Q. Any couple on Social Security with an income of $59,350 has a lot of assets, so they are not being taxed unfairly. There are probably not many people above $47,000. I don't understand why the really wealthy even use Social Security and Medicare. They use them because they like vacations, multiple homes and cars and lots of shopping trips. —-C.M., Grand Rapids, MI
A. It’s easy to believe that other people have so much income they don’t really need it or that it is spent foolishly. But the reality is that Social Security provides a large percentage of total income for the vast majority of retired Americans. Taxing that income is a burdensome tax on middle class retirees. The tax hurts our economy because it reduces consumer spending. Every dime of that money would certainly be spent on consumer goods and services.
Here’s an example. A couple who had a pre-retirement income of $90,000 (both worked) retires with $36,000 in Social Security benefits. They’ve also been active savers and have $600,000 in their 401(k) plans. This amount is well above average, but at a 5 percent withdrawal rate their standard of living is still no higher than it was while they were working. They have no defined benefit pensions.
If they draw at a 5 percent rate from their investments, or $30,000 a year, they will have a total income of $66,000 and they will be paying taxes on some of their Social Security benefits. Indeed, the taxation of those benefits will increase their income tax bill from $763 to $1,734. If they were less successful with their savings, or drew less from them, their income tax would also be significantly lower. Cutting back to $24,000 from their 401(k) plan would drop their tax bill by about $1,100. But they would also have $4,900 a year less to spend.
That’s a real life practical example for a broad group of working Americans. With a total income of $66,000 it isn’t too likely that they would use their Social Security benefits “because they like vacations, multiple homes and cars and lots of shopping trips.” What we’re talking about here is a harsh tax on the nation’s savers, compounded by a Federal Reserve policy that keeps interest rates on safe savings punitively low.
More than a few readers have responded to my recent columns on the taxation of Social Security benefits saying that Seniors have tax breaks and pay less in taxes than those still working. Not to mention that retirees also have deeply subsidized healthcare from Medicare.
I think that misses the point. To me, the issues are different. First, the taxation of benefits is a sneaky, dishonest tax, designed to slowly expand as inflation causes more and more people to pay it. If only some of the current generation of retirees pay the tax, it will certainly be paid by all of their children, decades after the lawmakers who passed it have left office. Taxing the next generation is another form of taxation without representation.
Second, it is definitely a middle class tax because it falls only on middle class incomes— such as the example above.
Q. I am looking at retirement in less than 10 years and my wife follows me in less than 15 years. Although we read your column and other financial advice we desire closer, hands on, face-to-face direction. Can you recommend any one person or company in the Seattle, WA area that may guide us without marketing their products or charging exorbitant amounts for their advice? We both are working professionals who can afford reasonably priced advice. —-J.S., Seattle, WA
A. I wish I could, but I can’t. I live in Dripping Springs, Texas for one thing. Also, I have found it is dangerous to do this because some financial planners have presented themselves to me one way and then behaved very differently with client assets.
Your best bet is to look for an adviser through NAPFA, the National Association of Personal Financial Advisors. This group works by fee only and can suggest NAPFA advisors in your area on their website, http://www.napfa.org, when you enter no more than your zip code.