‘A couple I know earn $236,000 between them, so why are they so deeply in debt? Their problem, in a word, is education’
Though vowing not to raise taxes on the middle class, President Obama was re-elected on a platform that would hike the rates of America’s top two tax brackets 3 per cent and 4.9 per cent on January 1 — that is, for households whose annual income exceeds $241,900 (£152,250). Thus he drew a sharp line between where “middle class” leaves off and “wealthy” begins-and with the latter designation, in this administration you lose all sympathy.
I have old friends, a couple living in the greater DC area whose earnings are now nudging up against the cut-off beyond which we are no longer supposed to feel sorry for them. Their fiscal particulars make for an illuminating case study. Respectful of their privacy, I’ll call them Fred and Ginger — both aged 56, with combined wages of $236,000.
Whoa! That’s a lot of money! Yeah, sure, lop off nearly half — $95,600 — for federal, state, local, Social Security, Medicare, and property taxes. Still, that leaves a healthy $140,000. So how could my friends be so deeply in debt? What’s their problem? A foolhardy fondness for Ferraris?
Their problem, in a word, is education-which Obama champions as the salvation of the American future. Wary of their district’s dodgy public schools, Fred and Ginger spent $180,000 on private secondary education for their two daughters, both exceptionally bright. Determined to provide the best leg up in a world where employment will grow only more competitive, they’ve sent both girls to top-flight private colleges-which cost, with room and board, $55,000 a year. Once the younger daughter graduates in 2015, my friends will have spent $440,000 on their kids’ Ivy League degrees, bringing the total education bill to $620,000.
That’s not even tax deductible. And get your heads round this: during the two years their girls were in college at once, my friends’ “tuition payment plan” sucked $9,000 a month out the door. Their income disqualifies their daughters from receiving financial aid. Despite a meagre 3.25 per cent prime rate, the interest on “government-backed” education loans is a whopping 8 per cent.
Besides, that $236,000 joint salary is misleading. These two journalists earned far less for most of their careers-averaging about $50,000 between them until 1997, when new job opportunities in their early forties finally pushed their income to $100K. After both traded up to yet heavier-hitting positions, their combined earnings finally crossed the $200,000 threshold only in 2007. This is a common trajectory for many professionals, whose earnings will often not peak until their fifties — the same time that children’s university bills hit and elderly parents may need care. “High earners” are taxed as if they’ve been making scads all along; when Obama scoffs at tax breaks for folks making “over $250,000”, most of his audience assumes that these fat cats have been raking in the same staggering income forever. Yet these are my friends’ few prime earning years, their only opportunity to save for retirement.
Retirement, hah! This couple took out a second mortgage to cover those college bills, so they’re paying two mortgages while having built almost no equity. Commuting costs whack off another $15,000 annually, and when Ginger’s car crapped out its replacement put them another $20,000 under water; the prospect of saving for old age is farcical. With moderate earnings for most of their lives, Fred and Ginger have accumulated only $250,000 in pensions, and modest lifetime contributions will also depress their Social Security payments. So Ginger can’t imagine they can ever afford to retire-though the workplace has its ways of making you retire whether you can afford it or not. Fred is nervous that several older, well-paid colleagues in his office have had their positions eliminated, the slick modern technique for getting around age discrimination.
Undoubtedly, Fred and Ginger are in better shape than loads of their compatriots, and in international terms they are rich.Small inheritances from two deceased parents have rescued the family from total insolvency. Nevertheless, these are ambitious, accomplished Americans who have worked their whole lives. One salary bump away from entering the income bracket that according to their president brands them as “wealthy”, my friends cannot foresee how they will support themselves and still pay their debts in the years ahead. Worse yet? Should America head over that notorious “fiscal cliff” of automatic spending cuts and tax rises in January, my friends’ tax bill will rise another $17,000. Incredibly, they still have a sense of humour — the pseudonyms “Fred and Ginger” were Fred’s idea. They enjoy their jobs, love their kids, and have no regrets about getting in hock up to the eyeballs to send the girls to top-notch schools. They don’t want us to feel sorry for them. But I do.
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