The Tax Attic with Jerry Coon — June 3, 2010

“The Golden Age of Retirement”

In my opinion, we are well past the mid-point of the age that future generations will come to call “The Golden Age of Retirement.” I have three reasons to back up my assertion. First, there are still mass amounts of people receiving benefits from defined benefit pensions, i.e. you work for 30 years and receive a pension of X amount of dollars.

Jerry Coon, Enrolled Agent

The employer shoulders 100% of the pension burden forever. As we are seeing from the General Motors debacle and the City of Grand Rapids issues with their pension shortfalls, the defined benefit pensions as we know them today are just not sustainable to the employing entity. “Forever” seems to be the issue. These pensions are quickly being replaced by defined contribution pensions, i.e. 401k contributory plans or Simple Individual Retirement Account plans, where the employee puts in some dollars and the employer puts in some dollars. The employee receives the value of the account when he retires and the employer has no further liability.

In many employment scenarios, older employees are covered by a defined benefit plan but all new employees are covered by a defined contribution plan. It appears this switch will continue, especially in non-unionized private industry, until there is no more defined benefit plan coverage. Eventually, the only entities having employees with defined benefit plans will be government and public entities such as schools and unionized private industry entities such as UAW and Teamsters.

The second reason I call today “The Golden Age of Retirement” is the current Social Security benefit rules. Practically everyone qualifies, once they reach the proper qualifying age, to receive a Social Security benefit, no matter how little their income or assets or how large their income or assets. In 2009, 51 million beneficiaries received $650 billion in benefits. In the late 1800’s, the Germans were the first nation to set up a Social Security system. We followed them in the 1930’s with our own version. Our version, called the Federal Insurance Contributions Act (FICA), was crafted to fulfill a rather limited set of needs. Beneficiaries could begin drawing at the age of 65. The kicker was that the average life expectancy for both men and women was less than 65. In its original form, it was not meant to have 51 million people drawing benefits. In fact, the original bill specifically excluded approximately one-half of the population. It excluded farmers, social workers, domestic service employees, government, teachers, nurses, library, and hospital employees. It really was quite a prejudicial and bigoted bill with women and minorities getting the short end of the stick. However, the Act was challenged in the courts and it was upheld by the Supreme Court.

Of course, in order to get up to the 51 million beneficiary plateau, most of those early prejudices have gone away. The point is that the legislators who passed the original bill thought nothing about keeping one-half of the population from qualifying and made the age high enough to start drawing that most of other one-half would never be able to draw either. I wonder if future legislators will think twice about decreasing benefits by some percentage or raising the age we can draw or using income levels or assets to eliminate beneficiaries. I think not.

The third reason I call this “The Golden Age of Retirement” is a reasonable standard of living is obtainable by the majority of the population. Inflation has not yet made the basic staples of life so expensive that retirees can’t afford items such as recreation and travel. Most retirees, if they choose, can afford to spend some time in Florida in the winter; go to a ballgame in Detroit; spend a weekend in Traverse City; or go out for supper with friends.

There are dangers on the horizon, of course. Medical costs continue to rise. Transportation costs continue to rise. Social Security benefits may be limited. Pensions may be cut. Next week, I will continue this discussion on how those Social Security benefits may be limited. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Dr. in Rockford. Contact him at www.actiontaxservice.com.

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