Retirement Age and Tax Shelters

One thing the government is considering to offset some to the expenses to entitlements such as Social Security and Medicare, to save both of them and to hone in on a balanced budget is to raise the minimum retirement age.   Although not a decision to be proud of, at some point it is probably a necessary evil.  The saving graces are (1) we are living longer; living beyond three score and ten years is now the rule rather than the exception, and (2) with baby boomers retiring, with no changes in the system, there will be more people taking out of these programs than putting in.  I still think both of these will have to be privatized eventually and we will have to look at the negative consequences to privatization as the greater good; versus losing them altogether and leaving certain Americans with no means of support.  The problem with every politician in both parties advocating raising the retirement age, there is never any mention of the other operand, tax shelters.

Once we reach age seventy, we have to start paying income tax on earnings from tax shelters.  There are no longer penalties for early withdrawals, but they are no longer tax shelters; so what most new septuagenarians do is transfer the money from the tax shelter to a liquid asset like a traditional savings account.  Hmmmm.  Prior to the days of multi-trillion dollar debt, you retired at sixty-five and had a five year window to get your faculties in order with respect to tax shelters like IRAs, 401Ks, and other of these tax deferred accounts.  You could still work between ages 65 – 70 part time and earn up to $10,000 a year before it would be deducted from your Social Security check ($10,000 was a little bit more money in the 1970s).  The question is how is it going to work if the minimum retirement age is raised to seventy-two and you lose your tax shelters at age seventy?

I have come to the conclusion that if we absolutely must raise the retirement age, we must also raise the tax shelter age in proportion.  If we must have a retirement age as high as seventy-two, then tax shelters must also be extended to at least seventy-five, preferably seventy-seven to reinstate the five year rule.  Otherwise, it will be a very rough road for those finishing up the final two years of full-time work before retirement, getting hit from both ends of the spectrum.

We will have to make some difficult and unpopular decisions very soon and the negative consequences of any decision will have to be looked at as the price we have to pay to achieve fiscal responsibility and avoid traveling on the road to Greece.  But if the equation has more than one operand, make sure we at least cover or think about them all.



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