Will Early Retirees Win or Lose if Mitt Romney Wins?
At first glance, Republican presidential candidate Mitt Romney’s proposed financial policies would seem a boon for early retirees. He has proposed eliminating federal income taxes on long-term capital gains, dividends and interest for married couples filing jointly with incomes under $200,000 ($100,000 for single filers and $150,000 for head of household filers). Since many early retirees rely primarily on investment income rather than wages and salaries to support their household spending, Mr. Romney’s proposed 0% tax rate on this income sounds like an early-retirement dream since it would eliminate all or most of their income tax liability. Alas, what sounds too good to be true often is. In the long run, for early retirees, the benefits of Mr. Romney’s proposed elimination of investment income taxes would be reduced by his proposals to raise the eligibility age for Medicare and Social Security benefits. Some early retirees would even find themselves to be long-term losers under Mr. Romney’s proposals.
In his speech to the Americans for Prosperity foundation in Washington on 4 November 2011, Mr. Romney announced his intention with respect to Social Security to “gradually raise the retirement age to reflect increases in longevity and slow the growth in benefits for higher-income retirees.” Yesterday, Mr. Romney stated that, starting in 2022, “We will gradually increase the Medicare eligibility age by one month each year. In the long run, the eligibility ages for both programs will be indexed to longevity so that they increase only as fast as life expectancy.” The selection of the 2022 starting date was made to avoid affecting current or near retirees. Currently, the normal retirement age for collecting full Social Security benefits ranges between ages 65 and 67, while Medicare eligibility starts at age 65. While the details of Mr. Romney’s proposals are unknown, it would be reasonable to assume eligibility ages for both programs would increase by one month in 2022, followed by another month in 2023, followed by one more month each year until the eligibility ages reach actuarially-determined life expectancies.
To see how these proposals would impact early retirees, let’s meet a married couple named Mr. and Mrs. Planner. The Planners took early retirement at the end of 2010. They are each 49 years old, and plan to become eligible for Medicare at age 65 and full Social Security benefits at age 67. Based on the Social Security Benefit Estimator at http://www.ssa.gov/planners/calculators.htm, Mr. Planner estimates he will receive a monthly Social Security benefit of $1,500 starting at his current full retirement age of 67 (assuming no future earnings). Mrs. Planner estimates she will receive a spousal benefit of $750 per month when she turns age 67, for a total benefit of $2,250 per month. The Planners recently filed their 2011 tax return, reporting taxable interest income of $9,000, tax-exempt interest of $1000, ordinary dividends of $15,000 of which $12,000 were qualified, and no capital gains. After accounting for a small pension and their deductibles and exemptions, their taxable income puts them squarely into the 10% tax bracket (for joint taxable incomes of not over $17,000). To cover their health insurance needs, the Planners pay $1,200 per month for a private health policy.
Based on the current tax law, the Planners paid 2011 federal taxes of 10% on their taxable interest income of $9,000 and their non-qualified dividends of $3,000, for a total tax of $1,200. However, they paid no tax (i.e., a tax rate of 0%) on their tax-exempt interest and qualified dividends. Thus, their total tax on their investment income was $1,200 in 2011. Assuming no changes to their financial situation or tax rates, they expect to pay $21,600 in taxes on this income over the next 18 years, at which time they would qualify for full Social Security benefits.
Under Mr. Romney’s proposals, the Planners would no longer owe any federal tax on their investment income since their combined income is less than $200,000. Thus, they would save the $21,600 in taxes over the next 18 years. Unfortunately, their eligibility ages for Medicare and Social Security would increase by one month for each year starting in 2022. By the time they reach their 65th birthdays in 2028, the eligibility age for Medicare would have increased to 65 years and 7 months, so the Planners would need to continue paying their pre-Medicare health insurance premiums of $1,200 per month for 7 additional months, for an expected expense of $8,400. Similarly, by the time they reach their 67th birthdays in 2030, the eligibility age for full Social Security benefits would have increased to 67 years and 9 months, so the Planners would not receive 9 months of their expected Social Security payments of $2,250 per month, for lost income of $20,250. Therefore, the increased eligibility ages for the two programs would cost the Planners a total of $28,650 from what they planned when they first retired. Overall, despite enjoying a 0% tax rate on their investment income over the next 18 years, the Planners would expect to come out net losers under Mr. Romney’s proposals by a total of $7,050!
Any attempts to calculate the long-term impacts of policy changes are difficult at best. Accordingly, many factors would change this off-the-cuff analysis. For example, the analysis would change based on the details of Mr. Romney’s proposals, changes in the types and amounts of an early retiree’s investment income, the impact of inflation and interest rates, future changes to tax, Medicare and Social Security laws, changes in health insurance premiums, etc. It is also noted that, in comparing political candidates to each other, care must be taken to consider the entirety of the financial proposals of each candidate along with the odds of that candidate actually implementing them. For example, in order to compare Mr. Romney to Mr. Santorum, it would be necessary to look not only at any changes proposed by the candidates to the existing tax structure but also at changes proposed to government benefit programs. That said, it is best for early retirees and potential early retirees to use a dose of skepticism when weighing the promises of candidates who promise to giveth only to then taketh away.
