Our challenge is clear and inescapable: America cannot be great if we go broke. This statement appears in the opening sentences of the commission's report, and it applies to retirement as well to our country in general. That's because only a financially strong county can afford to allow a significant portion of its citizens to not work. Around the world, elderly citizens of poor nations work almost until they die. So when we evaluate the specific proposals and how they might affect each of us personally, we need to remind ourselves that it's in all our best interests to keep our country financially strong.
Let's first focus on the obvious: proposed changes to Social Security. If you're currently age 50 or older (born in 1960 or before), there's nothing in the proposed changes that significantly affects your ability to retire, as shown in this itemized list below:
- There would be no changes to the retirement age provisions.
- There would be only a modest slowdown in the growth of benefits, particularly for those in the upper 50 percent of wage earners. These changes would be phased in gradually until they're completely in effect by 2050.
- A new minimum benefit would be added to keep full-career minimum wage workers above the poverty threshold.
- The CPI measure that forms the basis for the cost-of-living adjustment for retirees would be slowed by a new measure of inflation called chained CPI, which the U.S. Bureau of Labor Statistics claims is a more accurate measure of the cost of living index.
- The maximum amount of wages that is subject to FICA taxes -- currently $106,800 -- would gradually increase to about $190,000 in 2020. This impacts only those people who currently make over $106,800 per year.
All the news isn't bad, however. For instance, the Commission has suggested that citizens be granted some flexibility in starting their Social Security income. If the changes are adopted, we would be able to elect to receive half our benefits at age 62, with the lowest possible benefit amount, and defer the other half of our benefits to a later age when we would receive higher benefits. It's not clear when this provision would go into effect.
Some more good news: a "20 year benefit bump-up" that provides a benefit enhancement of roughly 5 percent of the average benefit 20 years after eligibility for the earliest benefit (currently age 62 with a gradual increase to age 64). This proposed change recognizes that people age 85 or older may have higher medical and long-term care needs. It's not clear when this provision would go into effect.
It's also been suggested that Medicare should be simplified by combining deductibles and copayments for Part A (hospital and in-patient expenses) and Part B (physician and outpatient expenses). More importantly, the commission proposes a "doc fix" that will help prevent physicians from declining Medicare patients. The commission has also proposed catastrophic protection for seniors that would reduce the copayment percentage from 20 to 5 percent after out-of-pocket costs exceed $5,500, and would cap the maximum out-of-pocket expenses at $7,500 per year.
There are a whole host of details on the above features and other provisions, all aimed at reducing the cost of our nation's medical bills. If successful, these features can only be good news for most retirees. I'll elaborate more on these other features and provisions in future posts.
Here are a few other features of the Deficit Commission's proposals that could impact retirees:
- Simplification and reduction of income tax rates. This would be funded by the reduction or elimination of various "tax expenditures," some of which are discussed below.
- Elimination of itemized deductions. All taxpayers would use a standard deduction. According to statistics from the IRS, in 2008, approximately two-thirds of all taxpayers use the standard deduction. While I couldn't find statistics on the prevalence for retirees, my educated guess is that it would be higher than two-thirds. So this feature would likely help most retirees, when coupled with the simplification and reduction in income tax rates.
- Replacement of the home interest deduction with a tax credit. This only affects retirees who still have a substantial mortgage. In 2008, 28 percent of all taxpayers claimed a deduction for interest; I'd guess this percentage is lower for retirees. Again, this feature should be good news for most retirees.
- Replacement of charitable deductions with a tax credit. This only affects the 28 percent of taxpayers who claim a deduction for charitable contributions; I'd guess this number is probably higher for retirees, so this could be some bad news.
- Taxing capital gains and dividends at ordinary income tax rates. This could be bad news for the 19 percent of taxpayers who reported qualified dividends or the less than 10 percent of taxpayers who reported capital gains or losses. Since many retirees have the bulk of their retirement savings in an IRA, 401k, 403b, or 457 plan, though, this isn't bad news for them.
Our democracy is best served by informed and interested citizens. I encourage you to do what it takes to understand these proposals and support our leaders to make the tough but necessary decisions. Stay tuned for future posts that dig deeper on these important proposals.
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