Dollars increase, but so will income taxes

By Scott Burns, Special to the Times
Published November 28, 2006

I'm 34 years old and, despite my master's degree in public policy, a little confused by the numbers Social Security sends me in their little "Social Security Statement" mailer. They say that if I retire at age 67, my payment would be $1,984 per month - less if I retire early, more if I defer.

What I can't figure, despite having read the mailer cover to cover, is whether they're talking in terms of today's dollars or whether this is their projection of the actual dollar amount I'll receive in 2039. Obviously two grand a month in today's dollars sounds a lot better than two grand a month in 2039 dollars. - J.M., Seattle

They are talking in constant dollars. Your benefit would be adjusted upward each year to reflect inflation. If inflation averages 3 percent a year, your future benefit would be about $5,262 a month - even though its purchasing power would be the same as $1,984 today.

Sadly, the increase in nominal dollars will have a terrible side effect: You will pay much more in income taxes than someone retiring today on the same purchasing power.

How can this be?

You can thank politicians of both parties for this generational atrocity. The formula for the taxation of Social Security benefits is not indexed for inflation.

For a single taxpayer, your Social Security benefits start becoming taxable when half your benefit plus your other income exceeds $25,000. Since your future benefits will be about $63,144, half of which is $31,572, you will have triggered the taxation of your benefits without ANY income from any other sources.

This tax inequity for the young is why I have suggested that young people should prefer Roth IRAs over traditional tax-deferred savings. It is also one of the reasons economist Larry Kotlikoff and I advocate scrapping the entire tax system and replacing it with a national sales tax in The Coming Generational Storm MIT Press, $18.

This current tax was passed in 1983, when you were 11 years old.

Today, we call that generational inequity. In 1776, the same kind of thing was called "taxation without representation."

Scott Burns has been a financial writer and editor for more than a quarter of a century. Questions about personal finance and investments may be sent to scott@scottburns.com those of general interest will be answered in future columns. His Web site is www.scottburns.com.

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For more information about deferring the acceptance of your Social Security benefits, see "A Real-Life Case for Delaying Social Security Benefits" at http://oamnetwork.com/?p=45.

[Last modified November 28, 2006, 09:31:08]