The Henry Debate moves to the Middle Class
The current political climate is reviving the debate about Henry. Henry is the high earner not rich yet American. And yes, this is the first group to be hit with tax targets. They earn $250,000 or more per year and are usually high achievers who worked themselves out of poverty and/or the middle class. They went to college, worked more than one job to start their professional career, and may have started a business. They are the nation's "mom and pop" businesses, lawyers, doctors, dentists, financial advisors, and accountants. At one time, they were the "so called" aspiring "Joe the Plumbers."
They played by the rules and did everything right. The got high grades in school. They worked double and triple time to provide for their families. And yes, they are in the top 1% of income earners along with Bill Gates and Warren Buffet. But they will tell you that they are not any where near the income or lifestyle level of Mssrs. Gates or Buffet. They'll say: "I'm not rich and live a middle class lifestyle."
Many of these Henry(s) will complain about being targeted and will use the public employee pension system as a focus of comparison. For instance, a firefighter, police officer or school teacher might be able to retire at 80% of salary after 25 or 30 years. With salaries in the range of $75,000 to $100,000 or more, a retirement income of $80,000 is possible. These employees can also elect survivor benefits and have vested portions which can be left to children if there is no surviving spouse.
Then come the Henry(s). In order to generate an $80,000 pension, it would be necessary to have saved up to $2 million in a 401k or IRA with annual withdrawals equal to about 4%. If you earn $250,000 per year as much as $100,000 is federal and state taxes, and you are left with $150,000. If you took half and saved it for 25 years, you'd be just below the $2 million mark without taking into consideration earnings or stock market crashes. Today, if you have what you've put in, many investors feel lucky. These Henry(s) will tell you, they are paying for or just finished paying for expensive college tuitions and don't have or didn't have children who are getting or did get massive financial assistance. Besides they are being hit with things like the alternate minimum tax and don't or didn't get tuition tax credits because of their incomes either. In their minds, they are being penalized for hard work and success.
Henry's also complain about the tax consequences of children inheriting retirement money as it can be hit with up to 85% or more of combined estate and income tax leaving very little of a life savings behind.
They'll also tell you that things are changing because as the health care debate roars forward, their concerns about taxing and spending have moved to the middle class including working and retired teachers and firefighters. The reason, they see their highly coveted health plans and future Medicare benefits at risk. Move over Henry and welcome MC voters.
The Forgotten Man
I just completed an interesting book that deals with the history of "The Great Depression." One of the startling commentaries is one political theory opinion that but for the "New Deal" programs of the Roosevelt Administration, the United States may have gone the way of Russia in political structure. It is titled: The Forgotten Man.
The author Amity Shlaes begins with the original notion of "the forgotten man," described half an century earlier than the Great Depression by Yale philosopher Willaim Graham Sumner. He penned a lecture against the "progressives" of his own day in favor of "classical liberalism." The lecture resulted in an essay by the same name as Shlaes' book title.
Sumner described the issue as follows: "As soon as A observes something which seems to him to be a wrong, from which X is suffering, A talks it over with B, and then A and B propose to get a law passed to remedy the evil and help X. Their law always proposes to determine...what, A, B, and C shall do for X." As Shlaes says, "What about C? There is nothing wrong with A and B helping X. What was wrong was the law, and the indenturing of C to the cause." C is the forgotten man, or the men and women who pay and are never thought of by A and B or if they are thought of, they are ignored.
Roosevelt however successfully morphed the notion of the forgotten man to be X which justified numerous programs such as Social Security and Medicare. Later during the Johnson "Great Society" programs, this further expanded to include Medicaid and other social welfare benefits which have now been increased with National Health Care under the Obama Administration.
The modern forgotten man is now personified by television and talk personalities like Sean Hannity and Glenn Beck and persons involved in the "so called" "Tea Party Movement" or the "Henry" described in my previous blog entry.
Why is this important to estate planners? Because the national debate about public benefits and taxes appears to be something that is not going to leave us very soon. The country is sharply divided on many of these issues. As the politics continues to be sorted, there is no question that changes and/or increases in income taxes and death taxes will be with us for some time to come as it is the only way for A and B to get C to pay for X.