The Fiscal Cliff

[Paperback Writer]

I agree with looking at earnings, not savings, but I assume that would be impossible to implement at this point unless the IRS maintains all of its records going back 40+ years. Still, it's patently unfair that the guy who earned $75K a year throughout his life, saved 10% a year and built up a nest egg would have his SS benefits reduced to help cover the SS payments going to the profligate jerk who earned $150,000 a year, lived the high life, but saved nothing.

The SS admin keeps track of every dime you make; that's how they calculate SS benefits. So that would be the base rather than AGI from the IRS.

Now there are lots of problems using earnings as a basis for SS benefits like comparing a 75K income in Tulsa to a 150K income in NYC. However, I'm amazed at how neglectful some people are with respect to retirement planning and financial planning in general. I don't care if someone opts to vacation in Hawaii, go on a couple of cruises each year, purchase new cars every four years, buy an expensive house and continually refinace it until property values drop, upgrade their wardrobe semi-annully, buy a boat, build a pool, and have a flat screen TV in every room...until they want me to forgo my SS benefits and press for tax increases on those still working because they haven't managed to save anything for their retirement.

It's already coming to terms in my own family. Grandparents are being asked to contirbute to their grandchildren's college tuition. And my folks are asking me how we are managing to fund two kids in college and still keep on track for retirement while a sibling with a higher income apparently doesn't have sufficient funds to send his oldest to the same university as one of my kids. It's being treated as a family emergency...one that has been 18 years in the making. My answer: Well for starters we stayed in the same "comfortable" home and didn't upsize houses and double our mortgage; and when my kids lobbied with me to go to Disneyland with their cousins, I asked them if they would rather go to Disneyland or have help with college tuition. My folks are thinking about helping out this family with college costs and then deducting it from their inheritance. It's their money and I don't want to see my neice punished but it should make things real interesting when my folks estate is settled. I warned them that they're just doing what congress does and "kicking the can on down the road". It won't be long until they are asked to finance another family emergency...like another trip to Disneyland.

[PaloAltoCougar]

The SS admin keeps track of every dime you make...

Yes, I overlooked that when making my hasty response. I'm trying to remember if the annual statement the SSA sends me, reporting my earnings since my high school days as a stock boy at Ardens' ("Where You Dress For Less!"), includes earnings above the SS yearly maximum. I know it does now (and has for some time) because Medicare tax applies on all earnings, but will my report show my total earnings (above the SS max) prior to the year the Medicare tax kicked in?

[Paperback Writer]

Yes, I overlooked that when making my hasty response. I'm trying to remember if the annual statement the SSA sends me, reporting my earnings since my high school days as a stock boy at Ardens' ("Where You Dress For Less!"), includes earnings above the SS yearly maximum. I know it does now (and has for some time) because Medicare tax applies on all earnings, but will my report show my total earnings (above the SS max) prior to the year the Medicare tax kicked in?

OK. Maybe not exactly every dime. I don't think my paper route money ever got reported to the SS admin. And that a good thing because all that Arden's stock boy earnings you collected as a lad will most likely keep you from being defined as one of Obama's uber-wealthy.

[PaloAltoCougar]

OK. Maybe not exactly every dime. I don't think my paper route money ever got reported to the SS admin. And that a good thing because all that Arden's stock boy earnings you collected as a lad will most likely keep you from being defined as one of Obama's uber-wealthy.

Hey, I wasn't riffing on trifling, under the table payments to kids and the like (and btw, my Arden's wages in 1969, set well above minimum wage at a princely $2.25 hr., do in fact appear on my SS report). My question was whether, had I raked in, say, $40K during those years, which was well above the level for maxing out on SS, if that excess would show up on my report, or if the report simply shows you maxed. Since there was no Medicare tax, any excess would have been irrelevant for reporting purposes, I'd assume... Actually, this question is kind of pointless. I'll just assume I'm going to get screwed by SS when the time comes.

[Mormon Red Death]

When your purchasing power goes down, your benefit is dimished. I'm trying to figure out how much more I will need to save in order to overcome the change if enacted. Sounds like purchasing power would fall behind about .28% per year, which compounds over time. I'll have to map it out on paper to really grasp it fully.

Here is how small the difference will be to you. Let's say you get $1,800 a month for social security in year 1. Lets also assume you are going to get SS for 30 years. Lets also assume that the CPI-W would have been 3% and that makes the chained CPI at 2.72%. Over that 30 year here is your table:

Year CPI-W CPI-Chained Difference
0 103.00% 102.72% 0.28%
1 21,600 21,600 -
2 22,248 22,188 60
3 22,915 22,791 124
4 23,603 23,411 192
5 24,311 24,048 263
6 25,040 24,702 339
7 25,792 25,374 418
8 26,565 26,064 501
9 27,362 26,773 589
10 28,183 27,501 682
11 29,029 28,249 780
12 29,899 29,017 882
13 30,796 29,807 990
14 31,720 30,617 1,103
15 32,672 31,450 1,222
16 33,652 32,306 1,346
17 34,662 33,184 1,477
18 35,702 34,087 1,614
19 36,773 35,014 1,758
20 37,876 35,967 1,909
21 39,012 36,945 2,067
22 40,182 37,950 2,233
23 41,388 38,982 2,406
24 42,629 40,042 2,587
25 43,908 41,131 2,777
26 45,226 42,250 2,975
27 46,582 43,399 3,183
28 47,980 44,580 3,400
29 49,419 45,792 3,627
30 50,902 47,038 3,864
Total 1,027,629 982,259 45,370

It may seem crazy but I think you will be ok.

[Bo Diddley]

Here is how small the difference will be to you. Let's say you get $1,800 a month for social security in year 1. Lets also assume you are going to get SS for 30 years. Lets also assume that the CPI-W would have been 3% and that makes the chained CPI at 2.72%. Over that 30 year here is your table:

Year CPI-W CPI-Chained Difference
0 103.00% 102.72% 0.28%
1 21,600 21,600 -
2 22,248 22,188 60
3 22,915 22,791 124
4 23,603 23,411 192
5 24,311 24,048 263
6 25,040 24,702 339
7 25,792 25,374 418
8 26,565 26,064 501
9 27,362 26,773 589
10 28,183 27,501 682
11 29,029 28,249 780
12 29,899 29,017 882
13 30,796 29,807 990
14 31,720 30,617 1,103
15 32,672 31,450 1,222
16 33,652 32,306 1,346
17 34,662 33,184 1,477
18 35,702 34,087 1,614
19 36,773 35,014 1,758
20 37,876 35,967 1,909
21 39,012 36,945 2,067
22 40,182 37,950 2,233
23 41,388 38,982 2,406
24 42,629 40,042 2,587
25 43,908 41,131 2,777
26 45,226 42,250 2,975
27 46,582 43,399 3,183
28 47,980 44,580 3,400
29 49,419 45,792 3,627
30 50,902 47,038 3,864
Total 1,027,629 982,259 45,370

It may seem crazy but I think you will be ok.

You're right, that when looking at just social security, the numbers don't look too bad, when factored in with the rest of your retirement package. However, when you multiply that by 4, you're getting closer to what I'll be looking at. As I said, my military pension will be reduced as well. So at 10 years I'm already behind $2800 per year. At 20 years it's $7600. That's a pretty significant reduction. So I suppose I will need to figure out how much to set aside each month when I start retirement, to save for when I need to start drawing it, to even out my purchasing power.

[byu71]

You're right, that when looking at just social security, the numbers don't look too bad, when factored in with the rest of your retirement package. However, when you multiply that by 4, you're getting closer to what I'll be looking at. As I said, my military pension will be reduced as well. So at 10 years I'm already behind $2800 per year. At 20 years it's $7600. That's a pretty significant reduction. So I suppose I will need to figure out how much to set aside each month when I start retirement, to save for when I need to start drawing it, to even out my purchasing power.

I really can empathize with you. A while back I was looking forward to getting my SS tax free. Now I pay a rate of 35% on 50% of it (I think that is the right formula), so I too took a significant hit I wasn't planning on back when I was 36 years old.

However, when pensions got dropped from the companies I worked for, I figured I should start saving in earnest. I used every deferral plan my companies would offer. Now I am hearing Obama thinks there can be amounts in these accounts that are too much and he wants part of it.

[Bo Diddley]

I really can empathize with you. A while back I was looking forward to getting my SS tax free. Now I pay a rate of 35% on 50% of it (I think that is the right formula), so I too took a significant hit I wasn't planning on back when I was 36 years old.

However, when pensions got dropped from the companies I worked for, I figured I should start saving in earnest. I used every deferral plan my companies would offer. Now I am hearing Obama thinks there can be amounts in these accounts that are too much and he wants part of it.

Exactly. Things change. All I'm trying to do is understand the possible changes so that I can plan ahead for them now. I might need to retire a year or two later than I had planned.

And look, I'm not going to complain about this if it happens. We all need to do our share of carrying water to fix this thing. Let's try to take a balanced approach. Balance is in short supply these days.

[Joe Public]

Now I am hearing Obama thinks there can be amounts in these accounts that are too much and he wants part of it.

From the Green Book details, it looks like Obama's budget calls for disallowing additional contributions once total tax-deferred account balances reach a value sufficient to purchase an annuity starting at age 62 that pays $205K per year (this was estimated to be a little over $3 million). The existing account balance could continue to grow without penalty, and tax-deferred contributions would be allowed if the account balance were to fall below the capped amount.

[Paperback Writer]

From the Green Book details, it looks like Obama's budget calls for disallowing additional contributions once total tax-deferred account balances reach a value sufficient to purchase an annuity starting at age 62 that pays $205K per year (this was estimated to be a little over $3 million). The existing account balance could continue to grow without penalty, and tax-deferred contributions would be allowed if the account balance were to fall below the capped amount.

Was there anything on tax exempt accounts? Traditional IRAs are tax deferred while Roth IRAs are tax exempt.

I don't understand Obama's budget hang up with tax deferred accounts. If one has > 3 MM in a traditional IRA and reaches age 70.5, there's going to be a hefty mandated minimum withdrawal amount, much of which will most likely fall into high tax brackets. On the other hand, Roth IRAs are not subject to minimum withdrawal amounts and continue to grow tax free. I wonder if that is what Obama's team is really targeting. Since taxes are already paid on Roth IRA contributions, funds can continue to grow tax free, never have to be withdrawn, and can be left to the estate if not needed during retirement.

[The_Douger]

Isn't the point of the Roth that you pay your tax before putting it in to the account?

I mean, I am no expert on this stuff but if they tax it again, isn't that kind of double dipping?

[Mormon Red Death]

Isn't the point of the Roth that you pay your tax before putting it in to the account?

I mean, I am no expert on this stuff but if they tax it again, isn't that kind of double dipping?

Why should you get to keep money that you saved and invested? That's the governments money because you didn't build that they did.

[The_Douger]

Why should you get to keep money that you saved and invested? That's the governments money because you didn't build that they did.

I know, right? I just get tired of them looking for more sources of revenue from the people. It's time they cut back on the stuff that's traditionally been hard to cut back on.

[Paperback Writer]

Isn't the point of the Roth that you pay your tax before putting it in to the account?

I mean, I am no expert on this stuff but if they tax it again, isn't that kind of double dipping?

In a traditional IRA both contributions and earnings are eventually taxed when they are withdrawn. In a Roth IRA, contributions have already been taxed but earnings are never taxed if they've been invested for at least 5-years in a Roth IRA. If contributions are not withdrawn, at some point earnings can outpace contributions. Think of it as a mortgage in reverse. Borrowers typically pay 3X the original amount of their mortgage (going from memory here) so more is paid in interest than principal. It's very possible the reverse works if Roth IRA holders make good investment decisions and hold their investments for long enough. And I think that what's Obama's team might be looking into. Roth IRAs are supposed to be retirement accounts but can be used for estate planning if other funds exist to fund retirement. In short, its a good strategy to avoid long-term capital gains tax.

[Joe Public]

Was there anything on tax exempt accounts? Traditional IRAs are tax deferred while Roth IRAs are tax exempt.

It used the acronym IRA without distinguishing between traditional or Roth. If I had to guess, I would think you're right and that they would seek to include Roth accounts in the calculation.

I don't understand Obama's budget hang up with tax deferred accounts. If one has > 3 MM in a traditional IRA and reaches age 70.5, there's going to be a hefty mandated minimum withdrawal amount, much of which will most likely fall into high tax brackets. On the other hand, Roth IRAs are not subject to minimum withdrawal amounts and continue to grow tax free. I wonder if that is what Obama's team is really targeting. Since taxes are already paid on Roth IRA contributions, funds can continue to grow tax free, never have to be withdrawn, and can be left to the estate if not needed during retirement.

I go back and forth on this. In theory, I'm fine with the government placing a high cap if they need revenues now. However, as byu71 pointed out earlier, the projected revenues from this aren't even $10B over a ten-year period. It's a drop in the bucket. I don't want to assume this is just class warfare / Romney backlash, but I haven't come up with a viable alternative yet.