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Retiring later, taxing more earnings and picking the perfect domestic tax haven

Retirement is a hot topic right now. Those of us near a certain age are wondering what changes might be in the offing regarding Social Security now that the prez has indicated he's willing to include the government retirement program in budget/debt ceiling talks.

Younger people have for many years been skeptical of the program. Many believe that it's impossible to make enough changes to guarantee them any Social Security benefits when they're ready to retire.

Those concerns were part of a recent hearing by the House Ways and Means Subcommittee on Social Security. The July 8 session examined Social Security expenditures, how benefits have changed over time, what changes we might make now and how those changes would affect current and future retirees.

In calling the hearing, subcommittee chair Rep. Sam Johnson (R-Texas) cited the Social Security Board of Trustees' 2011 annual report showing that in calendar year 2010, 54 million retired workers and their families, disabled workers and their families and survivors of deceased workers received $713 billion in Social Security benefits. 

By 2035, according to the report, Social Security costs as a percent of gross domestic product (GDP) will increase 28 percent, from 4.85 percent of GDP in 2011 to 6.22 percent of GDP in the next quarter century.

So how can we mitigate these costs?

Hike the Social Security earnings limit: Joan Entmacher of the National Women's Law Center told the panel that rather than making cuts, there's broad support for increasing the amount of wages subject to Social Security taxes:

A 2010 poll of election voters by Lake Research Partners found overwhelming opposition (82 percent) to cutting Social Security benefits in order to reduce the deficit, with 83 percent of Democrats, 82 percent of Republicans, 78 percent of Independents, and 74 percent of Tea Party supporters opposed.

Cutting Social Security benefits to make the program solvent in the long term was opposed by 67 percent overall: 78 percent of Democrats, 58 percent of Republicans, 66 percent of Independents, and 51 percent of Tea Party supporters.

Even more striking, said Entmacher, there is strong support across the political spectrum for taxing wages above $106,800 (in the 2011 tax year) for Social Security.

Seventy-three percent of Democrats, 59 percent of Republicans, 66 percent of Independents and 60 percent of Tea Party members supported the earnings limit increase approach to help make the program more solvent.

Retire later: At the same hearing, C. Eugene Steuerle of the Urban Institute testified that increasing the retirement age could be a major way to bolster Social Security and also provide higher lifetime benefits.

Social Security's current fiscal dilemma centers almost entirely on labor force issues, said Steuerle. Close to a third of the adult population is scheduled to be on Social Security within about 20 years, he noted, and on average people now retire on average for close to a third of their adult lives.

That means that the opportunity for saving within the program declines because people retire in what used to be their peak saving years. For instance, when a person retires for 20 years versus 15, he spends both five fewer years saving and five more years spending down his or society's savings.

But, said Steuerle, there also is an opportunity here. Older workers -- folks in their late 50s, 60s and 70s -- have now become the largest underused pool of human resources in the economy. He cited three types of reform to help take advantage of this resource and improve Social Security's fiscal outlook:

  • Increase the early and normal retirement ages, perhaps combining the date into a simpler "earliest age of retirement, with actuarial adjustments for later retirement."
  • Back load benefits more to older ages.   
  • Provide simpler options for people to purchase the higher Social Security annuity already available to them in theory, but currently made difficult to obtain.

Where to retire when you can: If and when you are able to retire, you then must deal with where. If you plan to stay in the United States, taxes become a part of your decision on where to spend your post-career years.

Income taxes are often the main thing retirees think about, specifically whether the state in which they decide to retire will take a tax bite out of their retirement benefits.

But you can't forget property taxes, state and local sales taxes, taxes on investment income and in some locales special levies that could cut into your Golden Years' budget.

The many considerations are discussed in my Bankrate.com story Picking the perfect U.S. retirement tax haven.

Hmmm. All these retirement issues almost make working seem like the better choice. Notice I said "almost."

Factoring how Social Security and taxes will affect your retirement is a pain, but it's one I'm looking forward to dealing with sooner rather than later!

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