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Gauging the Impact of the Sequester

As there was no last-minute agreement between Congress and the White House to postpone federal budget cuts scheduled to take effect March 1, the ax now falls. Unless a bipartisan effort somehow undoes them, assorted federal government agencies will have their budgets reduced by $85 billion between now and October 1, as the initial step in a planned $1.2 trillion deficit trimming over the next ten years. (The belt-tightening could have been more severe: without January’s fiscal cliff deal, it would have been $109 billion.)2

What gets cut? Broadly speaking, defense programs will take a 13% hit and other federal programs will have budgets decreased by 9%. (This is according to the projection of the White House Budget Office.)

Government contractors may be among the first to feel the pinch – especially defense contractors, and by extension their vendors. The White House projects the Army, Navy and Air Force having to slash a total of $34 billion this spring and summer, resulting in layoffs or furloughs for 450,000-500,000 workers. USA TODAY forecasts that four states – Virginia, Maryland, Texas and Alabama –will each see between 20,000-35,000 jobs lost as a direct result.

Some think that the punch to the labor market might end up being double or triple that. A George Mason University analyst recently commented to the New York Times that as many as 1.4 million private sector jobs could be lost when the effects of the sequestration are fully felt, with a third of them coming at small companies.

This potential wave of unemployment wouldn’t just be traced back to military cuts: the Obama administration has mentioned TSA agents being furloughed every tenth workday, FAA air-traffic controllers and Bureau of Prisons employees working fewer hours, and job cuts or reduced workweeks affecting the FBI, INS, FDA, NPS, VA and FHA. State programs linked to federal dollars (such as unemployment benefits, Section 8 housing assistance, foster care programs, Head Start and school breakfast programs, and Meals on Wheels and job retraining programs for seniors) could also soon see cutbacks. Cuts for many of these programs would begin in April.

What doesn’t get cut? While myriad government agencies will face reduced budgets, the cutbacks will not reduce Medicare, Social Security or Veterans Affairs benefits, Supplemental Security Income, Medicaid payments, Pell grants or food stamps. Medicare Part D subsidies won’t be cut either.

That doesn’t mean Medicare or Social Security recipients will be totally shielded from the impact of the sequestration. Some SSA offices might be closed certain days of the month or even for weeks or months – and the lines and waits at those offices could get longer. Medicare payments to doctors are slated to be reduced 2%.

Is there an undo button? Sort of. Congress might find it later this month, or in April. A short-term fix could be arranged, just like what happened at the start of the year when the fiscal cliff bill was passed: taxes could be raised here, pork could be trimmed there, and a little more time could be bought … time that could be used to improbably craft the “grand bargain” President Obama spoke of in 2012, or to give federal agencies a greater say in what gets cut.

After a few weeks of sequestration, public frustration might become more audible. Or, it might not be: last month, a Pew Research Center poll found that 40% of Americans saw merit in the March 1 cuts, with 70% of respondents saying deficit reduction should be a top federal priority.

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About the Independent Financial Advisor

Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.

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