I’ll Say It: Pensions Should be Taxed
I disagree with our uber-blogging intern Maurice Harris’s statement that the State of Missouri should go further to reducing the tax liability of senior citizens and eliminate the income taxes on pensions. Maurice writes:
A good next step would be to save other citizens’ retirement funds from taxation as well for instance, the state taxes my father’s pension check every month.
Why should retirees get to benefit from untaxed income as opposed to the rest of us? Maurice’s father likely has a defined benefit plan, the type being replaced just about everywhere by defined contribution plans 401(k)s, etc. The defined benefit plans that were so common until recently are a type of benefit not previously taxed as wages, unlike Social Security, where the amount deducted for SSI is included in determining how much income tax should be withheld from your paycheck every other week.
In all other types of common retirement savings, IRAs, Roth IRAs, 401(k)s, the money is taxed as income at some point, either before it is put away (Roths) or after it is withdrawn when you are retired (IRAs and 401(k)s). The amount the company put away years ago to fund a current retiree’s pension was never taxed as individual income for that employee. So it is more than fair that it be taxed as income now, when that person is likely in a lower tax bracket than they were when they worked. In the interest of full disclosure, I will have a pension when I turn 65 from six years of work for St. Louis County government. I fully expect that money will be taxed as income, as it should be.
Eliminating the tax on pensions would, like eliminating it on Social Security, increase the pressure to keep income taxes higher on everyone else. That does not mean I oppose the SSI tax reduction I support it but all income should be taxed by the federal and state governments once, at as low and hopefully one-day flat a rate as possible. Now, if we want to eliminate the income tax on pensions by the state of Missouri, we could do it as part of getting rid of the state income tax entirely for all of us. That I would support!