Originally published as ZIRP! VAT! A Double Blow to Retirees
Courtesy of Dr. Paul Price, at Real Money
What Ben has wrought…
Not too many years ago a retiree that had accumulated $1,000,000 over his or her lifetime could have parked their money in risk-free CDs, money markets or Treasury bonds. They would probably have expected to get $50,000 to $70,000 in annual interest income- enough to live on reasonably without drawing down their principal.
In today’s ZIRP [zero interest rate policy] world that same good citizen might only be looking at $5,000 – $10,000 of annual income from that same million-dollar nest egg. No wonder people are scared about outliving their money. The Fed has decided to throw savers under the bus in order to help banks while also propping up real estate related assets.
When asked about the damage that ZIRP has inflicted on those who had behaved responsibly, Ben Bernanke gave us a modern version of “Let them eat cake.” He suggested that older Americans should just get with the program and buy risk assets if they wanted to make any money.
Ironically, while the Fed has been actively subsidizing America’s banks, Washington’s Consumer Protection Bureau has been relentlessly taking those same institutions to court to extract multi-billion dollar settlements over mortgage paperwork. They’ve also taken away many of the banks’ largest income streams by limiting debit card swipe fees and monthly checking account charges. Now overdraft fees are under attack as well.
Talk about schizophrenic behavior! One branch of government is giving banks billions while another branch is busy taking money away from them.
One of the reasons federal tax receipts are so low is the lack of interest income people report these days due to ZIRP. Americans used to be rewarded for deferring gratification. “Save money now and you’ll live better later,” was a mantra we all grew up hearing. Now the message is that you shouldn’t expect to earn much of anything on your savings, even as the prices for gasoline, medical care, groceries etc. are spiraling ever higher.
What could be worse? We’re right near the point of seeing means [income] testing and wealth testing as determinants in how much social security you might receive upon retirement and in how much of the cost for Medicare you will have to bear personally. Politicians will soon tell those who played by the rules and saved for their own futures… you will have to take less and pay more because America simply can’t afford to take care of those who “don’t need help”.
This translates to punishment for previous good behavior. Those who squandered their money and retire with little to nothing will be treated best. People who lived frugally previously will bear their own ‘golden years’ costs as well as those of their profligate neighbors.
Proposals for a national Value Added Tax [VAT] would add insult to injury. Our parents and grandparents avoided most federal taxes once they stopped getting W-2 incomes. They likely collected huge multiples of what they contributed into the social security system. Even their unearned income was taxed at reduced tax levels due to higher Standard Deduction levels.
If VAT is implemented, Baby Boomers with assets will end up getting taxed again on after-tax money previously saved whenever they decide to actually spend it. A 15% value added tax would essentially confiscate that much of your lifetime savings as everything you buy would have increased in price by that much as a hidden component of its sticker price.
You could beat that VAT by never spending your money at all, but what fun would that be? If you tried to pass that money on to your kids it might very well be subject to the dreaded ‘death tax’ at a rate of up to 55% starting next January.
It’s pretty depressing knowing that the leaders of both political parties continue to reward bad behavior and punish, what we were taught to be, good lifetime habits.
Disclosure: I am 61 years old and have never collected a social security or pension payment. I’m mad as hell and wish I didn’t have to take it anymore.
