THE TAX ATTIC with Jerry Coon

A nonpartisan solution

Jerry Coon

I recently attended a conference for Money Concepts, the broker dealer firm that I am associated with for the financial planning portion of my business. One of the speakers was Dan Greenwell, a very successful and longtime associate in the Money Concepts system from Money Concept’s Kentucky Bluegrass Region. Dan titled his talk “What’s Next?” It centered on what we need to do to succeed in the future not only in the financial planning business but also in life in general.

The first portion of the speech involved Dan’s advice that we must be prepared to embrace change. He also gave his recommendations on the actions to take to benefit from those changes.

The second portion of the speech was a little more emotional. Dan gave us the four life principles that he learned from his father. His father was a successful businessman who died of a heart attack at age 63. He ran his business, the largest tire dealership in the five-state Kentucky area, and also his life, using the following four principles as his guide. These four were the principal reasons for his success.

First, always do what is best for the client. Ultimately, what is best for the client will be best for you.

Second, always tell the truth. It’s the only way you won’t forget what you told to someone in the first place. Truer words were never spoken.

Third, if you borrow money, pay it back. Dave Ramsey would have loved Dan’s dad.

Fourth, integrity is the only thing you take with you to the grave. Your money stays here. Your cars, your business, your house, your boat, your motorcycle, your friends, and your relatives all stay. Your reputation and your integrity, however, do live on in the sense of how people remember your life and time spent here. Those won’t help you either as you approach the pearly gates for that day of reckoning. However, on this earth, I believe one of the finest tributes that can be given to someone is to say he or she is and was a person of integrity. I didn’t know Dan’s dad, but I do know Dan, and he has the type of reputation that we all hope to have and be known for.

We can all control our actions in regards to how we live our life. However, a subject we have no control over is the fixing of the Social Security system. Congress and only Congress can make those decisions. Yes, we do elect the men and women in Congress but after that, the decision-making process is in their hands. It’s up to us to choose our Congressmen and women wisely because this is a problem that will require a nonpartisan solution.

That’s a sobering thought.

Our current Congress doesn’t elicit confidence that they will be able to solve any type of problem, especially if it requires a nonpartisan solution. That’s sad but that appears to be the way it is.

As I stated in an earlier article, if Congress does nothing, at some point somewhere from 2030 to 2035, every check written by the Social Security Administration (SSA) will simply be cut to approximately 70%-75%. All reserves will be gone and the SSA system will be operated as a pay-as-you-go system. The SSA will pay out in benefits what they collect, after operating expenses, of course.

What actions can be taken in the next few years to change this outcome? I am going to presume that Congress does want to change the system and they aren’t going to just wait until the reserves are gone and the pay-as-you-go happens when it happens. It’s a sobering thought, but it is a nonpartisan solution.

Here are the most common, most talked-about solutions that can be made to keep the pay-as-you-go solution from occurring. According to a Department of Treasury 2007 report, immediately increasing the FICA tax by 1.95% to a total of 14.35%, up from the current 12.4%, will provide a 100% fix to the system for at least the next 75 years. The report states that over the next 75 years, the system will endure, in present value terms, a $5.1 trillion shortfall. That $5.1 trillion equates to 1.95% of the present value of taxable payrolls over that 75-year time frame. Therefore, increasing the tax on the payrolls by 1.95% will solve the problem for 75 years.

As an alternate solution, the report works out the math that reducing benefits immediately by 13% will also provide 100% liquidity for the next 75 years.

Another solution would be to increase the tax rate to 14.4% gradually over the next 20 years. That will provide 63% liquidity. Of course, that leaves 37% to be dealt with by cutting benefits or using one of the other solutions such as increasing the full retirement age.

Eliminating the top-end cap on earned income subject to tax has become a very popular solution. That will provide some relief, but it will not cover all the previously mentioned shortfall of 37%. Evidently, there are not as many people as we think that earn more than $110,100, as it stands under current law as the maximum for 2012.

The key to a solution is for Congress to work together. To reach a solution that is going to last 75 years is going to take all of Congress. I think the last time that happened was back when Ronald Reagan was president, so I’m not expecting much. But a little bit here and a little bit there could add up to a lasting solution. Let’s keep our fingers and toes crossed. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry through his website, www.actiontaxservice.com.

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