The fiscal cliff might be less steep if Americans were not quite so dependent on the government in their old age. Of course, if we didn’t need the government quite so much when we’re old, the cliff might have not have arisen in the first place. Social Security and Medicare might be in far better shape, and the need for reforming these so-called entitlements would not be as urgent as it has become.
It’s too late to fix this now and have an effect on the present. But what about the future? Congress could help the next generation of senior citizens by adding better logic to how the government treats savings, including savings for old age.
Now, if you are a diligent saver, the government collects income tax on interest earnings above a certain amount even if you do not take the money out. That’s a good way to discourage people with good incomes from saving much at all. As for retirement savings, Congress allows you to put money aside before taxes are deducted. But then, once you pass 70 and a half, you have to take it out of that sheltered account and start paying taxes on the amount you take out. So the government forgoes tax revenue when people have income enough to save, but then taxes them when they’re old and need their money much more. There ought to be a better way.
How about this: Exempt all savings. including earnings on money saved, from federal taxation. This also would let retirement savers keep all of their nest eggs. And it would make Americans less dependent on Social Security, which might make reasonable reforms in that program both less necessary and easier to reach. (hh)
From Ray Kopczynski: “But then, once you pass 70 and a half, you have to take it out of that sheltered account and start paying taxes on the amount you take out. So the government forgoes tax revenue when people have income enough to save, but then taxes them when they’re old and need their money much more.”
True enough, but I believe that is because, everything else being equal, your gross wages will be considerably less in retirement — than before. Hence, you will be taxed at a lower rate. Personally, I do not think that is any kind of dis-incentive to “save.”
“How about this: Exempt all savings. including earnings on money saved, from federal taxation. This also would let retirement savers keep all of their nest eggs. And it would make Americans less dependent on Social Security…”
The devil is in the details. When you say “all savings,” are you meaning your classic savings-accounts at lending institutions? Or does that include any/all investment income? Inheritance monies? I honestly believe that if folks use a modicum of common sense, they would not (and should not) rely on (or be “dependent on”) social security as sole means for their retirement years.
