Adding the four-letter word to "tax"
Making the case to go tax-free
In March 2011, David Walker declared on national radio that income tax rates in our country would have to double. Otherwise, we’d go bankrupt. Bummer, huh?
So, who is David Walker and why should we care? And who is he to be making such bold claims? For one thing, he was the former Comptroller General of the United States. As an expert with a ton of credentials, Walker was essentially our country’s CPA. In other words, he's legit.
After explaining the grim future of income taxes, Walker then asked listeners to weigh in on the cause of tax increases. The fun part? He asked for four-letter word answers only. After several guesses ranging from “wars” to “kids,” nobody was able to nail the correct response. Walker went on to tell his audience that the correct guess was simply “math.”
Runnin’ on empty: Social Security and national debt
Now, let’s talk about why it boils down to math. As you probably know, the government takes in revenue, but it has a major expense, Social Security, that just keeps getting bigger and bigger. If we want to keep reaping the benefits of Social Security, we’re going to have to pay more for it—and that means increasing taxes.
The thing is, Social Security was never meant to be retirees’ only source of income. In the earlier days of the program, 42 workers paid into the program for every person receiving benefits. Today, the ratio is closer to two to one.
Another thing to point out is the age at which you could start receiving benefits. Even back then, you could start receiving benefits at age 65. Seems reasonable so far, right? But life expectancy at that time was only 62 for women and 58 for men. Present-day life expectancy according to the CDC is 78.7 years. That’s a quite a difference with several more years to pay benefits.
Now that we covered Social Security, let’s take a look at our overall national debt crisis. To help simplify the magnitude, imagine the United States as a household. In 2020, Uncle Sam’s family balance sheet would resemble the following financial train wreck.
Annual income: $68,703
Annual expenses: $137,719
Existing credit card debt: $558,420
New credit card debt: $69,016
But can’t we print more money?
One of the claims made by those who refuse to acknowledge the inevitability of rising taxes is that we can continue to print money as needed. Money grows on trees, right? But as any first-year economics student will tell you, continually printing money will eventually lead to inflation. And because several government programs are tied to inflation, we will be no better off.
Welcome to reality
There are a couple real solutions to our dire predicament. First, we need to drastically increase marginal tax rates. We also need to reduce benefits paid, and this could include Social Security and other government programs.
Given our reality, how can advisors help clients prepare for future tax hikes? First of all, you need to be proactive and start the conversation with clients right now. You also need new tools to help clients navigate the unpredictable road ahead. With unique and proven advanced planning strategies, you have the power to help them achieve more control and true peace of mind. Ask us how we can help. We're here for you.
SOURCES:
Ratio of Social Security Covered Workers to Beneficiaries, Social Security Administration. https://www.ssa.gov/history/ratios.html
Life Expectancy for Social Security, Social Security Administration, https://www.ssa.gov/history/lifeexpect.html
David Ditch, Heritage Foundation, September 28, 2020. https://www.heritage.org/debt/commentary/6-charts-show-americas-big-debt-problem
Joydeep Bhattacharya, Ask an Economist, Iowa State University, https://www.econ.iastate.edu/node/673
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