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Higher taxes and retirement

By Barbara Whelehan ·
Friday, December 10, 2010
Posted: 11 am ET

Over the past couple of years, individuals and businesses have focused on deleveraging by cutting spending and paying off debt. The recession scared us all into trying to restore balance to our balance sheets. It's the responsible thing to do.

Extending the Bush-era tax cuts for another two years -- cuts which were never paid for in the first place -- does not seem like the responsible thing to do when it's clear our country is sinking ever deeper into the red.

Just last week, the president's Debt Commission came up with solutions to address the out-of-control deficit, but that news was drowned out by the partisan politicking going on over the Bush-era tax cuts.

In an NPR interview aired this morning, President Barack Obama indicated that over the next two years, the national conversation to address midterm and long-term deficits and debt will continue. But right now the focus has to be on the economy and on the folks who depend on unemployment compensation to pay their bills.

"When we look at the deficit and the debt, I think it's important to understand this doesn't need to be Armageddon," Obama told NPR's Steve Inskeep. "This is not a situation where we've got to slash and burn everything. It does mean we've got to make choices. And it means that discussions have to be serious and they've got to be based on fact."

Taxes and retirement

How would increased taxes affect Americans' retirement? According to a study released this week by the Center for Retirement Research, or CRR, at Boston College, increased tax rates wouldn't affect our retirement preparedness all that much.

The study examines how higher tax rates would affect the National Retirement Risk Index, or NRRI, which measures the percentage of American households at risk of not being able to maintain their standard of living after retirement. Based on figures from the Federal Reserve's Survey of Consumer Finances, the NRRI shows that, at current tax rates, roughly half of households (51 percent) were at risk in 2009.

No big surprise there. We're all used to surveys that reveal how woefully bad we are at retirement planning.

The study points out that government spending is projected to increase rapidly in the next few decades. Left unchecked, "government debt will increase from the 2010 level of 61 percent of GDP to 79 percent by 2020, 118 percent by 2030 and 180 percent by 2040," the study cites, using numbers from the National Research Council and National Academy of Public Administration.

Clearly this is an unsustainable situation.

So CRR looked at what would happen if current tax cuts would be allowed to expire and the top personal income tax rate would increase to 50 percent by 2020. (Historically, that's not out of line.) Plus a value-added tax would be introduced in 10 years, with the rate gradually increasing from 0.9 percent to 8.1 percent by 2050. Plus payroll taxes levied for Social Security would increase from 12.4 percent today to 14.7 percent by 2080, with caps raised.

The study doesn't resemble the Debt Commission's final report, though it acknowledges there are many ways to address the looming debt problem. This is just one hypothetical scenario.

It concludes that most of us can deal with these tax increases, even in retirement. Gen Xers would have to cut back on spending -- before and after retirement. The hardest hit demographic segment would be high-earning early boomers, those at the cusp of retirement who are in the top third income group. They would be hard-pressed to maintain their sumptuous lifestyle after retiring. (OK, so that last sentence does not appear anywhere in the study.)

Hey, I can live with that, if it will prevent our country from sliding into an abyss.

What do you think?


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End the Ponzi Scheme
December 13, 2010 at 1:20 pm

Since you bring up privatization, how bad of a deal is SS?

Based on your computation of $898,991 available at retirement age, if I get an immediate annuity, joint life, with installment return of premium, the monthly benefit for life is $4,427.

Based on the same assumptions, the starting salary of $30,000 becomes $98,000 after 40 years of 3% pay raises. The expected SS check is $2,128, less than half the annuity, and zero return of excess "contributions".

Which is the better deal? A better question is where is the other half of the check? Pure wealth distribution, take from the haves to give to the have nots. That's Marxism, not freedom.

Barbara Whelehan
December 13, 2010 at 11:47 am

What would happen if, instead of going to the "Treasury," Americans saved 6.2 percent of their income and their employers matched that contribution (so that the amount currently directed toward FICA taxes went instead to individual retirement accounts)? Using Bankrate's 401(k) savings calculator, and assuming a starting salary at age 25 of $30,000, 3 percent salary increases each year and a 6 percent annualized return, the account would be worth about $898,991 after 40 years. My colleague, Greg McBride, comes up with a bigger number: $935,327. Of course, this assumes no unemployment during this period, no unfortunate accidents that might interfere with the ability to work, no hard luck situations.

That's a nice pot of money we could all have if life were completely predictable and we all had the discipline to save year in and year out without taking withdrawals for any reason whatsoever. It doesn't address the Medicare component, and the quick cash drain that happens when illness befalls us -- that's another topic altogether. But I disagree that entitlements must end. They're an important social safety net. But they should be tinkered with so that future generations can benefit as past generations have.

But of course everyone is entitled to their opinions.

End the Ponzi Scheme
December 13, 2010 at 10:52 am

I am not required to file to collect, but I sure am required to pay for it. That is the fundamental argument. I am forced to subsidize the failure to plan on others part. I will be fine without social insecurity, but I'm also passing up a lot of luxuries today to make sure I don't need it. Why because of diligent savings, living on less than I make, even when it wasn't very much, am I now the target to extract more from?

Entitlements MUST end.

Barbara Whelehan
December 13, 2010 at 10:20 am

I'm familiar with the final report, and while the tax rates would go down, a lot of the credits and deductions would go away. That's the direction we'll probably take over the next two years. I'm not arguing for higher tax rates, just reporting on a study that shows it wouldn't affect that many people in retirement. As for Social Security, a lot of people depend on it for basic needs. No one forces you to file for it. If you really feel that way, delay filing until you need it.

End the Ponzi Scheme
December 13, 2010 at 10:08 am

Just checking, but you do realize that the report indicates tax rates LOWER than the ones that are currently being argued about.

Lowest bracket is 8-12% depending on how many votes they choose to buy with giveaways, potentially up or down from the 10% it is today. Middle bracket is 14-22%, less than the 25-28% it is today, and the top bracket for the evil rich folks is 23-28% down from 33-35%.

So, the argument that we need to raise the tax rate is just liberal soak the rich rhetoric.

Make social insecurity back into what it was promoted to be when the public was conned into thinking it was a good thing. A last resort measure to provide for those at the end of their life with nothing left. Oh, and the day you can collect, is about a year after the actuaries say you should be dead.

December 13, 2010 at 8:18 am

Tough choices need to be made, and the government as it works now is incapable or unwilling. They have for too long purchased votes with "entitlements", and this is unfortunately unsustainable. Social Security is one of the big problems, this needs to be fixed, and sadly the only way to fix it is to bring it back to its intended function -- to provide for those who would otherwise be destitute. We have to stop giving away these funds simply as a prize for living to age 65. I know a great many elderly who could live without, and only a few who desperately need just a little more.

Barbara Whelehan
December 12, 2010 at 8:50 pm

I agree the government needs to cut spending, too. It's been spending like it has unlimited credit -- kind of like consumers who rack up a lot of credit card debt without thinking about how they'll ever pay it back. Consumers who do that and don't have enough current income to make payments often file for bankruptcy. But it would be disastrous if our government defaulted on its debt. And we don't want it to inflate our way out of the problem, because that means all our hard-earned money becomes worth a lot less. We elect representatives to make sound decisions, but it seems to me that they're more influenced by lobbyists than they are by their constituents.

Ryan Fulkerson
December 12, 2010 at 3:45 pm

You mention in your first paragraph that "individuals and businesses have focused on deleveraging by cutting spending and paying off debt. The recession scared us all into trying to restore balance to our balance sheets. It's the responsible thing to do."

You then mention that the Bush-era tax cuts were not "paid for in the first place". It seems odd that when individuals and business need to tighten their belt, they need to cut spending, but when government needs to focus on its debt, it needs more revenue.

The tax cuts should not be spending, but a decrease in revenue. It is the producer's money, not the government deciding how much you get to keep and then counted as an expense on the balance sheet.

Barbara Whelehan
December 11, 2010 at 10:39 am

Actually, I'm not from Minnesota. But I do know someone who hails from there and he's a conservative Republican.

John Starkey
December 11, 2010 at 7:15 am

You've got to be from Minnesota!
Liberalism really is a mental disorder.