It's Inauguration Day in Washington, an appropriate time to discuss the issue that President Bush wants to make the centerpiece of his second term -- Social Security reform.
I know my views on this topic will generate an incredible amount of mail, but I'm going on record: The president's plan to allow individuals to invest part of their Social Security taxes is a huge mistake. It will not greatly benefit taxpayers, as the president promises.
Instead, I believe the winners will be some wealthy Wall Street types who are already jumping for joy at the prospect of earning billions (yes, that's billions with a "b") managing the millions of private accounts that would have to be set up under the Bush administration's plan.
Does Social Security need some retooling? Yes, it most certainly does. Social Security faces a long-term financing problem. The program was designed as a safety net -- as in no matter what you do or how the stock market performs, you will have Social Security payments once you retire.
But what President Bush proposes -- allowing people to pull money out of the system -- will mess things up even more. Social Security isn't on its deathbed. It's got a flu, but what the White House wants to do will put it on life support.
The president's plan would permit younger Americans to divert a third or more of their payroll taxes into private investment accounts.
As I wrote in 2000 ("Social Security: Don't Mess With a Good Thing"), the diversion of payroll taxes would adversely affect all retirees, not just those doing the diverting, because money is being pulled out of the trust fund.
Some Republicans seem to have enough common sense to see that Bush's plan is faulty. House Ways and Means Committee Chairman Bill Thomas (R-Calif.) has his doubts, as reported yesterday by The Post's Mike Allen and Jonathan Weisman ("New Doubts on Plan for Social Security").
It seems that selfishness is driving the reform effort. Some folks (mainly middle- and upper-income taxpayers) can't stand the idea that Social Security is weighted in favor of low-wage workers. For example, look at a typical question asked during a recent online discussion with Evelyn Morton, director of economic issues for the AARP's Federal Affairs Department:
Q: "I'm 35. Why should I have to fund your retirement, and why should your grandchildren have to fund my retirement? Isn't Social Security basically a big pyramid scheme?"
Morton had a great answer: "Social Security works for all generations and enjoys widespread support among all generations. Social Security is one way that families take care of one another. Without these benefits many families would have to make tough decisions about paying grandma's doctor bills and paying for college. Because grandma and grandpa get Social Security they can live independently and help their families and their communities. Many young families will tell you how Social Security helped out when a working parent died or became disabled."
Read the full transcript of Morton's Jan. 13 online discussion.
If you want to hear from someone who favors Bush's plan, read the online discussion with Michael Tanner, director of Health and Welfare Studies at the Cato Institute.
Pay Attention to the Debate -- And Tell Me What You Think
Wherever you stand on Social Security reform, stay informed. After all, it's your money.
To help readers understand all the issues involved in this complicated topic, The Washington Post editorial page has started an occasional series on the topic. The first installment ran on Monday: Social Security.
I know many of you are eager to weigh in on this topic. So, come right back at me. What do you think of Bush's plan to allow private accounts? E-mail me at colorofmoney@washpost.com. In the subject line put "Social Security Reform" (and when you write, please be respectful -- as if you're writing to your mama).
Your Tax-Time Questions
Each week, Jim Dupree, the IRS spokesman for Maryland and Metropolitan Washington, will be answering your tax questions. If you have a basic question, send it to colorofmoney@washpost.com with "Tax Question" in the subject line.
Q: I am single and pay for more than half of my mother's expenses, which include paying bills for the home and personal expenses. I would like to claim her and use filing status "Head of Household." My mother would like to file a return also. She did not make much money, maybe net $2,500. Can we do this?
Dupree: You may be able to claim your mother as a dependent. And based on her
salary, your mother may elect to file her tax return as "married filing separate". For additional information and guidance, see IRS Publication 501, "Exemptions, Standard Deduction, and Filing Information."
Michelle: If you are caring for an elderly relative or parents, here's a column I wrote last year that discusses deductions that are often overlooked by caregivers: "Easing Burden on Caregivers" (March 7, 2004).
Q: I live in Florida. At the end of 2004, just before the presidential election, Congress passed a broad tax bill. One provision of the bill was specifically intended for residents of those states that do NOT collect a state income tax. Obviously, Florida is one of these. According to financial columns I have read, Floridians will be able to deduct their sales tax when filing. However, I have talked to two different accountants in my state and both have expressed skepticism at this supposed deduction. Can you please confirm the validity of the above and, if so, where I can I find details of the new sales-tax deduction rules for Florida?
Dupree: It's true. The tax bill actually allows the choice of sales tax OR state and local income taxes paid. One can use actual sales tax paid or use IRS Publication 600 ("Optional State Sales Tax Tables"), which will allow an "average" sales tax paid. While this deduction will mainly benefit taxpayers with a state or local sales tax but no income tax -- Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming -- it may give a larger deduction to any taxpayer who paid more in sales taxes than income taxes. For example, a person may have bought a new car, boosting the sales tax total, or claimed tax credits, lowering the state income tax paid.
Michelle: To read more about the option to deduct sales taxes or state income taxes, check Albert B. Crenshaw's Jan. 9 Cash Flow column -- "Tax Changes That Merit Remembering This Spring."
Q: My husband and I have been long-term foster parents of a 20-month-old child. The first year he was with us, we were told we couldn't claim him as a dependent because he wasn't with us for the full 12 months. This sounds very much like how a biological child (must be with you on Jan 1) is handled, but differs from my (possibly wrong) understanding of how a foreign exchange student is handled: Foreign exchange students can be prorated (as a dependent? for a credit?) for the months they are with you, which is usually 6 to nine months and almost never the full 12 within a calendar year. The foster issue is important to us as we may receive children at any time and only have them for 90 days but still have the same number of children in the household year round. Please clarify if you can.
Dupree: A foster child must reside in your home for 12 months.
Read more tax tips here.
Honey, I Need Some Money
It's time for the Color of Money "Honey, I Need Some Money!" contest.
Valentine's Day will be here soon and nothing says love like an argument about money. So, write and tell me about the funny or frustrating ways you and your partner handle your finances.
Your submission may be included in an upcoming Color of Money column, so they should be suitable for print (in other words, nothing that's going to wind up as evidence in divorce court).
Send in your entries by Feb. 5, and please include your address and daytime and evening phone numbers. Winners will get a free consultation with a professional financial planner. E-mail your entries to colorofmoney@washpost.com. In the subject line please put "Honey, I Need Some Money Contest."
And even if you don't want to go public about your financial problems, tell me how you and your sweetie manage your money together. Here's a column I wrote about this topic back in 1998.
You are welcome to e-mail comments and questions to singletarym@washpost.com. They may be used in a future column or newsletter with the writer's name unless otherwise requested.
