This is the taxes and financial page. I will be posting information here regarding income tax and financial matters for public safety retirees and others.
First up: The Early Retirement Penalty
One issue I am very interested in is the elimination of the early retirement penalty (ERP) for retired public safety workers. This penalty is 10% of ALL retirement plan income in addition to full income tax. As the IRS rules currently stand, you are subject to this penalty if you retire before age 50 and/or have a "defined contribution" (DC) retirement plan.
What this means to actual people is that you can be hired at age 18+ and work 25 years as a special risk employee, as in law enforcement or fire service. The State of Florida (and several others) say you are then eligible for a normal retirement. At this point, you must accept the state pension plan, a defined benefit (DB) plan, which is OK for some, but not others. There are drawbacks to the state plan, such as a reduction in benefit (monthly payment) if you want your spouse to receive the income in the event of your death. The alternative to the pension plan in Florida is the Investment Plan, which is a DC plan. Under this plan, you manage your own investments, and in the event of your death the entire amount is available to your spouse.
Florida has one of the best retirement systems in the country. Unfortunately, we're saddled with a complex and unfair tax code that ends up penalizing achievement. To avoid the ERP, there are several exceptions that by and large do absolutely no good for the retiree. First time home buyer? Higher education expenses? Not usually the case by this point in life. The only possible way to avoid the penalty for most is the "substantially equal periodic payment", which sounds reasonable on the face. The fine print though requires complex calculations as to the account value when you begin, your age, and an average interest rate of return. The amount you receive may not be enough to live on, and if you "bust" the plan by taking more money, you're subject to paying a penalty on all of it.
Apparently, the line of thinking with the IRS is that if you do not annuitize (DB) your retirement plan's holdings when you retire, the plan then becomes a "lump sum" windfall, since you could make more money than if it was annuitized, so the penalty offsets this gain. What this thinking fails to take into consideration is that in a recession like the current one, retirement accounts lose value, so there is not a much to continue to draw from. It is also a fine example of how the IRS tax code punishes achievement.
In my case, last year in 2008 I paid 34% of my adjusted income to the IRS. The president, with an adjusted 2008 income of nearly 2.7 million paid only 32%. I know what you're thinking, and my income was not more than his. I have no issue with paying my fair share of the constitutionally necessitated expenses to operate the country (the overlooking of the 10th Amendment is another story). I take issue with penalties that are patently unfair to those that have worked many years to enjoy a decent retirement.
I encourage anyone reading this to contact their representative and senator so that real tax reform can take place in the form of a Constitutional tax system such as the this plan (3MB PDF, about 13 pages of content).
Here's why I no longer support the Fair or any Flat tax system, but instead a revision consistent with our Constitution:
- Our nation's spending & debt have grown so much so fast that the 23% rate for the FairTax circa 2009 when I was involved in the organization won't come close to covering expenses.
- The concept of "gain" versus "income" is a worthy one. Consider that a business does not pay tax on gross revenue, only net. If it costs you $2,000/month for food, housing, utilities, a vehicle, etc. to go to work and earn $3,000/month, then your annual gain (which you should be taxed on) is not $36,000- it is $12,000. The fact is, you see that $3,000 only momentarily before it goes to someone else so you can survive.
- It does not require the repeal of the 16th Amendment.
- There are numerous legal precedents in support of this position.
