Robert Powell from MarketWatch posted a reasonably thorough assessment as to why retirement in the US is "endangered" with topics ranging from Social Security not being able to meet its obligation to why various demographic segments should expect a higher retirement age, smaller payouts and means testing.
This has been a popular topic here and from 50,000 feet something is going to have to have, actually a whole lot of somethings will have to give. From 30,000 feet a solution is probably going to include some combination of the above three ideas (higher retirement age, reduced payouts and means testing).
On the ground this means we all need to be out in front of this threat as part of our own solution. We all have our own emotional vulnerabilities and one of mine is being dependent on someone else or more precisely a bureaucracy that most people believe is grossly dysfunctional.
Consistent with past blog posts, for most people it is easier to control expenses than to go find an ever higher paying job meaning expenses are a function of our own discipline and that most of us won't find a job that pays us $50,000 a month.
One vague suggestion in the article was about giving more in the way of tax incentives for retirement savings. This might help but to the extent that people don't have enough saved I wonder if there is a way to stop taxing IRA distributions for retirees. I don't recall mentioning this here before and I am not sure if anyone else has talked about this but if someone has $300,000 saved and they take out $15,000 a year they might be paying $2250 in taxes on that money which sounds like a big number in relation to $15,000. Having access to the total distribution would be a difference maker for a lot of people (I realize some folks would pay more in taxes and some would pay less).
Most of my ideas on this subject focus more on things that people can do for themselves because, again, we have more control over the outcome than we do from positing what a dysfunctional bureaucracy should do but if we are in store for some combo of higher retirement age, lower payouts and means testing then not taxing IRA distributions could help smooth over the ill will that will come from social security austerity.
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16 comments:
I no longer have faith in our leaders to guide us. You are correct, eveyman must watch out for themselves. I believe with SS, the answers are simple for America...and in 1 week, a logical person (leader) can develop and implement a plan for the next 20+ years......but I just don't see this happening in our society.
Probably, if they decided to eliminate taxes on traditional IRA distributions, they'd probably tax us on recapture of tax deductions made on contributions;)
Well, we have a plan for the next 20 years. We need a plan for the 20 years after THAT.
I'd love for an expansion of the Roth IRA, or for a government or corporate sponsored Roth 401k. But the idea of a big expansion of tax sheltered savings could cause some revenue problems for the government.
But hey, I saved $50/month by dumping Comcast and moving to DirecTV. Now I gotta figure out what to do about internet.
Pretty good article and good comments from you, Roger. The comments about means testing remind me of a cartoon where a couple is talking to an IRS agent, presumably trying to resolve a tax problem; the IRS agent advises, "The first thing you have to do is stop thinking of it as your money." Well, we who receive SS "benefits" paid in for our entire working lives and it is fundamentally unfair to means test; turns SS into welfare/redistribution, very un-American.
Let's be pragmatic.
I would say in general that people who regularly read this blog and especially those who post comments needn't worry too much.
A rising tide lifts all boats; pretty much everyone here is ahead of the game.
Don't fall victim to Stage I thinking.
I would agree with that - but then the first thing that needs to be done is that SS tax applies to ALL salary.
SD I think that would crush people in the $150k-$200k range in places like NYC, SF and Boston.
Roger: I don't see how the people in the 150-200K range in expensive metros make an argument against raising the payroll cap on Social Security deductions. How are they more vulnerable than people in lower salary ranges who do not reach the cap? We don't worry about taking the full slice from someone making 75K, so why do we worry about the person making 150K, regardless of where they live?
To simplify let say the cap is at $100,000 in income. A self employed person would be paying $16,000 and a W-2 employee would be paying $8,000.
Will you concede that $150k in NYC is not a lot?
If the person making $150k has build a life around his take home pay and now you increase his tax burden by $8,0000 for a self employed or $4,000 for a W-2 there is an adjustment that must occur in their lifestyle and I believe that is enough of a difference to be very disruptive.
It may have been designed poorly but the transition to fixing it in that manner would crush a lot of people,
All applying SS to 100% of salary would do is shift compensation to some sort of unearned income. Rich people are smart that way.
Random - taxing ss all the way up would 'crush' folks in the $150-200K range? Don't mean to sound cold, but, first - SO WHAT? Second - IMO, 'crush' is debatable, I make less than $70K, if i incurred an extra $8K in taxes, i would not be happy, but it would not change my lifestyle at all.
It is all debatable but someone making $12-$13k/month paying $5000 in rent (this is realistic in NYC or SF, don't know about Boston) who then has to cough up another $600 in FICA could easily have a serious problem. I think far more people are stretched already than are in your situation. If more people were in your situation we would have to have this debate.
wouldn't have to have this debate--typo
Roger I agree with you. realistically the person that makes over the $110k gets a break on the last couple of months a year. This is a nice adder for me when I pay out teh max but not a make or break situation as described for a NY or CA resident. Cheers from CA!
There's another variable - if you applied it to all income, you could in theory lower the percentage.
We have to find other ways to curb expenses and to avoid taxes. It is something that everyone must do to prepare for the coming days
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