrust focused on corporations and wealthy individuals. One proposal would raise the top individual rate from 37% now to 39.6% for people with taxable incomes above $400,000, while also taxing long-term capital gains and qualified dividends as ordinary income at a 39.6% rate for people with income above $1 million.
The ability to avoid capital-gain taxes on inherited assets, through what's known as the "step up in basis," also was in Biden's crosshairs. Anyone can take advantage of this significant tax break, but Biden would like to repeal it for wealthy individuals.
But again, assuming a gridlocked political situation in Washington, significant tax changes don't seem likely. Even if Democrats somehow emerge with a razor-thin Senate majority following a couple of run-off races next year, it's questionable whether everyone in the party would be on board for what would be difficult votes in Congress.
No likely fix for Social Security
Neither candidate voiced much enthusiasm for reforming the nation’s main retirement-benefits program, keeping with a time-honored tradition whereby politicians from both parties have avoided tough funding decisions here.
Biden did propose a 12.4% Social Security payroll tax, to be split among employers and employees, for people with wages above $400,000. Currently, this tax ends at income of $137,700. According to the Tax Foundation, this would thus create a “donut hole” of untaxed income between $137,700 and $400,000. Like other tax proposals, the change would require Congress' approval.
Social Security’s trust fund — essentially its accumulated reserve — is projected to run dry around year 2035. After that, the system would be able to pay about 75% of benefits.
Fortunately, the COVID-19 outbreak and job losses that followed (with reduced payroll-tax revenue) likely won't worsen Social Security's funding situation that much, assuming the pandemic is brought under control reasonably soon.
Social Security's long-term expense and revenue assumptions aren't easily altered by short-term developments, and they "already implicitly incorporate recessions and recoveries,” wrote Alicia Munnell, director of the Center for Retirement Research at Boston College, earlier this year.
Still, she and others urge politicians to tackle the funding problem sooner rather than later to help ensure that Americans retain confidence in the system. But in a highly divided political climate, that doesn't seem likely.