Author Topic: Never before have my finances been so affected by the US Government  (Read 3408 times)

blue_green_sparks

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 My planning is (in a substantial part) based on the ACA and my Social Security estimates prior to C19. Born during 1960, I will suffer a significant financial loss if the Social Security COVID Correction and Equity Act does not pass in congress and further disruption will occur if the ACA is repelled or damaged by the courts.

I never went out of my way to avoid federal income taxes. I believed to do that is somewhat 'dishonorable'. Well maybe that was a foolish mistake, but at least the tax was predictable. LOL.

 I have a conservative portfolio. If things don't go our way, I will probably simply adjust my risk aversion somewhat. However... to keep things in perspective, I need only think of my father. Plucked from his family and career in his prime to carry an M1 rifle through the horrors of the Korean War. A great scientist taught me that 'everything is relative'. ;)



« Last Edit: October 14, 2020, 07:13:50 AM by blue_green_sparks »

uniwelder

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Re: Never before have my finances been so affected by the US Government
« Reply #1 on: October 14, 2020, 09:00:58 AM »
I had to read up on what exactly the proposed SS bill is.  Seems like the issue is that SS benefits are based on average or median US salary of the year you turn 60, and that average/median US salary is expected to be about 15% lower this year than normal, so your SS benefits would also be about 15% lower.  I might not have gotten that completely right, but that seems to be the gist.  Definitely sucks and hopefully there is some workaround to adjust for that, but that kind of benefit reduction (I guess a few thousand per year) shouldn't really factor in to your life in a major way.

Regarding the ACA, I'd like to be optimistic and assume if there are changes for the worse, people will eventually push congress to act and improve.

friedmmj

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Re: Never before have my finances been so affected by the US Government
« Reply #2 on: October 14, 2020, 09:48:40 AM »
I had never heard of this notch issue so I googled and found the following on SSA.gov

"Notch" year beneficiaries' principal argument is that they have been singled out to receive lower benefits. But the Commission found no evidence to support that position; indeed, the purpose of the 1977 legislation was to reduce benefits for all future beneficiaries, and it has generally done that.

In fact, considering the value of their benefits relative to the Social Security taxes which they paid, those born in the "Notch" years are, in general, receiving a greater return from Social Security than will subsequent generations of beneficiaries. In addition, their "replacement rate"Cthe percentage of pre-retirement earnings replaced by benefit paymentsCis equal to that of retirees who follow them, which was also the intent of the 1977 amendments. In this sense they are "doing well" as beneficiaries of the system, although not as "well" as those who came before them,(8) especially those who worked well beyond 62.

To the extent that disparities in benefit levels do exist, they exist not because those born in the "Notch" years received less than their due; they exist because those born before the "Notch" years (who were "grandfathered" under the old law's more generous computational method) continue to receive substantially inflated benefits. This disparity has created an understandable perception of unfairness.

friedmmj

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Re: Never before have my finances been so affected by the US Government
« Reply #3 on: October 14, 2020, 09:50:42 AM »
I had to read up on what exactly the proposed SS bill is.  Seems like the issue is that SS benefits are based on average or median US salary of the year you turn 60, and that average/median US salary is expected to be about 15% lower this year than normal, so your SS benefits would also be about 15% lower.  I might not have gotten that completely right, but that seems to be the gist.  Definitely sucks and hopefully there is some workaround to adjust for that, but that kind of benefit reduction (I guess a few thousand per year) shouldn't really factor in to your life in a major way.

Regarding the ACA, I'd like to be optimistic and assume if there are changes for the worse, people will eventually push congress to act and improve.

Sorry, this is not correct.  Benefits are based on an average of inflation adjusted highest 35 years of earnings history.

uniwelder

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Re: Never before have my finances been so affected by the US Government
« Reply #4 on: October 14, 2020, 10:03:06 AM »
I think that inflation adjustment is based on the average US salary when you are 60 years old (actually 62, but based on data two year prior). If the current average is 15% lower, the adjustment to the 35 years used will be that much less.  For example, if the current 2020 average US salary is $42,500 instead of $50,000, a person that is 60 years old will have their previous 35 years working salaries adjusted by a lower number for inflation of salaries.

It would have helped if blue_green_sparks elaborated a bit on their situation instead of posting a somewhat cryptic message that required digging.  I don't think there was any SS notch issue meant in the posting--- as in the reference to being born in 1960.
« Last Edit: October 14, 2020, 10:15:15 AM by uniwelder »

dandarc

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Re: Never before have my finances been so affected by the US Government
« Reply #5 on: October 14, 2020, 10:36:56 AM »
@friedmmj - I'm not finding anything at ssa.gov about this current iteration of a "notch". Your analysis I'm finding applies to the notch for people born in ~1917 from what I found. Link if you have an actual article regarding the 1960 birth cohort's notch that is not created by a flaw in the benefit formula, but by a once per century economic catastrophe we happen to find ourselves in the middle of right now. The current notch is because the wage index in the year you turn 60 has an outsize impact on your benefits.

Your benefits are computed one time for social security, and the value of that index in the year you turn 60 is how your earnings prior to that year are indexed up (or down as the case may be). If there's an economic calamity that causes that particular figure to be low for the year you turn 60, well that figure hurts you. It actually helps people who turned 59 in that same year.

A thorough analysis here:

https://repository.upenn.edu/cgi/viewcontent.cgi?article=1677&context=prc_papers

And the fix being proposed is simple and seems fair - just limit changes in the key index so it can't go down. Unless we find ourselves in a long-term deflationary situation, the overall impact is pretty minimal and we're not screwing over people who were unlucky to be born in 1960.
« Last Edit: October 14, 2020, 10:40:29 AM by dandarc »

dandarc

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Re: Never before have my finances been so affected by the US Government
« Reply #6 on: October 14, 2020, 10:42:47 AM »
I'd also point out - this issue could turn out to be a non-issue depending on where that average wage index comes out for 2020. A 15% decline would be really bad for those born in 1960, but the last recession this value only went down by 1.5%.

blue_green_sparks

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Re: Never before have my finances been so affected by the US Government
« Reply #7 on: October 14, 2020, 11:21:03 AM »
I think that inflation adjustment is based on the average US salary when you are 60 years old (actually 62, but based on data two year prior). If the current average is 15% lower, the adjustment to the 35 years used will be that much less.  For example, if the current 2020 average US salary is $42,500 instead of $50,000, a person that is 60 years old will have their previous 35 years working salaries adjusted by a lower number for inflation of salaries.

It would have helped if blue_green_sparks elaborated a bit on their situation instead of posting a somewhat cryptic message that required digging.  I don't think there was any SS notch issue meant in the posting--- as in the reference to being born in 1960.

Yes, that is my understanding. The early estimates were for a 15% cut. Perhaps people of 1961 vintage are likely to receive lesser than their estimates have provided for as well if the job market does not snap back really soon. In any event I have written my representatives in congress several times and will continue to do so in hopes they arrive at fair calculation that does not rely so heavily on the performance of the job market during the year one turns 60. I used to think it was cool to have been born at the dawn of a decade, but now, not so much.
« Last Edit: October 14, 2020, 11:23:22 AM by blue_green_sparks »

friedmmj

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Re: Never before have my finances been so affected by the US Government
« Reply #8 on: October 14, 2020, 12:43:06 PM »
@friedmmj - I'm not finding anything at ssa.gov about this current iteration of a "notch". Your analysis I'm finding applies to the notch for people born in ~1917 from what I found. Link if you have an actual article regarding the 1960 birth cohort's notch that is not created by a flaw in the benefit formula, but by a once per century economic catastrophe we happen to find ourselves in the middle of right now. The current notch is because the wage index in the year you turn 60 has an outsize impact on your benefits.

Your benefits are computed one time for social security, and the value of that index in the year you turn 60 is how your earnings prior to that year are indexed up (or down as the case may be). If there's an economic calamity that causes that particular figure to be low for the year you turn 60, well that figure hurts you. It actually helps people who turned 59 in that same year.

A thorough analysis here:

https://repository.upenn.edu/cgi/viewcontent.cgi?article=1677&context=prc_papers

And the fix being proposed is simple and seems fair - just limit changes in the key index so it can't go down. Unless we find ourselves in a long-term deflationary situation, the overall impact is pretty minimal and we're not screwing over people who were unlucky to be born in 1960.

Thanks and a mea culpa from me for not being aware of the technical age 60/62 adjustment issue covered in your link.  Here is the link to what I pasted above:
https://www.ssa.gov/history/notchfile1.html

yachi

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Re: Never before have my finances been so affected by the US Government
« Reply #9 on: October 14, 2020, 01:44:49 PM »
It's not adjusting to inflation (cost of goods), but rather adjusting for increases in the average wage subject to federal income taxes.  The Social Security Administration calls the adjustment indexing, and it's used to bring your "nominal earnings up to near-current wage levels." 
https://www.ssa.gov/oact/progdata/retirebenefit1.html

Just like other posters mentioned, it's used to adjust all your previous year's earnings to the average wage of the year you turn 60 (2 years prior to turning 62) to arrive at your average indexed monthly earnings" (AIME).  If you collect after 62, the only adjustment is COLA, based on cost of goods inflation applied to your AIME.  They don't recalculate your AIME.

I don't know what the legislation is considering, but it would have made sense to adjust to the average wager over a larger number of years, say 5.


Mr. Green

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Re: Never before have my finances been so affected by the US Government
« Reply #10 on: October 14, 2020, 01:49:23 PM »
It's not adjusting to inflation (cost of goods), but rather adjusting for increases in the average wage subject to federal income taxes.  The Social Security Administration calls the adjustment indexing, and it's used to bring your "nominal earnings up to near-current wage levels." 
https://www.ssa.gov/oact/progdata/retirebenefit1.html

Just like other posters mentioned, it's used to adjust all your previous year's earnings to the average wage of the year you turn 60 (2 years prior to turning 62) to arrive at your average indexed monthly earnings" (AIME).  If you collect after 62, the only adjustment is COLA, based on cost of goods inflation applied to your AIME.  They don't recalculate your AIME.

I don't know what the legislation is considering, but it would have made sense to adjust to the average wager over a larger number of years, say 5.
This is the correct explanation. There would be significant damage done from this year's average wage being significantly lower because it means all working years over one's life will not be adjusted as high because the disparity between the value of a dollar then vs. now will appear smaller. The result will mean a lower inflation-adjusted average income over the course of one's highest 35 years of work. The suck part is that it has nothing to do with when you choose to retire so there is nothing you can do about it. The determining number is the year you turn 60 and that's it.
« Last Edit: October 14, 2020, 01:51:39 PM by Mr. Green »

dandarc

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Re: Never before have my finances been so affected by the US Government
« Reply #11 on: October 14, 2020, 02:47:12 PM »
For the fix that has been proposed in the House:

https://larson.house.gov/media-center/press-releases/larson-introduces-bill-prevent-social-security-benefit-cuts-due-covid-19

"prevents the cut in benefits due to the notch for those born in 1960 (or any year in the future, if a similar situation reoccurs) by ensuring that the Average Wage Index as used for these purposes never drops below the previous year’s level – while carefully avoiding any benefit cut compared to current law; "

Seems the basic thing is putting a floor on the index number used in the computation - index cannot go down from year to year. Certainly fixes things for 1960 (or a similarly effected year - so far this index I think has only gone down year over year once before for the "great recession").

Mr. Green

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Re: Never before have my finances been so affected by the US Government
« Reply #12 on: October 15, 2020, 10:37:24 AM »
For the fix that has been proposed in the House:

https://larson.house.gov/media-center/press-releases/larson-introduces-bill-prevent-social-security-benefit-cuts-due-covid-19

"prevents the cut in benefits due to the notch for those born in 1960 (or any year in the future, if a similar situation reoccurs) by ensuring that the Average Wage Index as used for these purposes never drops below the previous year’s level – while carefully avoiding any benefit cut compared to current law; "

Seems the basic thing is putting a floor on the index number used in the computation - index cannot go down from year to year. Certainly fixes things for 1960 (or a similarly effected year - so far this index I think has only gone down year over year once before for the "great recession").
That seems like a poor solution, rather than just averaging a few years. If we were ever to experience a deflationary periord they are just creating another problem.

dandarc

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Re: Never before have my finances been so affected by the US Government
« Reply #13 on: October 15, 2020, 11:28:13 AM »
Could always fix it if/when that deflationary period actually happens. Or really change the social security benefit formula in a big way - decouple it from what you paid in entirely for example. Say everyone's base benefit amount is $2K per month if you're eligible, then apply the same formulas for when you decide to start taking distributions, family structure and so on and also adjust the base benefit amount for inflation every year.

yachi

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Re: Never before have my finances been so affected by the US Government
« Reply #14 on: October 16, 2020, 11:53:47 AM »
Could always fix it if/when that deflationary period actually happens. Or really change the social security benefit formula in a big way - decouple it from what you paid in entirely for example. Say everyone's base benefit amount is $2K per month if you're eligible, then apply the same formulas for when you decide to start taking distributions, family structure and so on and also adjust the base benefit amount for inflation every year.

Not without changing how social security taxes are harvested in the first place, I hope.  You currently pay a 6.2% up to a maximum $8,5337.40 on $137,700 in income, at which point the additional earnings are not subject to social security taxes.  The scheme is rationalized with you stop earning additional social security above the 137,700 level, so it's "fair".  But if my middle class income is going to support those who barely paid into social security, then I'm going to expect those with an upper class income to do the same.

TomTX

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Re: Never before have my finances been so affected by the US Government
« Reply #15 on: October 18, 2020, 09:41:08 AM »
I'd also point out - this issue could turn out to be a non-issue depending on where that average wage index comes out for 2020. A 15% decline would be really bad for those born in 1960, but the last recession this value only went down by 1.5%.

Since low-wage jobs were primarily the ones lost, I expect average wage for 2020 to be noticeably higher than 2019.

dandarc

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Re: Never before have my finances been so affected by the US Government
« Reply #16 on: October 18, 2020, 09:47:09 AM »
I'd also point out - this issue could turn out to be a non-issue depending on where that average wage index comes out for 2020. A 15% decline would be really bad for those born in 1960, but the last recession this value only went down by 1.5%.

Since low-wage jobs were primarily the ones lost, I expect average wage for 2020 to be noticeably higher than 2019.
Yep - could go that way. I'd think the chairman of the Chairman of the Ways and Means Social Security Subcommittee who has proposed the law to fix this might have some information general public does not.

blue_green_sparks

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Re: Never before have my finances been so affected by the US Government
« Reply #17 on: October 18, 2020, 11:14:27 AM »
I'd also point out - this issue could turn out to be a non-issue depending on where that average wage index comes out for 2020. A 15% decline would be really bad for those born in 1960, but the last recession this value only went down by 1.5%.

Since low-wage jobs were primarily the ones lost, I expect average wage for 2020 to be noticeably higher than 2019.
Yep - could go that way. I'd think the chairman of the Chairman of the Ways and Means Social Security Subcommittee who has proposed the law to fix this might have some information general public does not.

Not totally certain, but if you worked Jan, Feb, and 1/2 of March and then got laid off; you still get a W2 and are really bringing down the average.

maizefolk

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Re: Never before have my finances been so affected by the US Government
« Reply #18 on: October 18, 2020, 11:32:21 AM »
Could always fix it if/when that deflationary period actually happens.

I agree with Mr. Green that it would be better to switch to an average of several years than build in a trap that would require congress to vote to cut social security benefits if/when a period of significant deflation occurs.

There are very real reasons congresspeople are reluctant to vote for anything that could be spun as a cut to social security benefits, so better to plan ahead now, if we can avoid putting them in a situation where a vote for a "cut" would be necessary in the future.

John Galt incarnate!

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Re: Never before have my finances been so affected by the US Government
« Reply #19 on: October 18, 2020, 01:55:09 PM »



I never went out of my way to avoid federal income taxes. I believed to do that is somewhat 'dishonorable'. Well maybe that was a foolish mistake, but at least the tax was predictable. LOL.



"Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." Judge Learned Hand

May the words of  preeminent jurist Learned Hand dispel anyone's sense of dishonor for avoiding taxes.

Furthermore, read Atlas Shrugged to understand what a "looter" is and then consider all the looters who slither to and fro in the muck of the Washingtonian "swamp."  Many of them  fatten on tax revenue specifically  doled out in their favor.


« Last Edit: October 18, 2020, 02:13:14 PM by John Galt incarnate! »

Much Fishing to Do

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Re: Never before have my finances been so affected by the US Government
« Reply #20 on: October 19, 2020, 10:41:17 AM »



I never went out of my way to avoid federal income taxes. I believed to do that is somewhat 'dishonorable'. Well maybe that was a foolish mistake, but at least the tax was predictable. LOL.



"Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." Judge Learned Hand

May the words of  preeminent jurist Learned Hand dispel anyone's sense of dishonor for avoiding taxes.

Furthermore, read Atlas Shrugged to understand what a "looter" is and then consider all the looters who slither to and fro in the muck of the Washingtonian "swamp."  Many of them  fatten on tax revenue specifically  doled out in their favor.

Wow, that's some higher education.

My less scholarly reply to that would be just to ask the poster whats the difference between going 'out of their way to avoid income tax' and applying for and planning on an ACA subsidy for the rest of their life.... maybe I interpreted all that wrong and they just meant they never cheated on their taxes.

blue_green_sparks

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Re: Never before have my finances been so affected by the US Government
« Reply #21 on: October 19, 2020, 03:21:46 PM »



I never went out of my way to avoid federal income taxes. I believed to do that is somewhat 'dishonorable'. Well maybe that was a foolish mistake, but at least the tax was predictable. LOL.



"Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." Judge Learned Hand

May the words of  preeminent jurist Learned Hand dispel anyone's sense of dishonor for avoiding taxes.

Furthermore, read Atlas Shrugged to understand what a "looter" is and then consider all the looters who slither to and fro in the muck of the Washingtonian "swamp."  Many of them  fatten on tax revenue specifically  doled out in their favor.

Wow, that's some higher education.

My less scholarly reply to that would be just to ask the poster whats the difference between going 'out of their way to avoid income tax' and applying for and planning on an ACA subsidy for the rest of their life.... maybe I interpreted all that wrong and they just meant they never cheated on their taxes.
You misread my tone. I refused to do some of the things my accountant suggested over the years because even though they were within his interpretation of the tax code, I thought they pushed the intent of the code. Do I feel that way now in light of all I have learned about the world? Not so much, my mistake. When Warren Buffet says he pays at a lower rate than his secretary, it's just business as usual. Of course there could be a system more fair, but all we must work within the parameters we are given.
https://www.entrepreneur.com/article/338189