Are Retirees Leaving Future Generations High and Dry?
Morphh makes some interesting observations, prompted by (but not only in response to) some comments by Hank Geison, that seem like they warrant a new thread.
Hank, you’re comparing a marginal rate with an effective rate. Since we’re talking about low income households, factoring the prebate would reduce the effective rate to something that is similar or lower then the current system.
– start rant
Since you’re talking about double taxation, SS, and medicare objections. Let me object to your generation primarily voting for and increasing social programs that are paid for by your children. Over your lifetime, you paid for government service provided to your parents, and we’re paying for you… but it’s not quite the same thing now is it. Your generation says “we’ve paid our taxes”.. “don’t tax us again”… Baloney You haven’t paid for squat. You have debt through the roof with 60 trillion in unfunded liabilities.With the medicare and social security explosion, there is no way your children can pay this much – it is a pyramid scheme that is going to collapse. Generational robbery! Given this, why shouldn’t you pay more for your own social programs? Why should you break my back with 60 trillion in additional taxation? This is your unfunded burden – not mine. This is the tax you didn’t pay. You should be double taxed, triple taxed, quadruple taxed, until we either decrease the programs or pay for them.
If we pay for them, I prefer the option to grow the economy like crazy to make up the losses. Hmmm, what tax system is an economic machine. oh ya, the FairTax!
Perhaps this is a discussion for another thread. The fiscal gap and generation wealth transfer.
–end rantHank, I’m not directing this personally at you… You may not have voted for any such programs. I’m speaking generally and I’m making an extreme point to stir up some discussion.. So I hope you don’t take this the wrong way. I hooked onto a couple of key words and you just happen to be the line of fire – I’m in frisky mood. Sorry
As one who will turn 60 next month, and who is probably a decade away from retirement, I would have to say I agree with Morph. Our generation, and the generation before us, is collectively guilty of child abuse.
If we have to contribute towards Social Security from our consumption in retirement, that in my mind is a small price to pay to give our children and grandchildren a secure future.
~Jim Bennett
Summit, NJ
I think it’s kind of ironic that this thread (the part about the retired paying SS taxes again) is proceeded by a thread on embedded taxes. Morph stated that the personal income and employee payroll is approximately 10% (22% -12%). That means these taxes (at least the part that make up the 10%) aren’t currently being paid by the employee. They are instead paid for by the consumer. Therefore, I’ll argue again, that the retired are already still paying into the SS-Medicare system. The sad part is that the poor are paying (even the retired poor) for the social security of billionaires.
But returning to the theme of this thread, retirees did make poor choices when deciding to put so much of their government expense on the credit card. However, that pales in comparison to the fact that any reasonable attempt (that is something other than raising taxes) to reduce the burden of these social fiascos is met with such solidarity in the retiree voting block that nothing will ever get done until the system collapses on itself (or more likely that taxes ARE raised to a point that really destroys our economy. I’m sure it will be deemed a “market†failure). One viable solution would be to limit based on income/wealth. Basically retiree welfare. Another would be defined contribution private accounts that replace SS.
Actually, the people who truly paid no taxes for their Social Security and Medicare are the folks who had already retired when these programs were instituted. Gee, thanks, FDR!
The only way to permanently fix Social Security is to make it “current” – that is, correct the arrogance of FDR and his ilk, by bringing the system to the point where the workers of today are paying for their own retirement, rather than paying for today’s retirees. Hmm… that sounds a lot like a private retirement account to me. The only thing missing is the billions upon billions of dollars required to cover the shift between the two, and sadly, we keep waiting until the problem gets worse and worse, by having more baby boomers in retirement, thus adding their retirement to the cost of the shift.
Of course, all the people responsible for this travesty are long since dead.
I agree with Morph (and Kotlikoff) on this one. At least to a point.
The advantage of a consumption tax is that it would shift at least a portion of tax burden onto the retired, which would serve to offset the cost of society paying the Social Security and medical benefits of seniors.
However, we could accomplish this by simply replacing Social Security taxes and Medicare taxes with a consumption tax. The required tax rate would still be quite high, which would spur some tax avoidance and the like (including retirees living in Mexico and Central America), but it would not be as high as the FairTax would need to be. And since it would be spread around all age and income groups (no need for a “prebate”) the burden would not fall too heavily on any one group.
Plus, since Social Security and Medicare taxes are relatively regressive, if we replaced them with a consumption tax, we would be replacing one regressive tax system with another.
So, Morph has come up with the perfect solution!
As the senior retiree on this blog, I’ve been waiting patiently for someone to come to the rescue and counter the absolutely ridiculous idea that my generation is responsible for the massive current debt and future unfunded liabilities. Time for my response, I guess.
First, anyone who says I haven’t paid squat into the system seems to have forgotten history. When I entered the workforce, the top income tax bracket was over 90%. No, I never had to pay it, but my father in law did (professional golfer of some fame). Under Kennedy, the top rate dropped to around 70%, and was reduced again under Reagan to 40%. When measured in then year dollars, I’d be willing to wager that I’ve paid more taxes to the federal government than most, if not all, of you.
There is little doubt that the federal government has overspent it’s income of late. But, just where did the money go? Well, I wonder if some of my tax dollars went to your parents for child care while they worked? Or perhaps some of the money went to some of you as student loans? (paid them back yet?) Any of you take advantage of Head Start (1965)? How do you like driving on the Eisenhower Interstate System (1956-44% federal funds). Just who were the beneficiaries of the federal overspending? Could it be you?
As a reward for taking care of your generations, you now propose to (1) increase my effective tax rate and decrease my purchasing power, (2) make me pay for my own pension from SS, (3) raise my state and local taxes by 25%, (4) increase prices by 17%, (5) double tax my meager savings, (6) tax my investments, and (7) add insult to injury by allowing 30 million workers at or below the Fairtax determined poverty level to pay no net federal tax and yet still qualify for full SS pension and health care benefits.
Look, if any of you really want to start a generational war, bring it on. But I don’t really think that’s very productive. Our nation is heading for an economic train wreck and assigning blame won’t solve the problem. And neither will the Fairtax. I wish that all the Fairtax energy and enthusiasm could be directed at lobbying for reducing the size and cost of the federal government, rather than simply calling for a change in the way federal revenue is collected. The year 2010 is a crucial year with many important decisions to be made.
Stay tuned!
Hank,
I agree with you completely about reducing spending. However, we need to remember it’s the FairTax proposal not the FairSpend.
I have great hopes that the FairTax will encourage citizens to pay attention to taxes since it will be one rate for everyone and printed on all our receipts and thus should encourage paying attention to spending.
I’m also hoping the prebate will lead to acceptance of the reverse income tax idea of Milton Friedman. Currently our social spending is done in a manner that is highly wasteful and encourages generational poverty. I’ve read that 2/3 of every dollar spent on social programs is wasted by the bureaucracy before the beneficiaries ever receive a dime. Also generational dependence is encouraged by programs that reduce benefits drastically when one earns just a bit too much.
Currently we have many different programs for the poor and associated bureaucracies; Food Stamps, ADC, WIC, energy assistance, Medicaid and I’m sure others. Why don’t we just decide how much a person or family needs at a minimum and simply seed them cash? Why do we decide, say, how much food a person needs to eat monthly and take away any choice they may be able to make to save money and improve their lives?
The reverse income tax would replace all these programs with a monthly cash check and would replace all these bureaucracies with one which would reduce costs by at least half even with greater total benefits. It would do so in a manner that would never punish a beneficiary for making a bit too much money and would reduce generational dependency. I think the reverse income tax idea could grow from and work with the FairTax prebate.
While personally I’d like to see even more radical reforms, I don’t think America is ready to give up on the idea of a federal safety net.
As to your other points:
1) AFFT is promising your purchasing power will at least stay then same if not better. I say when you consider elimination of all the waste, which is apparently difficult for many to see, you will mostly likely have dramatically better purchasing power in a relatively short time.
2) You will pay anyway with either or both reduced benefits or embedded FICA taxes in the products you buy if we keep going the way we are.
3) Your information or math is wrong on state and taxes I think.
5) Even if you are double taxed you will not be taxed double, see answer 1). What about all the taxes you will never pay on those tax deferred savings? Current retirees are estimated to have 80% of their savings from taxed deferred investments.
6) Investments are not taxed with the FairTax. If you mean the “service charge” part then only when you use a financial intermediation service which will most surely be offset by the increased growth.
7) You’re assuming they stay at poverty level until they retire. The FairTax will help provide an economy where that’s less likely. The reverse income tax would help even more.
I don’t think a generational war is worth it. Many of us have fought increased spending as well as we could, but still ended up getting snookered by things like this prescription drug plan nonsense. Can’t wait for the cure for cancer or AIDs or something…at $1000 per one-a-day pill or something similar that we have to buy for the boomers.
Really Hank, the best chance we have is to start growing the economy as fast as we can as soon as we can. Hopefully we can reduce some spending too.
Hank — I see a chord has been struck.
Statistically, you (and I, for that matter) have paid less into Social Security and, in particular, Medicare than we will receive over our retirement lifetimes.
And since our government has consistently squandered the temporary surplus that was created in the Social Security so-called trust fund, younger workers will need to pay ever increasing amounts of their incomes to pay for our Social Security and Medicare. Regardless of who’s fault that is, that’s just a fact.
At some point, it becomes economically disruptive (let alone, completely unfair) to tax workers at such high rates as will be necessary to pay social security and medicare benefits to retired folks, many of whom live into their 90′s.
I certainly don’t think the FairTax is the answer, but I think it does make sense to increase the tax burden on upper middle class and wealthy retired folks (which I certainly hope to be) to pay more of the cost of the benefits they are receiving.
Personally, I would get rid of Medicare and Medicaid and instead offer universal health insurance for all Americans paid for through a consumption tax (without the prebate). Alternatively, we could have a consumption tax (without the prebate) to replace Medicare taxes. Yes, that would (slightly) increase the tax obligations of retired folks, but I think that is prefereable to having working folks pay all of the cost of Medicare for current retirees.
dculling,
Growing the economy and (hopefully) collecting higher federal revenues isn’t the way to reduce the size and cost of the federal government. There seems to be some sort of natural law that if the government receives more revenue, they will spend it! There also seemed to be a widely belief that we would be O.K. as long as the ratio of national debt to GDP remained constant (at around 35%.) That might have made sense to some, but it seems to me that that’s how we recently arrived at a $9 trillion debt. And our current GDP isn’t $27 trillion. So, how do we grow our way out of the pending economic disaster?
As for your comments on my numbered issues, here are a few responses:
(3) I did a state/local cost impact study last year using basically data from the Kotlikoff/BHI 2005 base/rate study. Starting with $1.1 trillion as the consumption base, BHI provided a breakout of how much is spent on payroll (services) and how much for goods (presumably new goods). All education related expenses had been removed from the base. I used my 17% increased cost for new goods, and I used the burdened cost of payrolls less the FICA share to arrive at the services cost. The bottom line was that state/local costs will increase by $270 billion, or 25%. Of course, state and local governments might choose to reduce services rather than increase taxes, but that’s a real “Hobson’s choice”. And the most recent BHI study proposes that states should tax the tax, that is, tax the inclusive price of goods. Kind of goes against the HR25 goal to eliminate cascading taxes, but it’s an option, I guess.
(6) Taxation of investments is not something you can choose. Read Sec. 801 -806 in HR25 again. The implicit tax is simply the product of the investment times the rate differential between what you are getting versus the applicable Treasury rate, times 23%. Here is an example. Say you have $100,000 invested for five years at 4%, and the mid term Treasury rate is 5%. That is a rate differential of 1% times the investment ($100,000) or $1000. That is multiplied by 23% and divided by 12 (if you get monthly statement). In this example, you would be charged a $19 implicit tax each month. I think this whole concept makes no sense, and don’t know what the authors of HR25 were thinking. And, if you don’t like the investment calculation, wait till you see what happens to credit card or mortgage debt. Much larger implicit tax penalty!
(7) You are correct in believing that many of the 30 million workers will grow their way out of poverty level earnings and start to contribute to their retirement benefits. But for those low income workers who are given only cost of living increases annually, they will never pay any net federal tax. The prebate grows at the same rate as the COLA.
I’ve read a lot of books lately on various tax plans, but this is the first I’ve heard about the reverse income tax. I’ll look into it.
Regards, Hank
Hank,
While top individual income tax rates have been quite high and decreased over the years, the individual income tax has stayed a consistent 10% of GDP throughout the period you stated (see Top Federal Individual Income Tax Rates and Receipts, 1960-2007). Over this period of time the Federal Government has held at around 18% of GDP for revenue / spending. I’m not suggesting that you didn’t pay a great deal of taxes or that my burden to this point is any less then yours. I’m quite certain that you have paid more in taxes that I have. Up to this point, the taxes collected have been insufficient to cover spending, resulting in a large and increasing debt (see Federal Budget Deficit as a Percentage of GDP, 1965-2050) . Who will pay the debt and the interest on this debt? – It was pushed to future taxpayers. Up to this point, the social programs have had many workers per retiree, but the tide is shifting, and the social programs as a percentage of GDP are increasing (see Three Major Entitlements and Tax Revenues as a Percentage of GDP, 1965-2050). Soon the government will grow to 40% of GDP to fund these social programs. Who will pay for all these programs? – It is pushed to future taxpayers – in particular the working class – wage earners.
I am that future taxpayer – my daughter is that future taxpayer. If the current tax base and economic growth stay the same, the middle income American will have to pay 80% of their income to fund these programs. We’re comparing a past tax burden of 18% of GDP to a future burden of 40% of GDP to meet the revenue needed to fund the debt interest and social programs for retirees. Lets not forget that we are also funding many of the programs (and likely many more) of the type you expressed (child care, student loans, etc). I agree that the government needs to reduce its size and I’m not trying to point any specific finger. I’m just looking at who were the majority of voters, what programs did they vote, who is the beneficiary for the wild increased spending, where is the tax burden placed for the programs. There is no doubt that a large burden of taxation (unfunded liabilities) has been pushed to future taxpayers. I agree that our nation is heading for an economic train wreck and assigning blame won’t solve the problem. I did not intend to assign blame – my point was to suggest that perhaps retirees (but mainly baby boomers) need to pay more taxes. If I’m looking at who should pay for the unfunded liabilities, it is clear to me where additional burdens need to be placed.
Morph — While I agree with you on the future burden of Social Security and, particularly, Medicare, I have a nit with the graph you link to showing that the percentage of federal revenue remained essentially the same regardless of the highest marginal tax rate.
What the graph fails to show, is that virtually nobody paid taxes at the highest marginal tax rates. There were tax shelters galore in those days, the most common ones being to invest in real estate partnerships and take depreciation as losses against ordinary income. This led to a huge overbuiling of buildings for no reason other than to create tax losses. During the Reagan years, when (the Democratic controlled) Congress together with Reagan cut marginal tax rates, they also eliminated these tax shelters.
Thus, while the nominal rate dropped from 70% to 28%, the effective rate didn’t change much because now people actually had to pay taxes on incomes that they could previously shelter. I’ll also point out that during those years capital gain tax rates were the same as ordinary income tax rates, so there was even less opportunity to manipulate income to avoid taxes.
Under GWB, capital gains and dividends are taxed at much lower rates than ordinary income, which creates bizarre consequences such as hedge fund billionaires being taxed at lower rates than secretaries. (By the way, that doesn’t mean we should switch to the FairTax, which would slash taxes on hedge fund billionaires even more; it just means we need to fix our current tax system.)