In this post, I offer a brief response to a recent thoughtful Reddit post. Credit to the poster for putting his or her views out there in an organized fashion and continuing the discourse.
The poster is concerned about one of the predictions Cody Garrett and I make in the book Tax Planning To and Through Early Retirement. The prediction, oversimplified, is that current readers of the book are unlikely to experience significant tax hikes in retirement.
Below I present the gist of the poster’s comments and then two brief responses. Note that I speak only for myself in this post. I do not speak for my co-author Cody Garrett.
The Reddit Post
If you are not on Reddit, I offer below a bullet point summary of the post’s highlights. I invite you to read the post for yourself.
- The poster acknowledges that in December 2023 I correctly predicted that “temporary” tax cuts set to expire at the end of 2025 would not expire. You can listen to the prediction timestamped here.
- The poster is quite concerned with the book’s prediction that taxes are not likely to go up on retirees.
- The poster believes it is problematic that the book’s historical analysis is limited to 10 years (2015 through publication).
- The post cites the 1983 law change that made Social Security potentially up to 50 percent taxable as a tax hike on retirees that had little adverse effects on the politicians who enacted it. Ronald Reagan was famously reelected in 1984 and won 49 states after signing a tax hike on retirees. Doesn’t the 1983 tax hike and the 1984 election result cast doubt on the analysis in Tax Planning To and Through Early Retirement?
Response: Taxes on Retirees Are Unlikely to Significantly Increase Anytime Soon
I have two brief responses to share. They boil down to (A) the comparison to 1983 supports rather than refutes the book’s argument and (B) the 10 year window in the book helps refute the hypothesis that increasing federal debts and deficits are highly likely to result in increased taxes on retirees.
The World, and More Importantly, the Electorate, Have Changed Since 1983
The poster’s invocation of the 1983 tax hike on retirees supports Cody’s and my arguments in the book much more than it supports the hypothesis that taxes on retirees are likely to increase significantly in the near future.
The 1983 tax increase on retirees was relatively modest. It only subjected up to 50 percent of Social Security benefits to income taxation. Further, it only kicked in at certain levels of income, blunting the impact for many retirees.
Much more importantly, let’s compare the electorate in 1984 to today’s electorate.
According to this research, in 1984 42 percent of the electorate was aged 50 and older.
According to this research, in 2024 58 percent of the electorate was aged 50 and older.
In political terms, this shift is a tidal wave. If 2024 is Earth, 1984 might as well be Mars or Venus, at least when it comes to American politics.
To further the point, recent research indicates that the average age of primary voters is 57 and the median age of primary voters is 59. See page 12 of the linked-to research.
Politicians respond to incentives. They don’t respond to fears promoted by big names in the financial industry.
What about an aging electorate in both primaries and general elections screams “Taxes are going up on retirees!”?
Lastly, the poster’s contention that 1983’s tax hike on retirees is somewhat instructive runs up against a wall just 10 years later.
In 1993 Bill Clinton and a Democrat Congress further increased the taxes on Social Security, subjecting up to 85 percent of Social Security benefits to income taxation. A year later the Republicans took back both Houses of Congress in a historic mid-term election wipeout.
I was in high school at the time. I remember that there were other factors at play. But it is interesting to see that the politicians’ behavior seems to have changed since the mid-1990s. It’s hard to find a significant tax hike on retirees since then.
Perhaps the politicians learned a lesson from the ‘93 Social Security tax increase that stuck.
Hypotheses That Repeatedly Fail When Tested Against Real World Conditions Should Be Strongly Doubted
We have heard it for years: Taxes are going up on retirees because of rising federal government debts and deficits.
That’s a contention that is easily tested, but only if real world conditions feature increasing federal government debts and deficits.
Fortunately, we have a 10 year window that is ripe with increasing federal debts and deficits: 2015 to the publication of Tax Planning To and Through Early Retirement in 2025.
As cited in the book, on September 30, 2014, the federal debt was approximately $17.8 billion. As I write today, the federal debt is approximately $40 billion.
Thus, one would expect that in the past decade, a decade featuring more than a doubling of the enormous federal debt, Washington politicians enacted numerous tax hikes on retirees if the hypothesis that increasing federal debts and deficits trigger tax hikes on retirees is highly valid.
Real world experience reveals the exact opposite.
During the past decade we have seen tax cut after tax cut for retirees. There were so many tax cuts for retirees during the past decade that we used a summary table instead of in-line narrative to describe them to avoid boring our readers and reduce printing costs 😉
Our book’s analysis selected a time frame that should have played right into the Reddit poster’s concern. The real world conditions were perfect for the concern to have materialized. Not only did the concern, tax hikes on retirees, not materialize–the opposite materialized.
At some point, we have to question the commentators who continuously predict tax hikes on retirees when real world outcomes point in the opposite direction.
The Reddit post states that the book’s “limiting the look-back window to 10 years of tax policy is a problem.” However the book does not limit the look-back window to 10 years. On page 240, the book discusses a retiree tax cut passed by Republicans in 2003 and draws a lesson from the 2008 Democrat election sweep not resulting in repeal even though the Democrats had commanding majorities and the Presidency in 2009. A tax planning book cannot be a tax history treatise. But my view is that the historical data Cody and I present is accurate and relevant in planning.
Conclusion
My prediction is that politicians will continue to act in the politicians’ own best interests.
I offer this post to reason through an often stated concern about taxes on retirees in the future. The above predicts likely outcomes. There are no guarantees when it comes to future tax rates on retirees. But there are the lessons of logic, reason, incentives, and history.
My view is that the most likely outcome for those thinking about retirement planning 2026 is a future with little in the way of significant tax increases on retirees. Frankly, we’re at the point that some tax increases would not make up for the decade of continuous tax cuts for retirees. Nevertheless, I believe the most likely outcome for those thinking about taxes in retirement in the year 2026 is a future tax environment that looks similar to the very retiree-friendly tax environment we have today.
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This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.