Can we consider "well-off boomers" as those who had high incomes rather than high savings? :-)
I'm a "well-off boomer" but only averaged an inflation adjusted $71k over the last 36 years.
Don't take my savings just because I decided to live below my income, while the family that made $120k
and spent it all, would not have to pay.
^This. I make the same argument, and this is why in my "means testing" comment earlier, I stated that it would be based on retirement "income", not "assets". So if someone was raking in over $50K/yr in pension and taxable income in addition to SS benefits, they would see a significant reduction in SS benefits, but not the guy who saved $1M living off a lower amount of taxable income. I don't think savers should be punished vs. those who spent their money like drunken sailors, and I think it would be a terrible idea to discourage saving, so means testing based on higher retirement income and pensions makes a lot more sense.
I didn't mean that you literally can't. I meant it would be stupid to. For example, somebody that had a pension or annuity with a value of $1M would be treated differently than somebody with a $1M in cash. That's just bad tax design to treat two basically identically situated people differently. But the bad part would not be the disparate treatment between different types of savings, it would be that savers would get penalized harshly. You don't want such a major disincentive for people to save. Somebody who made $200k per year on average for his career and spent all of it should not be treated better than somebody who made $200k per year on average for his career and saved a steady 25%, and they sure as hell shouldn't get treated better than somebody who made $50k on average and saved 10%. We already discourage (or at least deincentivize) savings and investment enough by "promising" people that younger workers will be forced to pay for their SS and medicare. We don't need to further penalize savings/investment with significant taxes on top of income taxes (in the case of savings into a tax deferred vehicle) and capital gains (for qualified investments outside of tax deferred vehicles).
My posts repeatedly stated means testing based on "income", not savings of any kind. I don't believe in a wealth tax and have never stated to support such a thing. Interest income, dividend income, capital gains, IRA withdrawals, pension income, are all examples of other types of retirement income that someone might earn in addition to SS. Don't confuse that with savings/assets themselves being taxed.
Well you said you would tax someone with a pension but not somebody with a million in savings. How is that not taxing wealth?
No, my references were in regards to means testing SS based on "INCOME", which is why I repeatedly used the word "income", whether that be income from a pension or income generated from a savings/investment or other taxable income. And means testing doesn't mean needing additional "taxing" at all, it means determining your eligibility to qualify for such a program (i.e. cut/eliminate SS benefits if other income in retirement is over some threshold like $50k/yr), as I said earlier when I first brought it up. I didn't say anything about increasing taxes for certain SS recipients as a method of means testing. I referred to increasing payroll taxes on us who are still in the workforce, but never mentioned increasing taxes for retirees or as a form of means testing. So, means testing SS benefits based on other retirement income to determine eligibility for benefits (or at least a % of full benefits) could be one of several ways to shore up the program. Wealth itself would not be taxed whether in a savings or the value of a pension. So, that's why it's not taxing wealth. It's not actually taxing income either, only using it as a means to test eligibility for SS benefits.
If a person receives his pension money and puts it directly into a savings account, they are getting taxed on all of it, despite the fact that they are not spending it
The pension payout can be rolled into an IRA or qualified retirement plan like a traditional 401K without being taxed. Only the distributions would be taxed, the same as any other savings in a 401K or similar retirement plan. Roth plans obviously aren't taxed during distributions, but the money is taxed as income at the high marginal rate while still employed prior to being contributed to the fund in the first place. The pension will get the same treatment as the 401K/IRA as far as taxing as is the case today (and the income applied in the same manner for means testing that I am suggesting should be used).
but the person who has a $1M in a tax efficient index fund pays taxes on a fraction of their growth.
That would be a non-retirement account, for which the recipient would have fully paid his income taxes at a likely high rate during his working career on those investments, and any growth would be subject to taxation in the form of interest, dividends, realized capital gains throughout this career at that high marginal rate (and cap gains rate), and eventually taxed in retirement as possibly lower rates. Yes, regulation of realizing gains and such could allow you to minimize taxes on the gains, but the principal and pre-retirement earnings and realized gains are taxed at a high rate while still working. For retirement accounts, a pension and traditional 401K are taxed as income. And for my means testing proposal, one doesn't have an advantage over the other.
If the person tries to sell off their pension stream to "deannuitize" it (I'm not sure this is even legally permissible; not sure if courts will enforce an agreement selling off pension income), they get hit with a huge tax.
No, they simply need to rollover into a qualified retirement plan as I mentioned above, and they will only be taxed on the distributions, just as with a traditional IRA. Means testing as I describe it would treat both the same.
But again, even if you provide some relief for that, you are still setting up a situation where consumption is basically not taxed (at the federal level) while somebody is not eligible for (or at least not yet taking) social security benefits, then you tax consumption heavily when they are taking social security benefits, and then you tax consumption lightly or not at all if they defer it until their kids inherit it.
That's just flat out not what I'm proposing. As far as means testing, I'm not suggesting any change in taxing income any differently than it is today, only using "other" retirement income to determine the eligibility for full (or reduced) SS benefits. This is exactly how means testing is currently done under ACA for Medicaid, PTC, and CSR. I haven't come up with some totally new idea, just something that is fair as possible without being too impractical to implement and administer.
That's just a messed up incentive structure.
Nothing is perfect, but it's probably the best practical solution just as with ACA.
And what kind of implicit tax rate are you envisioning for social security means testing?
No direct link, but people in the 12% tax bracket could be affected. In my example above and one or two earlier posts, I stated $50K/yr in other retirement income would mean a loss of SS benefits. And I think that figure should be indexed to inflation, unlike the thresholds used for determining how much of SS benefits are taxable, which haven't been changed since 1983. The actual amount would really need to depend on where this factors in as part of a larger restructuring of SS and benefits and how the CBO scores it, so I'm speaking more in general terms of means testing based on income here rather than trying to nail down the exact amount outside of the context of the larger plan.
You'll already have capital gains taxes on income outside of tax advantaged accounts. Are you going to essentially slap an income tax on top of the capital gains tax?
No. No changes in tax rates or additional taxes on any existing income.
And then for money coming out of retirement accounts, you are going to slap an additional income tax on it?
Again, no changes to taxes in regards to means testing.
And I assume you are going to reclassify Roth distributions as income for social security means testing, or else you are greatly tipping the scale towards the roth
No changes in taxes with Roth, either. The means testing method proposed doesn't change anything regarding work retirement accounts, IRAs, or pensions themselves. Only income is factored in, just as with ACA for Medicaid, PCT, and CSR. I'm not reinventing the wheel, just extending that type of means testing to determine SS eligibility for full (or reduced) benefits until they are phased out completely.
? However you do it, you are greatly penalizing savers except for those who live on low income in retirement with the intent to devise their savings to their heirs.
Saving itself isn't the issue, but rather income. If someone wants to live a very meager existence to keep their income so low as to avoid a cut to their SS benefits, that is their choice. That is no different than those who regulates their taxable income to take advantage of ACA subsidies. There's a MMM thread sticky thread all about it:
https://forum.mrmoneymustache.com/ask-a-mustachian/information-on-the-affordable-care-act-with-a-focus-on-early-retirees/However, those most affected by the cut in SS benefits due to means testing aren't likely to force themselves to suffer for benefits they don't need, just like many wealthy retirees aren't restricting their incomes simply to qualify for ACA subsides. They're going to enjoy their sweet SWR and sacrifice some of their SS benefits because they will still be better off doing so. That would need to be part of the formula - that the penalty of reduced benefits rolls off more slowly than the increase in income so that they will prefer the additional "income" over a greater SS benefit and prevent gaming the system.
I guess by greatly taxing seniors who spend down their resources, you are encouraging them to pass on larger inheritances and not suck up resources when they are not working, but those resources are still (presumably) going to be sucked up by the heirs.
Remember, I've not said I would tax anyone any more as part of means testing, only cut/reduce SS benefits, and wealthy seniors with large stashes aren't likely to cut down their distributions and spending that much for an additional benefit that they didn't need, but that will allow the SS system to more adequately fund the benefits to the seniors who will be more likely to need and spend those benefits. The formula needs setup as just mentioned to prevent people from gaming the system. If $10,000 more in income meant a $10,000 loss in SS benefits, then you would keep the $10000 in your retirement account to avoid the means testing cut and take the SS instead. Your spending would be the same. That's a bad formula. But if it's $10,000 in income vs. a $2,000 loss in SS benefits, you might prefer to withdraw the $10,000 from your IRA because that still gives you $8000 more to spend rather than just leaving it for your kids, despite a $2000 loss in SS due to means testing. Again, just examples on how it could be workable to prevent the issue you mentioned.
I mean, I get that there is a simplicity benefit as far as implementing it, but I think the awful incentives make it worth taxing based on lifetime earnings, rather than taxing consumption only in retirement.
I don't really want to add additional taxes at all as part of means testing - only use income as a means of testing eligibility for the benefits (or a reduced benefit that rolls off with greater income). Lifetime earnings could be another way of determining eligibility, which seems reasonable as well, although I think ALL income should be included for lifetime means testing as well, including taxable gains, dividends, interest, and distributions, which do not show on SS statements, so this would require a lot more effort to implement such a different system for applying this method of means testing when the one I recommend is already being used and would merely need to be extended to SS means testing. Lifetime earnings means testing would also incentivize working fewer years or early retirement, to keep lifetime earnings down to guarantee a full SS payout later in life, which is good for us FIRE folk, but it might not be the best method for means testing in general as it applies to the general public.