Results 1 to 2 of 2

Thread: Keeping an Eye on Retirement

  1. #1
    Banned
    Joined
    Jan 2003
    Location
    B.C & USA
    Posts
    1,869
    Thanks
    0
    Thanked 0 Times in 0 Posts

    Default Keeping an Eye on Retirement

    What does the future hold for your retirement ? What changes are being proposed:

    The leading reform proposal in Bush's first term said that individuals could set aside 4 percent of their pay (up to the payroll tax cap, currently $90,000) in personal accounts, but that the maximum anyone could set aside per year was $1,000. In his new proposal, however, the president added a promise to phase out that $1,000 cap. This may sound like an innocent change. But it turns a plausible plan into a crazy one.

    The phaseout kills the progressivity in personal accounts. Under the old proposal, a worker earning up to $25,000 could divert 4 percent into his account, whereas a worker on $90,000-plus could divert just over 1 percent; the opportunity to earn superior investment returns was to be concentrated among workers who most needed it. But if Bush phases out the $1,000 cap, that progressivity will ultimately be eliminated.

    This might be okay if you could create extra, compensating progressivity in the residual Social Security system. But Bush's cap phaseout makes that almost impossible.

    Why? In an uncapped system, high earners get big personal accounts; in return, they accept commensurately big cuts in their traditional benefits. According to Jason Furman of the Center on Budget and Policy Priorities, by 2075 high earners' traditional benefits might be reduced -- get this! -- to zero.

  2. #2
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: Keeping an Eye on Retirement

    I'm going to try like hell to avoid getting political in the Dollar Den, but the current structure of Social Security taxes and benefits plus some of the alternatives being bandied about in regard to social security reform sort of make it unavoidable.

    First point is that the original Social Security tax and benefit plan was based on the assumption that the system was not merely a wealth transfer scheme, but that there was some actual linkage between the amount of taxes paid and the amount of benefits received by a particular individual. This is the reason that a $90,000 cap exists and that higher earners aren't charged additional SSI taxes on incomes above that amount. This is also the reason that a de-facto cap exists on the size of SSI checks. The basic premise was that regardless of actual income a person should not be taxed to fund a system which will not be paying commesurate benefits to that same person. However, after 2018 this will no longer be the case, because ...

    Second point is that the Social Security system simply cannot be left in its current state without causing a major revenue shortfall in 2018 when the dollar amount of promised SSI benefit checks exceeds the dollar amount of SSI taxes being collected. Even though the Social Security system is 'owed' money from the US general revenue budget from 2018 through 2042 to pay off the 'special' SSI bonds it 'sold' to the general revenue budget, the fact is that this SSI surplus money has already been spent on general revenue items like social programs (part of the reason for Clinton's 90's economic boom), and that the ONLY way that these 'special' SSI bonds can actually be paid off is to hike general income tax rates like crazy beginning in 2018. If something doesn't change in the meantime, that 2018 general income tax hike is going to be REgressive, meaning that higher earners will wind up paying a much higher tax rate and that there will be no $90,000 a year cap on the income to which the general income tax rate increase will apply. Some preliminary numbers bandied about indicate that the size of the tax rate increase necessary for the SSI 'special' bonds to be paid off without making other changes in the general revenue federal budget is on the order of 34 percent - that's a HUGE number.

    My point here is that any relative gains or losses in future social security benefits will amount to a pittance compared to the additional general income tax burden which will fall upon high earning Americans once the general revenue fund must start paying off the SSI 'special' bonds in 2018. We're talking a couple of thousand dollars worth of difference in annual SSI checks, versus $15,000 or $20,000 or even $30,000 per year worth of additional general revenue income tax on a $100,000 annual income. IMHO THIS is Social Security's dirty little secret ! Furman's comments about the relative size of conventional SSI checks are a total red herring because the issue of huge 2018 general income tax increases necessary to start paying off the 'special' SSI bonds from general tax revenues is not even being discussed, yet the financial repurcussions are potentially 10 times larger !

    Yes high earners are likely to get hosed on the benefits side considering the fact that political realities are going to force some SSI benefit cuts along with general income tax increases. When it comes time to cut SSI benefits, one of the methods being bandied about is to add a 'means test' i.e. if you have saved your own retirement money privately (either through an IRA, 401k, or some future privatized SSI account) then you will have the 'means' to pay your own retirement expenses and thus won't need to receive an SSI check ! But high earners are going to get hosed far worse on the income side, with the majority of the hosing will come from the transfer of the actual source of SSI revenue away from the SSI tax (which is currently capped at a 14% tax rate on a $90,000 income level) and to a general income tax instead (which is not capped, which are currently running up to 33% tax rates, and which would apply to ANY income level) beginning in 2018. And the ultimate insult is that SSI checks are considered to be taxable income, meaning that even if the gov't does wind up giving high earners an SSI check after 2018 they'll turn around and tax 1/2 of it right back again !

    Bottom line as far as I'm concerned is not to count on receiving any money from Social Security, save privately for your own retirement, and hope like hell that the future general income tax rate increases necessary to fund the SSI system plus pay off the SSI 'special' bonds after 2018 aren't as draconian as the early numbers say they will need to be. This is another reason that I prefer the Roth IRA structure, because the money going into Roth accounts is being taxed at today's (presumeably lower) income tax rates but the money will be tax free when it is withdrawn after retirement. On the other hand, a traditional IRA defers all taxes on both contributed money and interest/dividend earnings until the money is withdrawn after retirement, at just the moment when general income tax rates are likely to have to be significantly higher than they are today to allow the general revenue budget to pay off the 'special' SSI bonds.

    ~
    Last edited by Melonie; 02-15-2005 at 02:05 AM.

Similar Threads

  1. Retirement
    By spartaca in forum Stripping (was Stripping General)
    Replies: 1
    Last Post: 07-31-2011, 07:38 PM
  2. Replies: 11
    Last Post: 06-20-2008, 07:43 AM
  3. Retirement...what will you do?
    By scarlett_vancouver in forum The Lounge
    Replies: 20
    Last Post: 04-16-2007, 10:04 PM
  4. retirement
    By sxybrat07 in forum Dollar Den
    Replies: 19
    Last Post: 04-22-2006, 08:30 PM
  5. Keeping an eye on the "Moral Majority"
    By Tigerlilly in forum Political Poo
    Replies: 13
    Last Post: 11-17-2004, 07:52 PM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •