Vision for retirement clouded by tax proposal

Few discussions of Trump’s proposed tax changes go beyond whether it favors the wealthy or the middle class (apparently we no longer have lower class or poor). Governing, I believe, requires a vision for what the country, its peoples’ lives, and the economy should look like in years to come. Not all tax savings are beneficial. Form a vision for the future first, and then find the gumption to pay for it.

Consider growing old and retiring. What should that look like for someone who worked hard for 30 to 50 years?

Social Security benefits are meager. Even at the highest payout, retirement on SS alone is difficult. If both spouses achieve full benefits, they can retire in the lower middle-class and scrimp and maybe get along.

For the last 50 years SS benefits have not increased beyond inflation (and are not likely to). Simultaneously, useful pensions, even if only as a supplement, became extinct except for unionized trade workers, government employees, and for executives and professionals who face little difficulty in surviving in retirement. (Ironically, the people who make Social Security policy are those not relying on SS.)

Given the lack of pensions and insufficient Social Security, supporting increased retirement saving is immediate if you believe that hard-working people should have a decent retirement. For decades, retirement saving has been encouraged by giving a tax break to those who contribute to IRAs of various types.

Relying solely on workers’ planning to supplement SS simply isn’t effective; several of the recent Nobel Prizes in economics have gone to economists who by experiments and biology demonstrate that humans don’t think rationally.

Part of the current tax proposal limits that encouragement, lowering the tax-deferred deductible contribution from $18,000/year to $2,000/year.

A couple who by their mid-3os manage to enforce a budget allowing a $500/month total (including employer) contribution, at a lucky 6 percent return, by age 65 amass $500,000, allowing a (non-inflation adjusted) taxable retirement supplement of $3,000/month from age 66 through 95 (still assuming an amazing 6 percent return; reduce all non-contribution figures for more realistic estimates). Those who save later or less will have reduced supplements.

At the proposed limit of $2,000/year, after 30 years, the couple will generate (at 6 percent return) a supplement of only $1,000/month (not inflation adjusted), barely able in 2065, say, to keep up with increased rent.

A contribution limit this low is thus almost punitive to the working class; it guarantees a retirement financial struggle even worse than during their gainful years.

Lowering the IRA deferred tax contribution limit thus drastically frustrates reaching the goal of comfortable retirement for hard-working couples. Instead, it would create impoverished seniors, while aggravating income disparity among the retired.

It makes more sense, if you favor livable retirements, to make sure the contribution limit is not set below what working-class couples might afford (higher limits benefit the wealthy).

Yes, there will be lost current tax revenue compared to the tax “reform” proposal. Eventually, all the deferred income, and gains, are taxed; for the less wealthy, at about the same tax rates pre- and post-retirement.

So it’s an issue of when the income is taxed, not tax avoidance. (Wealthier earners contributing now near the $18,000/year current limit might see lower overall taxes, by falling into a lower tax bracket on retirement.)

No responsible politician or economic theorist can promise that a better future for you, your children and grandchildren can come without cost. Much of the tax “savings” touted today will result in increased (and partially avoidable) future costs.

Potentially, an investment in more deferred taxes and resulting higher retirement supplements will reduce government and societal expenses for economically borderline retirees through their increased financial security.

The proposed stingy limit on tax deferred IRA contributions doesn’t help achieve my vision of livable sunset years for people who worked hard.


Jed Somit is a resident of Kapaa.


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