Self Imposed Means Testing?

Yesterday on our Sunday hike (pictured to the left) I had an epiphany about social security and medicare that I think can be part of the solution. The idea has a couple of building blocks of understanding that if agreed upon make the idea more plausible. The first building block is that financially, the country has a a lot of problems that must be addressed and second that no solution can be “fair” everyone or give everyone everything they want. An equitable solution should involve everyone giving up something.

You may not like that but it is my starting point.

As we hiked a thought popped into my head; why are there caps on how much money we can put into IRAs, 401ks and the like? I know the answer on a day to day level but conceptually, should there be caps on how much we can put into qualified retirement plans?

My idea is to do away with limits on qualified contributions–sort of. In 2010 we put $5000 into a contributory IRA for Joellyn as a non working spouse (she volunteers more than full time in dog rescue), $6150 into our HSA and 25% of my income (simplified explanation) into my SEP. We also let a fair bit (relative to our circumstances) accumulate in our taxable account. We can write off the first three but obviously not that last one. The idea then would be that we could put much as possible into Joellyn’s account and the SEP (HSAs work a little differently) such that anything above the limits is deducted from our future social security and medicare benefits.

This would involve some actuarial/spreadsheet work but maybe we could have put another $25,000 into our IRA in this context. This would have allowed us to reduce our taxes by quite a few thousand dollars while increasing our savings and reducing our social security benefit in the future. Doing this every year the way I am thinking would reduce our benefits to zero in all likelihood but leave us with more saved.

So far this sound like a perk for the wealthy. Here is where everyone has to give up something. People in a position to do this would be saving more, writing off more on their income taxes, phasing out their benefit but would continue to pay the same $16,000 in FICA every year. So they would be paying in the same amount and losing some or all of their future benefit in return for saving more and writing off more. Continuing to pay the full FICA may not seem fair but a real solution should be uncomfortable for everyone (repeated for emphasis). As an incentive for retiring later maybe people could stop paying FICA when they turn 65 or 70.

Given the savings problems the US has there are not a lot of people capable of participating but if something like 10% of the population could do this then it would relieve a substantial portion of the burden on the system as it would like boil down to more than 10% in dollar terms as most people doing this would be likely to otherwise qualify for the maximum benefit. Another element to this that I would add would be to make the penalties for early withdrawals from qualified accounts far more aggressive, bordering on usurious except for medical events.

Making the penalties so stiff would hopefully send a message that this is serious business and that once your money goes in it does not come out except for a medical event for you, your spouse or your kids (I am very forgiving on this issue).

As opposed to just being a perk for the wealthy, people involved are giving up a lot of security (assumes the entitlements survive) but are getting the chance to be more self sufficient. A conceptual drawback to this for me is that I think privatizing social security across the board would be disastrous with 401k results from the last eleven years as exhibit A. A solution here could involve serious education, having to pass a competency exam, a combo of both or any other idea deemed as practical.

This is probably obvious but I personally would jump at the chance to opt out one way or another but I also believe that with the mess we have that no one should get off Scott free. Maybe I am wrong but I think with this idea people still have incentive to work, make as much as they can and save as much as they can with at least an acknowledgment that we do stupid things sometimes with our money.

So, is there a starting point here for contributing to a solution? Obviously I am predisposed that it is a great idea and while blogs lend themselves to negative comments if this can be a starting point, how can it be improved to become something workable? Why not a grassroots solution? If this self imposed means testing makes any sense then maybe we can spread the idea and get it to where it needs to go to be implemented.

15 Comments

  1. stop smoking stuff before your hikes 🙂

    Reply
  2. Roger, your idea is a good starting point. As a conservative, and polls indicate that far more people consider themselves conservatives as opposed to being liberal (something like 40% vs 20%), the idea of turning SS into welfare (needs testing and leaving everything else unchanged) is a non-starter. Also, major changes must be phased in over a 10-20 year time span.

    Reply
  3. A simple solution for SS is to adjust the retirement age, the distribution scheme, the taxation scheme to the demographic curve. It really is that simple.

    Of course, we could make it a happy day for everyone by simply having SS buy equities and then make it illegal for equities to ever be sold. Distribution would be handled by “taking out loans”on this ever appreciating portfolio on behalf of the recipients. This would create an upward bias for equities and at the same time create a never ending income stream. Everyone would be happy.

    Reply
  4. Not a bad thought Roger. SS cannot become welfare, that is truly a non-starter as 8:11AM notes, but most of these caps including the $16k FICA contribution limit seem rather arbitrary and it seems hard to believe a better balance could not be struck with some work and, as you very correctly observe, some willing sacrifice from everyone; a new social contract as it were.

    That sacrifice however should be carefully thought out and it may not be simple. For example, the demographic curve is only moving upward for upper income folks but for everyone else it is flat even dropping depending upon which subgroup you analyze. Setting aside the observation that this trend is another sign of growing banana republic-hood in the US, lower income working folks are the ones who typically need SS the most and the earliest so raising the retirement age essentially removes them from SS benefits entirely; hardly a just reward for the years they paid into the system.

    Reply
  5. The best solution is to stop propin up zombie speculative banks and let them go bankrupt starting with Bank of Ameircan.

    Next re-regulating banking so that it is once again “banking” and not a corrupt pryamid scheme with risk backed by public funds.

    There is NO savings problem in America, it is a risk crisis!

    So called “de-regulation” caused political capture and tiliting the playing field to a few wall street bankers destroying the free market and the middle class in the process and money was, and still is, spiphoned off in massive amounts.

    For example, only 3% of silver contracts on the COMDEX have real silver behind them…97% is simply paper leveraging the market up…why? the traders get to take commissions and profits and the full 100%.

    Reply
  6. Roger,

    Why don’t they just take your money, deny you payments in the future and keep your IRA tax deductions low so they can get more money out of you today for now.

    In a couple of years they can increase your income and fica taxes instead as SS will be negative each year rather soon if not already.

    Their plan is to suck you dry and lie to everyone along the way.

    Reply
  7. anon 10:57, not sure how your comment advances the conversation

    Reply
  8. Roger,

    Off topic:

    With the historical high spread between the price of oil and nat gas, do you see any investment potential in some of the big nat gas producers (COG, CHK, DVN etc.)if they start converting some of their nat gas to liguids? I think SSL is building a plant to do just that.

    Reply
  9. I am so tired of “fair.” I have had a lifetime of “fair.” I am holding an empty bag of “fair.”

    The next “fair” offer (to share what I have left) will be responded to “fairly.”

    They won’t see it coming. (Hey! That isn’t fair! Oh, right.)

    Reply
  10. Interesting idea – lots of questions & could make for good conversation.

    I hope you will explore this some more in the new year, seems like a good topic.

    Reply
  11. “fair” means allowing taxpayers to socialize the loses of wall street risk takers.

    Once we are in the next boom we will be back to “free markets” and “de-regulation” “unfair” so wall street can steal more taxpayers money if anything is left.

    Reply
  12. What kind of country does not provide free health care to all it’s citizens? a 3rd world one.

    Even worse, what of country allows for monopolistic pricing of health care gauging its citizens and wasting a large amount of economic resources? a corrupt fascist one.

    One of person votes in favor of corporate monopolist health care over government regulated markets for health care? either a right wing fascist or a brainwashed idiot

    Reply
  13. What kind of country does not provide free health care to all it’s citizens? a 3rd world one.

    Even worse, what of country allows for monopolistic pricing of health care gauging its citizens and wasting a large amount of economic resources? a corrupt fascist one.

    One of person votes in favor of corporate monopolist health care over government regulated markets for health care? either a right wing fascist or a brainwashed idiot

    Reply
  14. Sadly, the author is right. Some form of ‘means testing’ is the only solution for SS in my opinion.

    I think the numbers will be if you are 65 AND make $200k of income (investments) you will get nothing.

    What you might get is a credit on estate taxes for the amount of money you did not get from SS. This is a benefit for your heirs. Probably the “right thing to do”.

    I believe Obama will recommend something like this in his State of the Union address in a few weeks.

    Reply
  15. Anonymous at 8:20 has it about right on SS.

    The bigger problem is Medicare/Medicaid. There are two ways to solve the problem. Let the government ration care to Medicare/Medicaid recipients. (It is my opinion that Obamacare when/if it is implemeted will do this.) The other option is the Paul Ryan solution where each recipient gets a voucher for $X amount to spend on healthcare. That way the patients will determine how the money is spent and the rationing will be on an economic basis. Neither way is “fair” or particullarly appealing, but the second way might (maybe an unwarranted assumprtion) actually slow the increase in medical costs.

    We need the wisdom of Solomon and the courage of David to solve these problems, which our cowardly representatives have allowed to fester for far too long, making them that much harder to solve.

    Reply

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Self Imposed Means Testing?

Yesterday on our Sunday hike (pictured to the left) I had an epiphany about social security and medicare that I think can be part of the solution. The idea has a couple of building blocks of understanding that if agreed upon make the idea more plausible. The first building block is that financially, the country has a a lot of problems that must be addressed and second that no solution can be “fair” everyone or give everyone everything they want. An equitable solution should involve everyone giving up something.

You may not like that but it is my starting point.

As we hiked a thought popped into my head; why are there caps on how much money we can put into IRAs, 401ks and the like? I know the answer on a day to day level but conceptually, should there be caps on how much we can put into qualified retirement plans?

My idea is to do away with limits on qualified contributions–sort of. In 2010 we put $5000 into a contributory IRA for Joellyn as a non working spouse (she volunteers more than full time in dog rescue), $6150 into our HSA and 25% of my income (simplified explanation) into my SEP. We also let a fair bit (relative to our circumstances) accumulate in our taxable account. We can write off the first three but obviously not that last one. The idea then would be that we could put much as possible into Joellyn’s account and the SEP (HSAs work a little differently) such that anything above the limits is deducted from our future social security and medicare benefits.

This would involve some actuarial/spreadsheet work but maybe we could have put another $25,000 into our IRA in this context. This would have allowed us to reduce our taxes by quite a few thousand dollars while increasing our savings and reducing our social security benefit in the future. Doing this every year the way I am thinking would reduce our benefits to zero in all likelihood but leave us with more saved.

So far this sound like a perk for the wealthy. Here is where everyone has to give up something. People in a position to do this would be saving more, writing off more on their income taxes, phasing out their benefit but would continue to pay the same $16,000 in FICA every year. So they would be paying in the same amount and losing some or all of their future benefit in return for saving more and writing off more. Continuing to pay the full FICA may not seem fair but a real solution should be uncomfortable for everyone (repeated for emphasis). As an incentive for retiring later maybe people could stop paying FICA when they turn 65 or 70.

Given the savings problems the US has there are not a lot of people capable of participating but if something like 10% of the population could do this then it would relieve a substantial portion of the burden on the system as it would like boil down to more than 10% in dollar terms as most people doing this would be likely to otherwise qualify for the maximum benefit. Another element to this that I would add would be to make the penalties for early withdrawals from qualified accounts far more aggressive, bordering on usurious except for medical events.

Making the penalties so stiff would hopefully send a message that this is serious business and that once your money goes in it does not come out except for a medical event for you, your spouse or your kids (I am very forgiving on this issue).

As opposed to just being a perk for the wealthy, people involved are giving up a lot of security (assumes the entitlements survive) but are getting the chance to be more self sufficient. A conceptual drawback to this for me is that I think privatizing social security across the board would be disastrous with 401k results from the last eleven years as exhibit A. A solution here could involve serious education, having to pass a competency exam, a combo of both or any other idea deemed as practical.

This is probably obvious but I personally would jump at the chance to opt out one way or another but I also believe that with the mess we have that no one should get off Scott free. Maybe I am wrong but I think with this idea people still have incentive to work, make as much as they can and save as much as they can with at least an acknowledgment that we do stupid things sometimes with our money.

So, is there a starting point here for contributing to a solution? Obviously I am predisposed that it is a great idea and while blogs lend themselves to negative comments if this can be a starting point, how can it be improved to become something workable? Why not a grassroots solution? If this self imposed means testing makes any sense then maybe we can spread the idea and get it to where it needs to go to be implemented.

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