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Saving Little for Retirement Under Proposed Tax Plan

Updated: Dec 5, 2020

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First of all, let’s discuss Social Security for a second. My personal thoughts are that I will never see my benefits in any way, shape or form. For about three decades, since I was 16 years old, I’ve been paying into a system that I always knew was going to go bankrupt.

How did it get this way? Well, there are several factors. Social Security was part of the New Deal that President Franklin Roosevelt gave to Americans during the Great Depression. The intent of Social Security was to stimulate the economy at the time by giving money to those who could use it, while setting up a system where future generations would not have to worry about retirement.

Here is where Social Security went wrong. The taxes that were paid in the 1940’s, when the system was rolled out, were used to pay the seniors from that generation, who didn’t pay into the system.

The Greatest Generation, who were paying into the system at the time, would have their benefits paid by the next generation. The Baby Boomers had five payers into Social Security for every one person that was receiving benefits. In theory we should have a surplus in the system today, but we don’t.

When I look back at it, Social Security was taught to me by an idealistic 11th grade history teacher, who told the class that our Social Security number was the key to some sort of mystical bank account that would miraculously support us when we retired.

However, what did the US government do with that surplus of Social Security money? What they do best! They spent it. So, we are back in the cycle of my generation, where there is a lot less of us paying into a system so that now there are two workers for every one person that is on Social Security. By the end of this decade, that ratio will be one to one. The problem is my generation is so much smaller than the Baby Boomers.

I will take a moment to pause. Anyone who is reading this should go to the Social Security Administration website and pull your Personal Earnings Benefit Estimate Statement (PEBES). I’ll wait.

As you can see, from what Gen X and the Millennials already know (and you wonder why we are so cynical), there is a date listed on your PEBES that clearly shows when Social Security will be paying more benefits than it is receiving. Next, you get the treat of seeing the date where Social Security will be completely exhausted.

With a few quick mathematical calculations, you’ll understand that it will happen before I am allowed to retire. The system is broken. My idealistic American History teacher either lied to me or had no idea what he was talking about. Unless something radical happens, I will never see the money that I am supposed to be due. The real question is, did Congress know this, too?

Of course, they did. That is why since I have been employed, we have been incentivized to start our own retirement plans, with tax deductions. Today a self-employed worker can put up to $54,000 into a 401k plan and receive a tax deduction. There are other plans in which you can put your money and receive a higher tax deduction. That was how Congress told my generation to start saving for retirement — they knew full well what was happening.

Now that tax reform is all the rage, here is the issue. A worker, not self-employed, who is under 50, can put up to $18,000 into a 401k plan, pre-tax. The Republicans want to change that to $2,400 per year, in effect axing the incentive for us to save our money.

What do you think will happen? Fewer people will save for retirement and a mess that will be created. The contrarian in me says, “Well, if we don’t get a deduction for it, then when we take it out and it will be tax-free.” Sort of like a Roth IRA that has been forced upon us.

I look at retirement plans to accomplish two things. Yes, we have retirement funds. Then we have the tax savings. If someone is in the 35 percent tax bracket, then they have a tax savings of $18,900 if they are self-employed and max the savings out to $54,000. How that is sold to a client is that they are spending $54,000 to get an $18,900 savings on tax, but that $54,000 is their money. It is not tied up as they can borrow from it, and when paid back, they pay themselves interest. It’s a no-brainer.

And that is what your government is up to. There are a few months left in the year. There is no possible way that we will get real tax reform this year.

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