Friday Reading: Is Payroll Tax a Tax or Prepaying For Future Benefits?

By Harry Sit

As I read other blogs and online media during the week, I share the ones I find interesting on my Facebook page and Twitter account. On Friday I select a handful and highlight them here. If you are on Facebook or Twitter, like or follow me there. You will get more interesting reads than what I can include here and you will get them sooner instead of once a week.

A quick question:

Do you read the short comments under each link or do you just want the links?

Now, the highlights for this week:

It Is Easier To Cut Investment Expenses Than to Find Yield by Scott Burns

True. Expenses become especially important in a low yield world. However, the author also said "The only way to get a higher yield is to take risk in non-guaranteed investments." Not exactly. Believe it or not there are still quite a few ways to get a higher yield without taking risk in non-guaranteed investments. I will explore them in a series in the next few weeks. Stay tuned.

***

Special CD Rate and Other Deals for Navy Federal’s Members Appreciation Week by Ken Tumin at Deposit Accounts

If you are a member of or eligible to join Navy Federal Credit Union, be sure to take advantage of the special 1-year CD at 4% APY. The special ends on Sept. 23.

Although it’s limited to $4,000, it’s still an extra $120 over a 1% CD elsewhere. This is just one example for how you don’t have to take risk in non-guaranteed investments and still get a higher yield. Too bad I can’t join (NavyFed requires a military connection).

***

Is Rebalancing Market Timing? by Mike Piper at Oblivious Investor

Rebalancing is not market timing, although market movements can trigger rebalancing. Rebalancing is for risk control. If you only want the highest return, risks be damned, don’t rebalance.

***

Your Clients’ Toughest Retirement Decision: The Debate Between Systematic Withdrawals and Immediate Annuities by Wade Pfau at Advisor Perspectives

For those without an advisor, make that *our* toughest retirement decision. I’m not retired yet. If I were, I would still favor systematic withdrawals. It’s just more flexible. Maybe I will buy a life annuity for the basic needs.

***

Top financial blogs for building wealth by Allan Roth at CBS MoneyWatch

I met Allan Roth at the Financial Blogger Conference. We laughed over our disagreement in investors’ market timing. I listened to Allan’s intensive debate with Todd Tresidder about using moving averages to protect against bear markets. Here Allan listed the blogs that won the Plutus Award. I hope my blog will make it onto the list next year.

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Do 47% of Americans Really Pay No Taxes? by Jay at The First Million Is the Hardest

Whenever this topic comes up, people are obligated to bring up the payroll tax. Is the payroll tax a tax or prepaying for one’s own Social Security and Medicare benefits in the future?

You can’t have it both ways. If it’s a tax, then you have to say there is no promise for Social Security or Medicare to anyone in the future. No promise means there is nothing to break. If by paying the payroll tax people earn a promise for themselves in the future, then it’s not really a tax.

***

The 401(k) is a Beautiful Thing So Stop Bashing It by Darwin at Darwin’s Money

The biggest fault of a 401k is that it doesn’t force people to use it. I’m OK with a mandatory 10% savings into a privately run retirement account as Australia does in its superannuation program down under (9% mandatory payroll deduction, increasing to 12% in 2020).

If the problem is that people don’t save enough on their own, then make it mandatory. There is no need for the government to receive the money or guarantee it. Australia’s mandatory but privately-run program works pretty well.

***

3 Reasons Traditional Index Mutual Funds Are Better Than ETFs by Kyle Bumpus at Amateur Asset Allocation

I use both. Open-end index mutual funds are easier to buy. ETFs are easier to hold. It doesn’t have to be either-or. When you have both, you get the best of both worlds.

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Blog of the Week: Financial Ramblings

Welcome another finance buff to the blogging world although the author hinted he isn’t exactly new at this. The blog is new, but I see great potentials. Michael wrote in the "about" page:

"We’ve worked hard, made (mostly) good decisions, and put ourselves in a comfortable position. We’ve paid off our mortgage, we have no consumer debt, and we’ve built a sizable (and growing) investment portfolio. We started from meager beginnings, and we’ve achieved all of this while raising a family."

Yes, that’s a blog I’d like to read.

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Software picked, likely related posts:

Posted on September 21, 2012 under News. Keywords: , , , , .

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Comments

21 Comments on Friday Reading: Is Payroll Tax a Tax or Prepaying For Future Benefits?

  1. Mike Adams on September 21, 2012
     

    I really like the comments on each link. They’re very helpful. Thanks!

  2. michael on September 21, 2012
     

    I like the comments that go along with each link.

    And thanks for the shout out!

  3. JR on September 21, 2012
     

    You wrote: “Believe it or not there are still quite a few ways to get a higher yield without taking risk in non-guaranteed investments. I will explore them in a series in the next few weeks. Stay tuned.”

    When you do this, can you focus on investments that can be purchased in tax-advantaged vehicles?

    It seems every article about this topic covers investments like high yield bank checking/savings accounts and CDs that are all but impossible to purchase in even the most liberal 401ks and IRA plans.

  4. Mark on September 21, 2012
     

    Definitely keep the comments with the links. They are of certain value.

  5. Harry on September 21, 2012
     

    JR – Duly noted. It will be hard if not impossible to do a reward checking account in an IRA when it requires you to use the debit card 10-15 times a month. I think the NavyFed special 1-year CD is available as an IRA.

    If you have money outside tax advantaged accounts at all, you can also do a trade. Sell bonds to buy sotcks in tax advantaged accounts; sell stocks (or not buy as much) in taxable account. This way you effectively move some of your bonds money out of the tax advantaged accounts. This money is now available to take advantage of the better yields available only to taxable accounts.

  6. Ryan on September 21, 2012
     

    I like the comments…your insight is helpful.

  7. Dylan on September 21, 2012
     

    I really like the short comments and don’t usually click to all of the links. I hope you keep them. Thanks.

  8. Leigh on September 21, 2012
     

    Agreed – love the comments. They help me decide if I’m going to click through on a link or not and if I don’t, they provide a helpful summary!

  9. Eric on September 22, 2012
     

    Definitely keep the comments – without some guidance, I’d be far less likely to click over to an article just based on its title, which might not reveal how useful it is, or whether it has some really interesting insights. I know it’s more work for you, but it is definitely appreciated.

  10. f carruba on September 22, 2012
     

    I like the comments that go along with each link.

    I believe most people do view the payroll tax as prepaying for one’s own Social Security and Medicare benefits in the future. But you are wrong, many politicans do have it both ways.

    Certainly payroll taxes function like a defined benefit pension plan that is guaranteed for everyone, unless you die. And, of course while contributions maybe proporationally the same for everyone, the more successful receive lower benefits. So for the most part, those contributing to the program will get their money back.

    In theory these government revenues do NOT go toward the governments constitutional obligations. The fact is that with our progressive tax system, increasing taxes for the 47% who pay no income taxes will generate very little revenue.

    However, I believe if taxes are to be increased they should be increased for everyone. Everyone should have skin in the game. We should not have a tax code that promotes divisive attitudes.

  11. Harry on September 22, 2012
     

    f carruba – I agree with you even though you said I was wrong. When Bush tax cuts were passed, the complaint was that they were tilted to the wealthy and the middle class and the poor got very little. Then by definition if those tax cuts expire, the middle class and the poor will be affected very little. So what’s the problem? Just let them expire for everyone and this 47% number will come down.

  12. Clint Logan on September 22, 2012
     

    Keep the comments.

  13. Charles on September 22, 2012
     

    I use the comments to help me decide which topics to read in full.

  14. Steve Thorpe on September 23, 2012
     

    Comments with the links are excellent – Thank you!

  15. edward on September 24, 2012
     

    I disagree with the notion that a privately mandated national savings plan is advisable. The only certain result of one is commissions for the financial industry. Like so many people, you confuse the units of accounting, dollars (and their analogs of bonds, stocks, etc.), with the division of production. Social Security doesn’t avoid this problem, but allows a forced resolution through currency devaluation – a government can just print money. It’s fraud, theft, but at least it comes closer to the intended goal of preventing poverty in old age. That last letter in OASDI is Insurance, not Investment. Automobile insurance wouldn’t exist if every driver expected to collect the full cost of premiums (and then some) in claims. Any retirement funding system will work when the ratio of retirees to workers is low and remains so indefinitely. It’s just not a viable system in the long run.

  16. Babar on September 25, 2012
     

    I view any government controlled payment scheme (pensions, social security, guaranteed tuition programs etc etc) as variants of Ponzii scheme. I like 401k, ira since it makes the investor solely responsible for the future returns.

    Future taxpayers won’t be on the hook – nor shall there be a sense of ‘entitlement’.

  17. dd on September 25, 2012
     

    I would gladly contribute more $$$ to SS to get a higher benefit.

  18. David C on September 28, 2012
     

    +1 on the blog comments, only by reading your comment do I decide if I want to read the linked article :-)

    Regarding Payroll taxes (Social Security & Medicare) I have always viewed them as simply another form of income for the federal government alongside the individual income tax, corporate income taxes, all other taxes that are a relatively small contributor to the government (customs, gift taxes, etc.), and borrowed money (Treasuries). Likewise I have viewed the Social Security and Medicare benefits paid in any given year as an expenditure alongside defense spending and all other federal spending.

    “If it’s a tax, then you have to say there is no promise for Social Security or Medicare to anyone in the future.”

    I do not reach that conclusion. As a rebuttal I will point out that Social Security benefits are credited based off of your earnings and not the actual payroll tax you pay. Indeed, the reduced employee payroll taxes for 2011 and 2012 provide a good example of this as current workers continue to earn the same number of social security credits (and hence promised future benefits) they would have even without the payroll tax cut. Or to phrase it slightly differently, the reduced revenue from payroll taxes has not changed the promises the government is making.

  19. Harry on September 28, 2012
     

    David – The quarters worked, AIME, bend points, PIA, etc. etc. are only applicable to those who are eligible and apply for benefits this year. They are data points used to determine benefits retrospectively when you are eligible. You don’t lock into those prospectively before you are eligible. Therefore if you view the payroll tax as just another tax and the benefits just another expenditure, there can’t be any promise just like there is no promise on military spending in any future year no matter what data points they use to determine the military spending for the current year.

  20. David C on September 29, 2012
     

    Oh dear, after reading TFB’s latest comment (and re-reading the original quote above) I may have misinterpreted what he was saying (and hence the subject of my first comment) :-( .

    So, now I’m reading the TFB’s comments to say “from a real world/accounting perspective the government cannot really promise benefits in the future: they may be able to provide estimates for what they think they would provide in the future but no real guarantees/promises. And if future revenue is insufficient then those estimates will be too high and the real benefits paid out will be lower (or taken to the extreme non-existent).” If that is what you were really saying the entire time then I actually do agree with you.

    When I first read your original comment I interpreted it to discuss political (as opposed to real) promises from current politicians: in that case I saw no need for that kind of promise to change since it is being made without actually figuring out how to deliver it. Taken to the extreme Congress could tomorrow promise all of us our own moon colonies and spaceships 20 years from now but without taking measures to actually follow through and deliver it is not a realistic real world promise (just a political one).

    Hopefully I understood your point better today or I may be hopeless here…

  21. Harry on September 29, 2012
     

    David – Yes that’s what I mean. Glad you agree. I gripe that politicians mislead the public into believing there is a real promise when there is none.

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