Taxing Pensions is Double Taxation
Here at the Show-Me Institute, we do have disagreements on policy, and I have one with David Stokes. In his blog entry yesterday about taxing pensions, he says that in many cases, since employers put money into people’s 401(k) plans or Roth IRAs, money paid out of pension funds should be taxed because that income wasn’t taxed in the first place.
Well, in those cases I’ll agree with him that it might be fair that those funds are taxed, since they were not taxed in the first place as real income.
Yet I don’t agree with this reasoning for all plans. My father doesn’t have an IRA or a 401(k) plan; he is on a defined benefit plan sponsored by the union he is in. This plan was funded by his post-tax wages, so everything in the fund has already been subject to an income tax. This pretty much means that when he receives his defined amount every month, if it’s taxed, it reduces the funds he has to live on. This deduction rises well over $100 a month.
In other words, he is being double-taxed on the money he put into his pension. It was taxed as income when he contributed, and it’s taxed as income now that he’s drawing on the funds. The real amount he could be living on each month as a retiree is reduced, because the federal and state taxes he pays on his pension check, in effect, reduce the standard of living that he worked for, for his retirement.
So I will temper my strong statement earlier, but I still believe that most retirement funds, especially pensions, shouldn’t be taxed.
I also agree with David on this: There needs to be serious reform on tax policy in Missouri and the United States. We can give tax credits to only so many people before we have to raise tax rates on others to make up the shortfall. Hopefully, one day when I retire, I will not be taxed for saving for my future.