Wednesday, August 25, 2010

To Lease or To Own - That is the Question

By Scott Burns

It is usually better to purchase than lease. There are several reasons for this.
  • First, leasing commits you to operating cars in their early years of maximum depreciation. Since depreciation is the single largest cost of operating a car (by far), it means you’ll never get to have years of low depreciation costs.
  • Second, leasing commits you to operating cars for relatively short periods of time. So you will be making repeated sales tax payments as you move from car to car.
  • Third, leasing commits you to having a significant interest cost built into the operating costs of the car.

You can understand this by checking a regular exercise on the cost of car ownership done by AAA, the American Automobile Association ( ).

By purchasing a car new (or a recent model used car), you can drive it long enough to reduce the average depreciation and have zero interest expenses because you’ve owned it long enough to have the loan paid off.

Basically, you’ll have the lowest cost of transportation by owning a car for a long time. Doing that has gotten easier as cars have been built to higher standards of durability— 100,000 miles used to be an old car, but it isn’t today.

Are there any exceptions to this? Yes, but they are rare. There have been periods where some luxury car manufacturers have offered lease deals that would be lower than the cost of ownership for the period of the lease.

Social Security Modernization: Part 3

By Scott Burns

Which of these tax bills would you rather pay?

a. $0
b. $610
c. $2,004

This is not a trick question. The historical role of taxes as the price of civilization notwithstanding, most people will go for answer (a) because most of us have a deep inner belief that taxes are best when paid by someone else.

In fact, (c) is the amount a nicely Solvent Senior would pay on 2009 income from various sources under current tax law. The other answers, (a) and (b), are what the same Solvent Senior would pay if there were such a thing as an honest politician. I got these figures by doing some woulda-coulda testing for a reader who wanted to know how the taxation of Social Security benefits affected his tax bill. I thought you might like to know.

The retired couple had combined Social Security benefits of $50,000 a year. They get this much because both worked and both earned and contributed more than most people. They also had $12,000 in pension income, $15,000 in IRA distributions and $12,000 in Roth IRA distributions. So their total retirement cash income is $89,000.

That’s a nice total. Lots of retirees and working stiffs would happily change places with them. Even so, they are among the 52 percent of retired couples who derive at least 50 percent of their income from Social Security. They are a long way from Fat City.

Now let’s look at the three possible tax bills.

Current Law. Under current law, $12,000 of Roth IRA income isn’t counted. But their other $27,000 of pension and IRA income causes $12,800 of their Social Security benefits to be added to their taxable income. This gives them a taxable income, before deductions and exemptions, of $39,800. After the standard deduction, elderly deduction and two personal exemptions totaling $20,900 their taxable income is $18,900. Their federal income tax bill is $2,004 the TurboTax program tells me.

Current Law with indexation of Social Security benefits taxation. When the weasels in Washington decided to tax Social Security benefits in 1983 they knew it would be unpopular. So they finessed the conflict. They set a high threshold that was not indexed to inflation. Basically, they put a slow burning fuse on a bomb timed to go off well after they were out of office. The first threshold number for couples is $32,000. The second is $44,000. Plug those numbers in the Bureau of Labor Statistics online inflation calculator and the inflation adjusted numbers would now be $68,927 and $94,775, respectively.

That’s why I don’t think it’s rude to call these jokers weasels.

If the taxation formula were adjusted for inflation this couple would not have to include any Social Security benefits in their taxable income. Their taxable income would be $6,100. Their tax bill would be $610, and the politicians of 1983 wouldn’t have made President Franklin Delano Roosevelt into a liar. (He’s the one who promised Social Security benefits would never be taxed.)

Under promised Obama law. While a candidate, President Obama offered a “Comprehensive Tax Plan” that included eliminating income taxes for seniors with income under $50,000. Under current tax law, the income before deductions and exemptions for this couple would have been the $39,800 cited earlier. So their tax bill would have been $0 if the President kept his word. The President is being quite fastidious about increasing taxes for those with incomes over $250,000, but he has forgotten his promise to cut taxes for seniors.

Social Security Modernization: Part 2

By Scott Burns

Social Security, the most important social program in America, is also the least understood. Many retirees depend so much on Social Security that any discussion provokes anger. The very young are the opposite— they dismiss it with a cavalier shrug, assuming it won’t be there for them.

Most people know so little about Social Security that they fall victim to “all or none” thinking, one of the most common cognitive errors we make as human beings. This is an observation, not a judgment.

So, after setting off alarm bells for lots of readers last week, I’d like to provide some factual grounding in the realities of Social Security.

Here are the basics.

It is the largest single source of income for retirees. Loss of the benefit would be catastrophic for most retirees. Even very affluent retirees would find their standard of living badly damaged if they no longer received benefits. A recent report from the Employee Benefit Research Institute found that Social Security accounted for 39.8 percent of income for those 65 and over.

The program has lots of money coming in. Employment tax collections in fiscal 2009 were $654 billion and accounted for 31 percent of all federal revenue.

Employment tax collections exceeded benefit payments from 1983 to the present. During those 27 years the surplus was spent by Presidents of both parties and by Democrat controlled Congresses and Republican controlled Congresses. The weasels took our retirement savings and gave us IOUs from the U.S. Treasury. The Social Security trust fund is now nominally worth $2.3 trillion. The only problem: The Treasury has no money to make good on its bonds because our government is already running a gigantic deficit.

And, no, the money could not have been invested elsewhere. First, it would have overwhelmed the private investment markets. Also, holding thobligations of Fannie Mae, Freddie Mac or private companies like AIG wouldn’t have been better.

Paying down existing federal debt is the only way that extra $2.3 trillion would have benefited future retirees. This would have required that the regular budget of the United States was balanced, an event that has occurred only 3 times in the last 50 years: 2000, 1999 and 1960. Then the employment tax surplus could have paid off our public debt, creating room for future borrowing.

The problem is bigger than any single politician. It was not caused by George W. Bush and the Iraq war. He simply made an existing problem more difficult by spending more and taxing less.

We can’t blame it all on the politicians. When Social Security was created in 1935 the life expectancy at birth of American men was about 58 years. It has been growing ever since. It hit 74.9 years in 2005. It costs more to live longer. That’s why the 1983 “reform” that was supposed to fund Social Security for 75 years is underfunded by over $5 trillion only 27 years later.

We can solve the entire problem by reducing our life expectancy. If we live (and die) as they do in Russia, Social Security would have no problems. But most people would prefer to die at 78 rather than 66. We have a problem of success, not failure.

At 78.24 years, the United States ranks 49th in the world for life expectancy according to the CIA World Book. That’s well behind the 79.16 years of Britain or the 81 years of France, where they have the terrible socialized medicine that costs half as much as ours.

It is still good to defer taking Social Security benefits. How can that be? Simple. Even under the worst case scenario— that nothing is done to improve program funding— tax revenues will still cover 76 percent of benefits as far in the future as 2037.

Can your corporate pension do that? Not likely.

Most workers no longer have pensions. Those that do should worry about their funding. Waiting to collect a larger Social Security check is a wash for the program (they’ll pay out more money for fewer years) but it gives workers a larger benefit income. That larger benefit check will also help people avoid spending their life savings while interest rates are held low to benefit the Too-Big-to-Fail-Banks.

Tuesday, August 24, 2010

Social Security Modernization: Part 1

By Scott Burns

As a subject, Social Security ranks somewhere between Britney Spears and vampires. Google told me so. It revealed more than 50 million references to Britney, but millions fewer for “Social Security.”

Vampires were real underdogs. With fewer than 20 million links, they will need some fresh programming to stay in the competition for our diminishing attention span.

But here is a daring prediction. By 2012, Social Security will be as important as Britney Spears. At long last, maybe then we can make some headway on its problems.

Let’s start with your annual letter from the Commissioner of Social Security. It recaps your work record and projects your future retirement benefits. It also warns that benefit payments will exceed employment tax collections by 2016. Worse, it says the Social Security Trust Fund will be exhausted by 2037. When that happens, employment taxes will cover only 76 percent of promised benefits.

As it turns out, the letter is optimistic.

Benefit payments already exceed employment tax collections. According to the Congressional Budget Office, a crush of retirees and fewer workers has turned the expected surplus of employment taxes over benefit payments into a shortfall.

Fortunately, it’s estimated at only $29 billion this year, piffle in government finance.

The piffle, however, is expected to continue. There will be a need to find cash and we will be talking about it in 2012.

Some readers will say, “Gee, isn’t that what our Social Security Trust fund is for?”

It’s a reasonable, if na├»ve, idea. While it is true that anyone who worked between 1983 and today has shoveled some extra money into the trust fund, it’s not sitting there like dollar bills in Scrooge McDuck’s vault. The trust is just a collection of IOUs from the U.S. Treasury.

Back in 1983, when Alan Greenspan led a commission that reformed Social Security, total Federal debt was only $1.4 trillion. Our reformed Social Security was supposed to be solvent for a full 75 years. Its accumulating surplus, held in trust, would cover the hefty cost of the baby boomers when they retired.

But as with a few other things, Alan Greenspan missed the mark. Today the unfunded liabilities of Social Security alone are $5.3 trillion. And the surplus is no more. Worse, U.S. Treasury debt is now $12.4 trillion— which includes $2.3 trillion of IOUs held by the Social Security Trust Fund. So when Social Security goes to redeem its IOUs and cover that $29 billion shortfall, it will go to the Treasury. Sadly, the Treasury is empty except for its tax revenue and whatever it can borrow. It’s a real hand-to-mouth operation.

So, instead of subsidizing other government spending, as it has for decades, employment tax funded Social Security will be just another program in need of cash.

And what does that mean?

No one knows yet. But my bet is that it will be called “modernization.” (Remember, they’ve already done “reform.”)

You can get an inkling of what it really means by reading a recent report from the Senate Committee on Aging. It provides an extensive menu of steps to address the problem. Here are two extremes on the list:

“Increase Worker and Employer Contributions by 1.1 percent.” Since worker and employer now pay 12.40 percent of payroll in employment taxes, the 2.2 percentage point increase in the tax would be a 17.7 percent increase on all workers, including those working short shifts at McDonald’s.

My bet: Public reaction, whether left or right, will be, “Sorry, we won’t go for that trick twice.”

—“Reduce benefits by 5 percent for New Beneficiaries in 2010 and Later.” That’s a hefty cut, but hardly enough. It would cover only 30 percent of the projected 75 year shortfall. So the weasel pack would have to look for additional cuts.

Between those two extremes, the Senate Committee lays out a list of weaseling and finagling tools and calls it “modernization.” They are careful to say they don’t favor any particular option and dislike some, but the reality is that this is the political menu. They are in the kitchen, getting ready to cook.

We’re going to be hearing about increases in taxes, decreases in benefits and changes in formulas. Whatever.

The big sucking sound you’ll hear is 535 weasels, hard at work, but the bottom line is that more will be going in and less will be coming out— at least to the people who paid it in.

Thursday, August 12, 2010

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By Arianna Capital

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