Opening Music Plays
HOST: Welcome to the NAIFA Advocacy Podcast, the broadcast about important legislative issues affecting the insurance industry. I’m Andy Moyer, communications producer for NAIFA. Lately we’ve been hearing more and more about something called “Pay-Go.” To learn more about Pay-Go and how it affects NAIFA’s members we’re speaking with Michael Kerley, senior vice president of federal government relations at NAIFA. Michael, thank you for joining us here today on our podcast.
MIKE KERLEY: Glad to be here, Andy.
HOST: First, Mike, can you tell us exactly what is Pay-Go?
MIKE KERLEY: Well Pay-Go is simply shorthand expression for “pay as you go.” Every family practices pay as you go. You bring in so much money; you pay out so much money. And generally it’s not a good idea to exceed the amount of money that you bring in. Well Congress operates somewhat on the same way and they have budget rules. One of those budget rules is called pay as you go. The Congress had allowed those rules to lapse a couple of years ago and unfortunately our budget deficits ballooned but when Congress reconvened this last January they restored the Pay-Go, or pay as you go budget rules, for this Congress.
And I think the public can see if they’d been paying attention that in fact deficits have been going down.
HOST: Well that seems pretty straightforward but what role does this Pay-Go rule play in Congress’ operations?
MIKE KERLEY: Well I’ll tell you something. It’s created a mad scramble for revenue offsets. That’s really the biggest implications. What that means is this. If Congress wants to increase the funding for a particular program they have to find the revenue to do it. Well there’s only two things you can do to get revenue to pay for that new program. First, you can get it from some other program. So you diminish a program. Or you increase taxes, revenue in other words, to pay for that program.
That has created a tremendous amount of pressure up in the Congress to find what they call “offsets” for new spending programs. The Democrats that now control Congress do in fact have a different priority list than the Republicans who had controlled Congress for a number of years. And each one of these initiatives is going to cost money. And that’s where the pressure builds.
HOST: So now with this Pay-Go rule re-established what does this mean to our NAIFA members?
MIKE KERLEY: Uh, a big danger sign has gone up. I mean, danger, danger, danger. Um, most members of NAIFA don’t really focus on the fact that the products that they provide for their clients all come with really valuable tax incentives. Life insurance inside buildup, life insurance death benefits, disability income nontaxable, health insurance benefits, retirement benefits in both annuities and qualified retirement plans. All of these products and services that NAIFA members use to serve their clients have a tax component to it.
That tax component adds up to about 1.5 trillion dollars. That’s trillion dollars (!) worth of what I call sales incentives for the public to buy these products. And the danger here is that Congress will look at those sales incentives and decided they’d rather scale back the ones that apply to insurance products and services and give them to something else.
HOST: So essentially stripping out all the sales incentives from the product?
MIKE KERLEY: That could happen. And that’s where the danger is. Senator, uh, Chairman Long used to sit at the head of the Senate Finance Committee every time it convened to look at ways to fund new government programs and he’d say, well the job here today folks is to carry out that old adage of don’t tax you, and don’t tax me, but tax the man behind the tree. What we don’t want to be, ladies and gentlemen listening to this podcast, is the man behind the tree.
HOST: Can you give a present-day example of how the Pay-Go rule has impacted business of insurance agents and financial advisors?
MIKE KERLEY: Well, right off the bat when Congress came back in January one of the five items on the Democratic to-do list was to increase the minimum wage. Sounds pretty simple, right? Simply pass a law that increases the federal minimum wage. But Pay-Go raises its ugly head, and so they say, oh, well, okay, we have to offset the cost of Pay-Go. Where did they… what was the first thing they turned to? They turned to scaling back the amount of income that people could put into deferred compensation plans.
Now, the proposal that was put together was flawed from the get-go but the point is that’s the first place they went was to the deferred compensation aspect of our members business. And so that should a produce a huge red flag over the NAIFA building to say we need to be on guard. A second example is the state children’s health insurance program; a wonderful program to help disadvantaged children get health insurance. And in fact NAIFA and its health insurance conference has actually supported that program.
However, certain members of Congress want to expand the program to the point where it needs a considerable amount of additional income to pay for it. And so they’ve looked around, the Congress has looked around for that revenue. And first they found a lot of it in the tobacco, by increasing the tobacco tax, the increase on tobacco products. Not a lot of sympathy there but they still needed a little more money so what did they do?
They, at least the House, cut back on Medicare Advantage Programs that our members are selling to senior citizens. And they’ve also added a $2.00 a person tax that employers must pay for each person for whom they have a health insurance plan. Once again sets off all kinds of danger signals here and while those may not be the primary focus of NAIFA association members still it’s starting to get close to home.
HOST: Wow. Well what about the future? Are there threats to other products and services that our NAIFA members use to help clients achieve their financial goals?
MIKE KERLEY: Well as I said earlier a minute ago the products and services that our members provide amount to about 1.5 trillion dollars worth of non-taxed income and so what our fear obviously is that they will move from things like Medicare Advantaged which is important to a lot of our members but move to the mainstream which is life insurance, death benefits, inside buildup, disability income, long-term care insurance, and so on, annuities. And there are all kinds of ways at getting at those products. For example, with life insurance the Congress could decide to cap the amount of death benefit that an individual beneficiary would be allowed to have. They could make loans under life insurance policies taxable instead of what they are now, not taxable.
HOST: Significant changes.
MIKE KERLEY: Significant changes to the products. You could also attack any insurance product offered by an insurance company, um, through something called a deferred acquisition tax which is a tax that’s actually applied at the corporate level but in fact is aimed at inside build-up of life insurance and annuities. There are all kinds of worry in the land or there should be at least.
HOST: Well what should NAIFA members be doing to make sure that Congress maintains the current tax benefits the industry products enjoy?
MIKE KERLEY: Just like any legislative threat members of the association must pay attention to what’s going on. And the fact that members are listening to this podcast is evidence that our members are doing so. So I congratulate them. Second thing is they have to be willing to act. For anybody who is skillful enough to download this podcast and listen to it you are skillful enough to respond to an action alert on the NAIFA website.
We have a legislative center on the NAIFA website and when we send out an action alert it directs you to go to that legislative action center and respond to that action alert. These are just really simple, you know, if this were football it would be simple blocking and tackling. I mean that is the, that is as simple as it gets in this business. Third thing you could do is, members could do, is to talk to their legislators. Explain the role of insurance products in transferring risks that individuals have.
The risk of dying too soon. Living too long. These are the risks that our industry takes on for the public. At the same time it relieves the federal government and the state governments of the responsibility of doing so. So I believe our members have a great story to tell legislators. I think one other thing that we might want, members of our association might want to consider, and that is making certain that the middle class is well served.
Statistics published by the life insurance marketing research association indicate that to some extent we are not serving the middle market. Congress did not create these tax incentives to help rich people. They created these tax incentives to help the middle class. And if our industry is not serving the middle class then it once again opens us up to inspection.
HOST: Michael, thank you very much. We really appreciate you being on our podcast today. And I hope this explains a lot of this to everybody.
MIKE KERLEY: Glad to be here, Andy. Thanks.
HOST: NAIFA encourages you to reach out to your legislators and discuss the limitations Pay-Go could have on the industry and your client’s financial future. For more information on Pay-Go or how to contact your elected officials log on to NAIFA’s legislative action center at www.naifa.org/advocacy.
Membership in NAIFA is all about your success. We give you the tools you need to grow your business and propel your career as an insurance or financial advisor. Learn more about becoming a NAIFA member and join today at www.naifa.org/join.
[This 2007 podcast is a copyrighted production of the National Association of Insurance and Financial Advisors. All rights are reserved.]
Closing Music Plays.
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