Social Security Expansion Act

Investment Analysis Clubs Millionaire Fools
1

Bernie Sanders seems to think that those of us that saved for 45 or more years and were classified by Social Security as “maximum wage earners” for 35 or more years haven’t contributed enough to Social Security!

https://www.sanders.senate.gov/wp-content/uploads/Social-Sec…

Require millionaires and billionaires pay their fair share into Social Security.

Currently, workers have 12.4 percent taken out of each paycheck and contributed to the Trust Fund, half paid by the employer and half by the worker. This bill would require the wealthy pay the same 12.4 percent on their investment and business income, by increasing the net investment income tax by 12.4 percent and applying it to certain business income not already covered by payroll taxes.

At 77 my RMD has grown to the point that I am now subject to the Net Investment Income Tax and Bernie wants to increase the tax to 12.4%. The Tax Cuts and Jobs Act has already increased my tax liability by 21% by seriously reducing or eliminating the itemized deductions that I could take prior to 2018.

Quillpenn would classify me as a HODLer (hanging on for dear life). Perhaps its time for me to become a trader where I can deduct my expenses.

1 Like
2

Currently, workers have 12.4 percent taken out of each paycheck and contributed to the Trust Fund, half paid by the employer and half by the worker. This bill would require the wealthy pay the same 12.4 percent on their investment and business income, by increasing the net investment income tax by 12.4 percent and applying it to certain business income not already covered by payroll taxes.

This seems really fair to me. Why should productive labor be punished by the tax code? Do we really need to discourage earning money by being a carpenter or school teacher?

17 Likes
3

This seems really fair to me. Why should productive labor be punished by the tax code? Do we really need to discourage earning money by being a carpenter or school teacher?

Is it fair? Why should retirees that are no longer in the labor force be subject to an additional 16.2% Net Investment Income Tax (NIIT)? Fifty percent of our Social Security benefit goes to Social Security. The next 15% of our Social Security benefit goes to Medicare. As you age, RMD will put you over the NIIT threshhold along with the death of your spouse.

5 Likes
4

At 77 my RMD has grown to the point that I am now subject to the Net Investment Income Tax and Bernie wants to increase the tax to 12.4%.

And how much tax did you pay on your IRA when you put money in? I didn’t pay any.

CNC

5 Likes
5

And how much tax did you pay on your IRA when you put money in? I didn’t pay any.

I don’t think that what I paid when I put money in is not all that important. What’s relevant is the taxes I pay when taking it out now that my wife has died. My effective Federal Income Tax rate is 20% due to filing as single and the TCJA limits on state tax deductions. Bernie proposes changing NIIT from 3.8% to 16.2%.

1 Like
6

MCCrockett writes,

I don’t think that what I paid when I put money in is not all that important. What’s relevant is the taxes I pay when taking it out now that my wife has died. My effective Federal Income Tax rate is 20% due to filing as single and the TCJA limits on state tax deductions. Bernie proposes changing NIIT from 3.8% to 16.2%.

Welcome to the level of taxation us single folks have been shouldering all along.

intercst

7 Likes
7

I don’t think that what I paid when I put money in is not all that important.

Oh, so the fact that the government subsidized your contributions so that 25% - 35+% of your contribution was taxes that were being deferred isn’t important? Sorry, but being able to put that extra money in significantly contributed to the amount you were able to accumulate, which is what helps create significantly higher RMDs. So, yes, that deferred tax benefit is important to consider when looking at the taxes you will pay now.

What’s relevant is the taxes I pay when taking it out now that my wife has died.

Yes, that’s why planning for being single for some/all of one’s retirement is important to consider. And once Roth conversions became available to you as a high-income earner in 2010, and you chose to continue working and not do conversions even though you apparently had enough to retire, and by the time you retired, you didn’t think that Roth conversions would be beneficial, so you chose not to do them, you kind of set yourself up for this potential issue.

Bernie proposes changing NIIT from 3.8% to 16.2%.

For a guy who claims that he just reinvests his RMDs because all of his other income pays for his expenses - what were your plans for that money anyway? I get that you don’t want to pay more in taxes, but it’s not like you were going to spend the money, since you keep claiming you’re reinvesting it in your taxable account.

If you’re a charitable kind of guy, and were going to leave some of your estate to charities, you could limit your current taxes by doing QCDs for up to $100k of your RMDs. That way, you can see what the charity does with your money, and the $100k doesn’t even hit your income, so there won’t be as much, if any, to be taxed by NIIT on a Federal level. And California doesn’t count QCDs as income, either, so you would save on state taxes, too. And if you still were over $200k in income even with the QCDs, you could consider making additional charitable contributions (possibly even to a DAF if you want to delay actually giving the money away) to get your taxable income down to $200k, so that you wouldn’t have to pay any NIIT taxes. Then it wouldn’t matter if Bernie wanted to increase the NIIT tax rate to 50% because you wouldn’t be getting hit by NIIT.

But if you don’t want to take advantage of leaving money to charities, and just want the money so you can leave it to your non-charity heirs (because you keep claiming you aren’t spending it), I’m not sure I have a lot of sympathy, since, as already mentioned, you set yourself up for this tax issue - which potentially could have been avoided through retiring earlier and/or doing some Roth conversions.

AJ

21 Likes
8

Yes, that’s why planning for being single for some/all of one’s retirement is important to consider. And once Roth conversions became available to you as a high-income earner in 2010, and you chose to continue working and not do conversions even though you apparently had enough to retire, and by the time you retired, you didn’t think that Roth conversions would be beneficial, so you chose not to do them, you kind of set yourself up for this potential issue.

I have a question about this. Maybe better for the tax board, but I will start here.

I weighed doing Roth conversions a few years ago and decided against it*. But I now wonder if perhaps I didn’t account for all the variables (RMA related ones). Our 401k+IRA is about 10-15% of total assets and our marginal tax rate is usually about 38.8% in recent years (it may have been higher one or two years).

  • I did however kind of do the equivalent (equivalent of conversion) though, by redirecting all my 401k contributions (I think $27,000 a year now) to Roth 401k instead of to pre-tax 401k. I’m not even sure if this is advantageous, but I figure that I may as well work on getting the Roth up a bit so I end up with both pre-tax IRA and Roth IRA money available in retirement for flexibility.
9

It appears you’re second guessing previously using a Traditional as opposed to a Roth IRA.

The main difference in return between Traditional and Roth IRA’s or Traditional/ Roth 401k’s is the income tax bracket when the taxes are paid.

If you believe your tax current bracket is higher than your expected retirement tax bracket, pay the taxes in retirement, that is a Traditional IRA.

If you believe your tax bracket in retirement will be higher than your current tax bracket, pay the taxes now, that is a Roth IRA.

Secondary influences are distributions from Traditional IRAs, RMD or otherwise, count as income which may impact your retirement tax bracket, possible Medicare costs, and other miscellaneous tax impacts, such as raising or lowering income based tax floors and ceilings.

The impact of choosing to the taxes now or later will likely be much greater than the secondary influences.

As far as estimating your retirement tax bracket, all you can do is make an educated guess.

Here’s the underlying math:

T = tax rate
C = contribution
R = annual return
Y = years invested

Traditional, taxes paid in retirement

Value = C × ((1+R)^Y) x (1-T)

Roth IRA, taxes paid upfront

Value = C x (1-T) × ((1+R)^Y)

Since multiplication is associative (A×B) = (B×A), the order of (1-T) x ((1+R)^Y) can be switched to ((1+R)^Y) x (1-T) which makes the equations identical.

Traditional, Value = C × ((1+R)^Y) x (1-T)
Roth IRA, Value = C × ((1+R)^Y) x (1-T)

The equations are identical, thus so are the returns. The only variable between the two equations is the tax rate now or in retirement.

11 Likes
10

"Is it fair? "

No.

Howie52
But when does fair or legal or moral mean anything to the Federal government?

If you live in the state Sanders represents, do not vote for the man.
Check with your representatives and tell them to not support the proposal.

Basically vote the rascals out of office and get people who care about your interests
to work for the government instead of only caring about government and their own power.

4 Likes
11

Our 401k+IRA is about 10-15% of total assets

If you’re looking at the percent of assets, I would focus more on the percent of investable assets, rather than the percent of total assets, unless you’re figuring that in retirement, you will get rid of (and not replace) all non-investable assets like real estate. That said, it’s more important what you expect your RMDs to be, and how, when added to other sources of income, like pensions and SS, will it create in ordinary/investment income.

There are online calculators that help you figure what RMDs will be. I found one on the Vanguard website years ago that alerted me to the potential of high taxes on RMDs, so I could strategize on how to avoid them.

our marginal tax rate is usually about 38.8% in recent years (it may have been higher one or two years)

Unless you expect your marginal rate to be higher than 38.8% in retirement, it was probably a good decision to not do Roth conversions during those years.

AJ

4 Likes
12

If you’re looking at the percent of assets, I would focus more on the percent of investable assets, rather than the percent of total assets, unless you’re figuring that in retirement, you will get rid of (and not replace) all non-investable assets like real estate.

I am only looking at investible assets. I don’t really count my residence as an asset, because it’s an expense! And I don’t invest directly into real estate, but if I did, I would, of course count those as investable assets.

There are online calculators that help you figure what RMDs will be. I found one on the Vanguard website years ago that alerted me to the potential of high taxes on RMDs, so I could strategize on how to avoid them.

I just did a quick check … and RMDs are substantial. I never realized how much they require you to withdraw each year as you get older.

Unless you expect your marginal rate to be higher than 38.8% in retirement, it was probably a good decision to not do Roth conversions during those years.

I’ve always expected taxes to rise … because I believe that taxes = spending over the long-term. The only thing that can make that untrue is default and/or revolution, and both of those usually render most planning, and sometimes the money in general, moot anyway.

1 Like
13

Hi MarkR,

Roth conversion decisions are almost always looked at while wearing blinders. The blinders force a horse to look ahead only which is fine but sometimes these financial decisions need a wider view.

In 2010 after finding a “problem” in Quicken Planner, I decided to start trimming our trad IRA’s by doing small Roth conversions each year.

The problem was apparent when looking at the year we started our RMD’s. Our portfolio started a quite noticeable decrease each year.

In digging into it, I found a choice I made in “Q” was to spend the RMD. Another choice was to reinvest the excess. Changing that corrected the descent but the money was rapidly building our taxable account.

Then I looked at all the cash flow info for each year and found the RMD amount started at almost 3X our annual income from SSA, pension, etc. This jumped a tax bracket.

So I modeled a plan in Quicken to do annual Roth conversions. By tuning the amount, I found I could mostly fill my tax bracket and greatly reduce the RMD’s.

I started in Oct 2010 with:

      Taxable  Trad IRA   Roth IRA
2010   13.00%    83.30%     3.70%
Now     0.20%     0.00%    99.80%

I did the final conversion in January 2022.

Something that I never thought about when I started that is worth considering is large withdrawals. Let me explain.

In October 2020, our YTD portfolio performance passed 100%. DW and I decided to move and build a new house. I started selling stock in our taxable account and my Roth IRA. I was mostly finished before Christmas 2020.

I withdrew more than 10X our full, annual expenses from my Roth IRA in 2021 to purchase a lot and have cash to start building.

If that was in a trad IRA, taxes would have been severe, to say the least.

Instead I paid lower rate taxes over a series of years.

When I made conversions, I converted all available cash. In addition, I transferred the stock I believed had the best growth opportunities.

Each year, I set a conversion amount based upon known income and the tax tables.

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

3 Likes
14

I’ve always expected taxes to rise … because I believe that taxes = spending over the long-term. The only thing that can make that untrue is default and/or revolution

Uh, you left out the most important one: growing productivity (and the tax base) faster than expenditures. If you buy a large house you may be house-poor for a few years, but assuming your income rises because you are a more productive worker then your housing expense becomes a smaller and smaller part of your financial worries.

A glance at this chart shows that progress was being made between 2009 and 2015, only to reverse course for some reason that I can’t put my finger on. If you look at the same chart for earlier years you will find a constant ebb and flow: up in the 80’s, down in the 90’s, up in the 00’s, again for reasons I just can’t quite explain :wink:

https://www.usgovernmentspending.com/rev/google_vis.php?titl…

The problem, of course, is that when there’s surplus, everybody wants to spend it. Rare is the politician who says “hold the line” - but it does happen.

For the record, the US debt is about 120% of GDP. Japan’s is more than double that. In fact while the US debt is large, there are maybe a dozen countries with larger percents than us. So I’m not awfully worried about Default unless some irresponsible politicians take us there. And I’m not worried about Revolution unless some irresponsible politicians take us there.

Oh wait. OK, I’m worried.

15 Likes
15

Uh, you left out the most important one: growing productivity (and the tax base) faster than expenditures. If you buy a large house you may be house-poor for a few years, but assuming your income rises because you are a more productive worker then your housing expense becomes a smaller and smaller part of your financial worries.

Yep … except the cost of governing ourselves grows faster than EVERYTHING. At least for the last ~120 years. Governing ourselves has grown to become a bigger and bigger and BIGGER part of the total for a long long time, and it shows no sign of abating anytime soon.

https://j.mp/3wGMS88

4 Likes
16

Yep … except the cost of governing ourselves grows faster than EVERYTHING. At least for the last ~120 years. Governing ourselves has grown to become a bigger and bigger and BIGGER part of the total for a long long time, and it shows no sign of abating anytime soon. - MarkR

Part of that increase is driven by population growth, more of us to govern. A bigger part is that government keeps finding more and more and ever more aspects of our society that need to be governed. Can you think of any activity of daily living that is not touched by government regulation?

3 Likes
17

Part of that increase is driven by population growth, more of us to govern.

Using this idea, as population grows, government grows … I suppose once it reaches 100% the population can’t grow anymore. I wonder if that is where China is at this point using this idea.

A bigger part is that government keeps finding more and more and ever more aspects of our society that need to be governed. Can you think of any activity of daily living that is not touched by government regulation?

This is indeed a big part of the problem. Government allowed to grow unchecked, or mostly unchecked, will … grow. The question is how does it end, if ever? That’s the biggest macroeconomic question that faces the world today, probably even bigger than climate change (because the MASSIVE size of government, when it is such a large proportion of GDP consumes lots and lots and lots of energy, and more often less productive use of it than other sectors).

1 Like
18

This is indeed a big part of the problem. Government allowed to grow unchecked, or mostly unchecked, will … grow. The question is how does it end, if ever? That’s the biggest macroeconomic question that faces the world today, probably even bigger than climate change (because the MASSIVE size of government, when it is such a large proportion of GDP consumes lots and lots and lots of energy, and more often less productive use of it than other sectors).

OK, I call baloney. Mostly.

The big change in the American economy came in the 1930’s and 1940’s, with FDR’s attempts to prime the pump with (what we now call) stimulus spending, and then World War II. If you take a moment to look at the chart, federal government spending as a percent of GDP was around 18% in 1950, and it’s about 20% now. (I’ve ignored those super-macro events such as World War II, the 2008 financial collapse, and even the 80’s Reagan over-spending while he complained about deficits.)

https://www.usgovernmentspending.com/rev/google_vis.php?titl…
Red=federal, yellow=state, green=local, blue=fed to state or local transfers

There has been a growth in both local and state spending, but even those are not outrageous given the transformations in our society over the past 75 years.

A full accounting would fill a book, maybe three, but in 1950 there was no NASA. Without NASA there are no satellites, without satellites weather forecasting is accurate to roughly 24 hours instead of 76 or more. Agriculture is more productive. There is no GPS which makes travel more efficient for you and for transport of goods. In 1950 there is no DNA, so police departments rely on manual index card for fingerprints, and conviction rates for serious crimes are lower or unreported at all.

Highways still have red lights every few blocks, and routes between towns are mostly two lane roads with occasional hash marks so you can pass slower traffic. Cars have sharp protruding design elements on the steering wheel, bumper, hood and elsewhere causing thousands of needless deaths each year. The military is a fraction of its current size and strength, although we are just as powerful, relatively, because everyone else in the world is living in a pile of bombed out bricks and streets. That advantage will not last.

If you think about it for a moment you can see how vastly different your life is today from 1950. The internet you are using came from government research, not from the free market of the 10,000 radio stations, 2,000 television stations, 100,000 ad agencies, 20,000 daily and weekly newspapers and magazines. Not one of them thought it up. Nor did they think up Google, which birthed directly from research funded by government. The best we had to that point was the Dewey Decimal System. Computers, of course, we invented on the government dime - at first for artillery shell prediction by the military and later for all sorts of “big iron” uses, and eventually transitioned to smaller machines for industry, then even smaller for homes, and now in your pocket.

I would say that a reasonably large part of the increased productivity of our society has come directly or indirectly from government investment, and it’s not unreasonable that tax receipts should be rewarded appropriately for that, just as private individuals and companies who make progress possible are.

Government is NOT “growing by leaps and bounds” as you may have heard. It is growing, I wouldn’t argue that. But it is growing at a slow pace, consistent, I think, with the pace of society as a whole.

Can you think of any activity of daily living that is not touched by government regulation?

Well, that’s a tough one. How about, hmmm, assault rifles?

37 Likes
19

If you take a moment to look at the chart, federal government spending as a percent of GDP was around 18% in 1950, and it’s about 20% now.

Apparently you didn’t look closely enough at your own chart. From your chart, Federal govt spending in 1950 was 14.2%, and now is 24.12% of GDP. That’s quite a big change.

Considering how many (including you) have lamented that corporate profits are “so high” and comprising “so much of GDP” (it’s about 11% now, down from about 15% in the 1950’s), it is kind of ridiculous to claim that govt hasn’t grown much.

Furthermore, when you claim that growing government causes “increases in efficiency”, wouldn’t the numbers show that overall? Increasing efficiency means that growing government by 1% of GDP would cause GDP to grow by more than 1% and thus government as a percentage of the whole to decline. Yet, that is rarely the case across the 120+ years of history shown here. Sometimes it is true for brief periods of time (maximum 5-8 years), but the chart clearly shows that the cost of governing ourselves is inexorably growing over the decades. The chart is starkly and clearly moving from the lower left to the upper right, anyone can plainly see that!

So I will ask you a hypothetical question. If you were to assume the next 100 years will be similar to the previous 100 years as far as government growth, then we will be close to 75% of GDP at that point. Be honest, would you make the same arguments that you presented here at 75%?

7 Likes
20

Considering how many (including you) have lamented that corporate profits are “so high” and comprising “so much of GDP” (it’s about 11% now, down from about 15% in the 1950’s), it is kind of ridiculous to claim that govt hasn’t grown much.

I am not aware that I have complained about corporate profits lately, or pretty much ever, actually. But if you have a link I’d be glad to acknowledge.

Apparently you didn’t look closely enough at your own chart. From your chart, Federal govt spending in 1950 was 14.2%, and now is 24.12% of GDP. That’s quite a big change.

Federal spending in the 50’s (I am sorry if I misled you to a specific data point in 1950) was in the high teens. It is now in the low 20’s (excluding outlier periods.) That, to me, is not a monumental change given the world we live in.

Furthermore, when you claim that growing government causes “increases in efficiency”, wouldn’t the numbers show that overall?

Sure. But I have never claimed that ALL government spending increases efficiency, just a lot of it. The Erie Canal. Interstate highways. Hoover Dam. DARPA. NASA. Medical research. Early investments in microprocessor technology. Land Grant Colleges. FDA Drug regulation. Food safety. Air pollution control. Access to higher education. Expanding foreign markets. Panama Canal. Financial regulation. Aviation safety.

There are others which are hard to quantify, but I would add those laws which require equal treatment of human beings, i.e. anti discrimination, and the like as help build the human capital of the country by include minorities and women.

(I understand that you will be able to pick off a few of those with horrible examples and say “Oh yeah? What about this!” but please don’t bother, we all know nothing is perfect, and we have all seen the road crew of four leaning on their shovels while ostensibly building a road.)

Increasing efficiency means that growing government by 1% of GDP would cause GDP to grow by more than 1% and thus government as a percentage of the whole to decline.

Yes, but there is always more that can be done, and gosh darn it those fools in government try to do that. Roads could be frozen in time, but we keep building more. And wider. And we repaint them more often. We add smarter stoplights to improve traffic flow. You see the cost, but are seem unaware of the benefit.

We keep trying to expand access to higher education, not always successfully, but generally speaking a better educated populace is a good thing. We could have held the number of college attendees at 9% - the number in the 1950’s - instead of 30% where it trended to, but we chose not to and to continue to invest in such apparent nonsense. USDA inspectors help keep you from getting sick, and the CDC helps you stay alive. The EPA keeps poison out of rivers and smoke particulates out of the air. Maybe that didn’t seem important at one time, but now it does.

Yes, there is a point of diminishing returns. We are not there yet. How do I know? I don’t, except that I live in the richest, most powerful country in the history of the planet, and we have one of the lowest tax rates besides. (Yes, we do.)
https://www.taxpolicycenter.org/briefing-book/how-do-us-taxe…

So I will ask you a hypothetical question. If you were to assume the next 100 years will be similar to the previous 100 years as far as government growth, then we will be close to 75% of GDP at that point. Be honest, would you make the same arguments that you presented here at 75%?

Of course I’ll be honest. You present a ridiculous argument and pretend it’s a legitimate question. You are comparing apples and auto tires. The US was largely an agrarian economy until the census of 1920, when for the first time half the population was living in cities or surrounds. To compare that with what we have today is absurd. But I will say that if there was as large a change in society as from an agrarian society to an urbanized, consumer, mechanized, interconnected, industrial, way of life as is as unimaginable to me as an iPhone would be to an 1890’s farmer, then any and all possibilities remain open, including taxation levels, at least for me. Some people won’t agree, and want to go back to the days before we funded the FBI, space travel, highways, and all the rest. I’m sure people in 1890 couldn’t imagine giving up 30% of their income either. (Some still do: Ted Kaczynski and similar.)

I like where we are and I like where I am. My complaints are few, my luxuries many. I live better than the kings of Europe or the Pharaohs of Egypt.

Why are you so unhappy?

36 Likes