Watch out: tax increases to save Social Security are being proposed
Ric Edelman: It's Thursday, April 6th. We've been talking about retirement security lately, what's going on in France and South Korea, and how this is a global problem. All around the world. We're living longer and producing fewer babies, and that means all over the world, fewer people are working and paying into Social Security and similar government retirement plans. And more people are retired and taking money out. All these programs are going broke.
And all around the world, government leaders are starting to deal with it. In France, they're increasing the retirement age. Here in the US, we haven't decided yet what to do. Should we lower and delay the benefits like France or raise the taxes to pay for it all? Well, so far here in the US, the tax increases are taking an early lead. An Op-Ed in the New York Times recently said that we should tax 401(k) plans and IRAs because the people who are most likely to have the most money in those plans are rich people. The richest 20% of Americans get 60% of the tax benefits of 401(k)s and IRAs, while the poorest 20% of Americans get just 1% of the benefits.
Said another way, the richest Americans save $215 billion in taxes by contributing to IRAs and 401(k)s, the poorest Americans save only $5 billion in taxes. Not only that, according to the Op-Ed, Wall Street banks and brokerage firms and mutual fund companies earn tens of millions of dollars by managing the assets that rich people put into those 401(k)s and IRAs. And they give lots of advice to those rich people to help them maximize their investment returns.
Meanwhile, people who are dealing with Social Security get no advice at all. So the Op-Ed says we need to start taxing the money that is inside 401(k)s and IRAs. Not only that, but there are also bills in Congress to raise Social Security taxes and the tax raiser camp, they're supported by President Biden's budget. In his budget, he leaves Medicare and Social Security untouched. So even though their costs are rising, the benefits will continue as is by 2033.
According to the General Accounting Office (GAO), by 2033, Medicare and Social Security will consume 11% of our nation's GDP. That's a 30% increase over last year. What President Biden does do in his budget is raise taxes on high income workers.
So clearly, tax increases are in our future. Some people think that Social Security benefits are going to get cut anyway. And so a lot of the folks who are 62 today who otherwise would have deferred starting their benefits to age 70 are deciding to start receiving their benefits right now. The rationale? Well, we know that if Social Security is unchanged by Congress over the next ten years, Social Security benefits are going to be cut 25% starting in 2032. So you might as well take the income now before that 25% cut occurs.
Does that make sense? Well, it's a gamble because it means you're stuck with the lower monthly income for the rest of your life. And we have no assurance yet of what Congress is going to do to solve the Social Security funding crisis. So the best step is probably to do nothing rash. Instead, talk with your financial advisor, have them adjust your financial planning to acknowledge the likelihood of higher taxes and lower benefits. Don't make any decisions simply out of fear.
And if you are feeling fearful about what's going on in the world these days, listen to Jean's podcast Every Thursday Self-Care with Jean Edelman. You can follow Jean as well on Twitter, Instagram and YouTube. Be sure to leave her a comment. Let her know what you think about the topics that she's covering.
Well, before I go, I will say Happy Passover to you today. We're taking the day off tomorrow for Good Friday and Happy Easter Sunday. And by the way, if you watch or listen to the podcasts on YouTube, leave a comment. Let me know what you think.