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Why are Social Security benefits taxable?

29 Jul
Brochure from 1961 with basic advice about Soc...

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If as many people believe, they paid for their Social Security, they earned the benefit, they are entitled, why is Social Security subject to income tax? After all, no money you save (other than pre-tax) is subject to income tax when you take it from the bank.

According to the Social Security website:

Originally, Social Security benefits were not taxable income. This was not, however, a provision of the law, nor anything that President Roosevelt did or could have “promised.” It was the result of a series of administrative rulings issued by the Treasury Department in the early years of the program.

In 1983 Congress changed the law by specifically authorizing the taxation of Social Security benefits. This was part of the 1983 Amendments, and this law overrode the earlier administrative rulings from the Treasury Department.

Of course the fact is we have not paid for our own Social Security, we paid a tax that was and still is inadequate to provide promised benefits. To be truly accurate, Social Security should be exempt from taxation up to the point our benefit payments do not exceed the total we contributed during our working lives. Beyond that it should be fully taxable just as any pension paid for by someone else is taxable as ordinary income.

Instead we have a system that excludes certain individuals from paying any taxes and taxes up to 85% of the Social Security benefit based on total income.

Here is how it works:

IRS Tax Tip 2011-26, February 07, 2011

The Social Security benefits you received in 2010 may be taxable. You should receive a Form SSA-1099 which will show the total amount of your benefits. The information provided on this statement along with the following seven facts from the IRS will help you determine whether or not your benefits are taxable.

How much – if any – of your Social Security benefits are taxable depends on your total income and marital status.

Generally, if Social Security benefits were your only income for 2010, your benefits are not taxable and you probably do not need to file a federal income tax return.

If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.

Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet.

You can do the following quick computation to determine whether some of your benefits may be taxable:

• First, add one-half of the total Social Security benefits you received to all your other income, including any tax exempt interest and other exclusions from income.
• Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

The 2010 base amounts are:

• $32,000 for married couples filing jointly.
• $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year.
• $0 for married persons filing separately who lived together during the year.

For additional information on the taxability of Social Security benefits, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Publication 915 is available on this website or by calling 800-TAX-FORM (800-829-3676).

Social Security payments would fall with new inflation gauge

27 Jul
Roosevelt Signs The Social Security Act: Presi...

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The title of this article is from a headline in the July 26,2011 issue of USA Today. If you are receiving Social Security or close to doing so, it sure grabs your attention. Yikes, my monthly income is going down?

What the article is really saying is that future increases in benefits may be slightly lower than if the current inflation formula is used. So the headline should more accurately read:

“Social Security payments would increase at a slightly lower rate with new inflation gauge.”

Of course, such a statement would not grab your attention, scare seasoned citizens or be consistent with the political views of the mainstream press.

The change in the inflation calculation is called chained inflation CPI.  So, how much of a hit to Social Security benefits are we talking about? According to the article the change would mean 0.3% less of an increase in payment. That is three tenths of one percent.

In June 2011 the average Social Security monthly payment was $1,079. Let’s do some math. If benefits were to increase by 3% each year for ten years the benefit would go from $1,079 to $1450.09.   However, if the new formula is used, the benefit after ten years would be $41.67 less than the current formula or $1408.40 (rounding). Looking at it another way, in the first year of the new formula the monthly increase is $3.24 less than an increase under the current formula. The benefit still increases, just not as much. Clearly the payment did not fall.

There is more to the story. The theory behind the new formula is that people adjust their buying for inflation. As the USA article illustrates, if the price of beef increases people will buy less beef perhaps turning to chicken thereby compensating for the higher inflation associated with beef. The new Social Security inflation factor would then track the price of chicken not beef.

The inflation formula used to calculate the Social Security COLA has been questioned for many years. In general it tends to overstate the impact on seniors of some items they are less likely to be purchasing once retired. Adjusting the formula as a relatively painless way of stabilizing Social Security has been suggested in the past.

Needless to say politicians on the left see this as pinching the elderly and one has to assume the AARP is not thrilled either. However, a difference of a few dollars over a decade seems a small price to pay to save hundreds of billions of dollars for the rest of Americans.

Since 1975, Social Security general benefit increases have been cost-of-living adjustments or COLAs. The 1975-82 COLAs were effective with Social Security benefits payable for June in each of those years; thereafter COLAs have been effective with benefits payable for December.

Prior to 1975, Social Security benefit increases were set by legislation.

And there you have the essence of the problem. Rather than increasing benefits by legislation when affordable, Congress in its wisdom fixed a problem and set the COLA on automatic without regard to future changing economic or fiscal conditions. Today making a reasonable adjustment to this process is attacked as lowering Social Security benefits.  COLAs are common in government pensions and as with Social Security they have created fiscal problems for the states.  NJ just suspended COLAs until the pension trust reaches a funding status target. I managed a corporate pension plan for decades and over that time we granted seven increases in pensions, each time following a detailed analysis of the economics of the company, past inflation, the additional liability that would be created and the additional funding required.  Many times a COLA proposal was rejected.  That is the difference between accountability and political decision-making.

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The AARP is at it again, don’t be mislead

22 Jul

The AARP is off and running with its scare ads about Social Security. For the record, nobody is talking about cutting existing retiree benefits they “earned” or even the ones they didn’t actually earn (LOL). As the TV ad says, seniors are fifty million strong, but what they are really saying is: “We vote, so remember that politicians. If you touch our entitlements we will get even.”

Isn’t class warfare creating enough problems, we don’t need a good dose of generational warfare to make things worse. Reducing government waste and closing so-called loopholes as suggested by the AARP is not going to fix the deficit when forty percent of the budget is Social Security and Medicare.

If the AARP and other special interest groups have their way, there is a bleak future facing all Americans. Come on AARP, us seniors don’t deserve more than younger Americans who are now paying our benefits. There are young families struggling too and we had sixty-five years or more to get it right.

Social Security benefits, the trust fund and why the federal budget and deficit matter

18 Jul
INFOGRAPHIC - Why Social Security Needs To Be ...

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Does Social Security have a fiscal problem or doesn’t it?

Many seniors think they earned their benefit; they paid for it is often heard. If you listen to the AARP and others there is no real problem, the program is self-funded, self-sustaining. It has a trust fund. Some of our liberal friends say that because it has a trust fund, Social Security has nothing to do with the deficit or federal budget. In other words, these folks like to delude themselves into believing that the major entitlement programs are somehow in a budget world of their own and that just because politicians say so, everything can continue as usual (or just raise taxes on the wealthy). Were that only true.

If there is a Social Security trust fund and if as liberal politicians claim Social Security is a self-funding (via payroll taxes) program and if as they also claim changing Social Security for fiscal solvency is not a budget issue, why is there even any talk about not being able to pay Social Security benefits if the debt limit is not raised? Think about it. Why can’t we simply draw from the trust fund to pay benefits?

Well, there is no trust fund except for an accounting entry. Congress has spent all the tax revenue in excess of taxes over benefits and provided the trust with what are effectively IOUs. Today, benefits are paid using incoming payroll taxes and interest on the Treasury bonds previously sold to the government.

So where is the problem?

Since the government spends billions more each month than it receives in revenue, there is no money to pay the interest on the Social Security trust fund bonds unless it borrows more money and it can’t borrow more money unless… you guessed it, unless it raises the debt limit. Hence, the federal budget and deficit matter very much to those Americans on Social Security and to those who hope to someday receive Social Security.

Part of all this is a scare tactic because the government could use incoming general tax revenue to pay Social Security benefits and simply default on other obligations. Yikes, is that any better?

We have a really big mess and anyone who tells you otherwise is lying or a fool.

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Modifying inflation index for Social Security COLA and other federal adjustments. Budget negotiators are on to something, too bad the AARP doesn’t like it

11 Jul
"The Third-Term Panic", by Thomas Na...

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As reported on Bloomberg.com

Four senior congressional aides said lawmakers are discussing using an alternative yardstick to gauge inflation, known as the “chained consumer price index,” to determine annual cost-of-living adjustments for millions of Americans.

The idea may rile both Democrats and Republicans, because it could mean paring Social Security by $112 billion over 10 years, raising taxes by $60 billion and cutting pension and veterans’ disability payments by $24 billion, according to estimates by the nonpartisan Congressional Budget Office and the Joint Committee on Taxation.

Advocates say the government should switch to the chained index because its current measure of inflation overstates how quickly prices rise.

This is not a new idea, for years some experts have argued that the inflation measure overstates the impact of inflation, especially on seniors who spend money differently than younger families. Such a change would be relatively painless and yet provide real measurable savings.

I would go one step further and say that new Social Security recipients should not have any COLA adjustment for the first five years after starting their payments or in the alternative before age 65. This would not only save considerable money, it would encourage a delay in the receipt of benefits and perhaps longer periods of employment. Every American has several alternatives to saving for retirement. It doesn’t seem unreasonable that future retirees fund at least inflation erosion of their income for five years. An exception could be made for the very lowest income seniors.

Nothing may come of all this talk, but there is hope.  Despite what you may hear from those on the left, Social Security does have a dramatic impact on the federal deficit and it should be a key component of any comprehensive solution to the budget and deficit problem we face.  However, it seems to me that just as not letting current tax rates expire is not a tax cut, not allowing future Social Security benefit increases to occur is not a benefit reduction.

Needless to say, as usual, the AARP has a different view. 

“AARP is strongly opposed to any deficit reduction proposal that makes harmful cuts to vital Social Security and Medicare benefits,” Rand said.

Rand singled out some of the specific savings that have been floated in the press over the last 24 hours, most notably changes to the program’s formula for annual Cost of Living Adjustments that would reduce benefits over time by indexing them to stingier inflation measures.

“AARP will fight any cuts that are proposed to this important program, including proposals to reduce the cost of living adjustment for beneficiaries (COLA)—such as the proposed chained CPI—which AARP also believes should not be considered as part of the debt ceiling or deficit reduction negotiations,” The AARP CEO Rand said.

The AARP would do well to take a broader view of what is of critical importance to America.  Already too large a percentage of the resources of the U.S. are consumed by us seniors at the expense of our children and grandchildren.

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Medigap coverage – balancing premiums and your out-of-pocket risk

21 Jun

I'm confused

I began administering employer based health plans beginning in1961. In all those years the typical plan had a modest deductible and coinsurance of 20%. Starting in the late 1970s we saw changes with the introduction of HMOs promising lower costs in return for tighter control over health care services (unfortunately an unfulfilled promise). This evolved into point of service plans providing a lower deductible and lower coinsurance or a co-payment if in-network services were utilized. Today we have several variations and ever-increasing (high) deductibles and co-payments with the insured paying upward of 25% of premium even in the best employer plans.  Current thinking says that if the patient has a greater stake in the cost of care they will be better consumers.

The point is that regardless of the plan, there was a deductible to be met and a co-payment or coinsurance to be paid except for extraordinary annual costs eventually reaching an out-of-pocket limit.

Then we have Medicare with a hospital deductible, a low Part B deductible a 20% coinsurance, extended hospital stay co-pays and under the Affordable Care Act a growing array of services provided subject to neither a deductible or co-pay. While there is no out-of-pocket limit, fees are deeply discounted and there are strong caps on provider balance billing. Beneficiaries for the most part pay only 25% or less of the cost of Part B and nothing for Part A. This results in beneficiaries paying about 11% of the total cost in premiums (not including taxes paid in the past which were used by then current Medicare recipients).

Inpatient Hospital Deductible $1,132

Inpatient Hospital Coinsurance
$283 per day for days 61–90
$566 per day for days 91-150
$275 per day for days 61-90
$550 per day for days 91-150

Skilled Nursing Facility Coinsurance
$141.50 per day for days 21-100
$137.50 per day for days 21-100

By most measures Medicare is good coverage that many younger people would love to enjoy. But this is not sufficient. Many Medicare beneficiaries want 100% coverage so they spend an additional $250 or more a month (mostly more) to obtain coverage for the Medicare deductibles and coinsurance, a level of coverage virtually non-existent in the under age 65 population. This removes substantial concern over the utilization of health care services.

If a couple has $500 or more a month to spend on supplemental coverage, they may be better served putting that money in an investment to be used when necessary for out-of-pocket costs or for related costs such as dental, vision and hearing services. In essence, a Medicare Health Savings Account. Of course, such a special account does not legally exist, but saving the $500 is still an option. Sometimes our fear of health care expenses clouds our judgement, extensive Medicare supplemental coverage may be one of those times. Consider that the average hospital stay under Medicare is under six days and even the average length of stay in a skilled nursing home is about thirty days

Health care costs are not related to income so high out-of-pocket costs impact lower-income individuals far more than higher income, but that is not unique to Medicare, it is always the case. On the other hand, a fixed expense of say $500 a month as in this example may be more of a burden to lower-income individuals.

There is a balance to be considered between supplemental coverage for only the most catastrophic expenses such as a very prolonged hospital stay and accumulating funds on a “self-insured” basis for more routine expenses and which can also be used for other purposes not normally covered by Medigap policies.

In deciding how much to spend on Medigap coverage, consider your potential financial risk, how much you can absorb and whether all or some of the premium you pay would be better in your pocket by buying coverage only for that portion of the risk you don’t want to take as opposed to reimbursing you 20% of office visits and more average expenses that may not exceed your monthly premiums.

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Social Security- from lock box to slush fund. Can anyone look beyond 2012?

20 Jun

Deficits and debt

If you look at many of the fifty states you will find that their state worker pensions are grossly underfunded.  This is largely the result of overly optimistic earnings assumptions, and the failure of the states to adequately fund the trusts often diverting money to other purposes.  Clearly this is not a model we want to follow on a national basis…or do we?

For 2011 our elected politicians decided that lowering the Social Security payroll tax would stimulate the economy (and apparently that further underfunding Social Security was not a problem).  Now in the interest of the short-term economy, proposals are being circulated to extend the tax reduction and perhaps even to increase the cut in payroll tax and to include a tax cut for employers as well. 

Holy cow!

Payroll Tax Raid on Social Security

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Social Security’s Enduring Truths ( A naive point of view- what would FDR say?)

15 Jun
Social Security Poster: old man

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The following excerpts are from an article in the AARP Bulletin.  It is understandable why Mr. Roosevelt would be supportive of Social Security, but in my view this type of naïve assessment of the issues facing Social Security does every American a great disservice. Mr. Roosevelt is the grandson of FDR

 

 

 

 

Social Security’s Enduring Truths

Despite the naysayers, the system’s finances are sound by: James Roosevelt Jr. | from: AARP Bulletin | June 1, 2011

 “Much of the money that boomers are and will be drawing from Social Security is and will be their own.”

 “But these important factors are usually left out. Instead, the purveyors of fear want you to believe that boomers are retiring on the backs of their children and grandchildren. If you buy that, they have statistics showing fewer contributors supporting more beneficiaries— “proof” that the program is unsustainable. These utter distortions, however, are nothing new.”

 Utter distortions, ah, not so much.  For example, I paid Social Security taxes since I was fourteen.  The last statement I received from the Social Security Administration a few months before I began to collect benefits showed that over the years I paid $110,457 in taxes, my employer paid a like amount.  However, in 2.64 years my monthly benefit together with my spouse’s portion of the benefit will exceed the entire amount I paid in taxes.  If you include the employer taxes, my benefit will exceed what was paid in taxes in only 5.28 years.  These calculations do not include the fact that my benefit will continue for my surviving spouse or that there is a Cost of Living Adjustment that regularly raises the benefit.  Since I began collecting Social Security benefits in November 2009 I only have a year to go before I am receiving benefits paid for by someone else’s taxes, my children included. Thank you very much. 

“By the end of 2010, the Social Security trust fund had a positive balance of $2.6 trillion. As a result of interest earned on the trust fund balances, the fund’s surplus will continue to expand to approximately $3.67 trillion at the end of 2022. After that year, it is projected that the balance will begin to decline. Still, reserves will be sufficient to pay full benefits through the year 2036. After that, Social Security would still be able to pay for 77 percent of benefits.”

Here is what the Social Security Trustees Report says in 2011:

“Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The $49 billion deficit last year (excluding interest income) and $46 billion projected deficit in 2011 are in large part due to the weakened economy and to downward income adjustments that correct for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink to about $20 billion for years 2012-2014 as the economy strengthens. After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Through 2022, the annual cash deficits will be made up by redeeming trust fund assets from the General Fund of the Treasury. Because these redemptions will be less than interest earnings, trust fund balances will continue to grow. After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085.”

Let’s look at that interest earned and where it comes from.  If we were talking about interest earned on a private pension fund or even your 401(k) account, the interest comes from the earnings of companies in which you are invested, in other words from creating wealth or it comes from bonds, the proceeds of which the companies use to finance growth and expansion. However, the interest paid on Social Security bonds comes from the US Treasury and the Treasury gets the money from borrowing more money (or just printing it).  Think of it as using one credit card to make the minimum monthly payment on another card.

“Since when is news that a program is completely solvent for 25 years bad news?”

Not bad news?  Twenty-five years is not that far away, especially if you happen to be age 50 or 55 at the moment.  Would it be bad news if your employer said its pension trust was only going to be solvent for twenty-five years or that your 401(k) account would only last for twenty-five years?  In addition, it is foolhardy if not irresponsible to pretend there is no problem with Social Security.  This is such a massive and complex program and one so emotionally charged that it will take decades to change the direction in which we are headed.  We certainly cannot wait for twenty-four years and then try to find a fix.

FDR envisioned quite a different program from what we have today following decades of “improvements” made by Congress. If you think that government estimates of the cost of a program are to be relied upon for years into the future, consider this from a 1936 government Social Security brochure:

YOUR PART OF THE TAX

The taxes called for in this law will be paid both by your employer and by you. For the next 3 years you will pay maybe 15 cents a week, maybe 25 cents a week, maybe 30 cents or more, according to what you earn. That is to say, during the next 3 years, beginning January 1, 1937, you will pay 1 cent for every dollar you earn, and at the same time your employer will pay 1 cent for every dollar you earn, up to $3,000 a year. Twenty-six million other workers and their employers will be paying at the same time.

After the first 3 year–that is to say, beginning in 1940–you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year. This will be the tax for 3 years, and then, beginning in 1943, you will pay 2 cents, and so will your employer, for every dollar you earn for the next 3 years. After that, you and your employer will each pay half a cent more for 3 years, and finally, beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.

When was the last year you paid $90.00 in Social Security tax?

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Social Security tax rates, how much is enough?

7 Jun
Ida May Fuller, the first recipient

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Some observers of the coming (here now actually) Social Security crisis, see the solution in simply raising taxes. Of course, to some that means raising taxes on the wealthy alone.

In 2011 the tax rate for Social Security is 6.2% of wages up to $106,800 on both worker and employer. In its infinite wisdom Congress “stimulated the economy” and made the Social Security Trust Fund weaker by lowering worker taxes to 4.2% for this year.

Ida May you don’t know how lucky you were

The question is how much would taxes have to rise to cover Social Security obligations. Here is what the Social Security Trustees estimate:

Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable wages will grow rapidly from 11-1/2 percent in 2007, the last pre-recession year, to roughly 17 percent in 2035, and will then dip slightly before commencing a slow upward march after 2050.

In other words both worker and employer would each have to contribute 8.5% of taxable wages in the future to cover benefits. Remember, that is just to cover benefits. Up until 2010 taxes exceeded benefits so there was additional revenue to purchase Treasury Bonds for the Trust Fund.

As for taxing the “wealthy” there aren’t enough of them to carry the load. Also, keep in mind that the Medicare tax already has no limit on taxable earnings and beginning in 2013, the health care reform law increases the Medicare Part A (hospital insurance) tax rate on wages by 0.9% (from 1.45% to 2.35%) on earnings over $200,000 for individual taxpayers and $250,000 for married couples filing jointly and imposes a 3.8% assessment on unearned income for higher-income taxpayers.

The fact is that unless there are changes in the benefit structure for Social Security, related taxes are going up for everyone (in addition to other tax increases).

If you buy a bigger house, your mortgage payment and your taxes go up, if you charge more on a credit card, your minimum payment goes up. When you can’t afford to make your payments, you either increase your income, buy a smaller house or lose all your stuff…or I suppose you can get your wealthy neighbor to pay your bills.

Will my Social Security check stop if there is no increase in the debt limit?

31 May
INFOGRAPHIC - Why Social Security Needs To Be ...

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That is an interesting question; if you believe the far left politicians Social Security is never in jeopardy because there is a trust fund and it is backed by the full faith and credit of the federal government. In addition, it does not affect the deficit according to those same folks.

Will your (our) Social Security checks stop if the federal government can’t spend any more above its debt limit? The correct answer is no…for now at least. The answer you hear in the press depends on which side is trying to scare whom.

First, as of now the receipts (plus interest income) from the Social Security payroll tax are sufficient to cover the current benefits being paid so even if there is no increase in the debt limit, checks can continue. However, when we get to the point (not long from now) when the payments exceed current Social Security total revenue, we may face a different question.

Also, there is still general tax revenue flowing into the government (you did pay your “fair share” did you not?) and Social Security payments, because they are fixed by law, are high on the priority list of payments that will continue even if no additional debt can be incurred for a period of time.

The bottom line is that in 2011 at least, Social Security checks can keep coming.

However, that does not mean there is no problem. Read this short summary from the Social Security Trustees Report.

I find this discussion enlightening don’t you? The very fact that we have to ask whether Social Security can continue to be paid if the federal government can’t keep borrowing should tell us something about the fiscal state of our government. In fact, isn’t it a bit scary that current tax revenue can’t keep all government payments of any kind flowing for any period of time? Every day we spend more than we have.

Politicians, who keep assuring us that there is no problem with Social Security, should start being honest. There is a problem. There is no trust fund other than a considerable amount of paper representing Treasury Bonds that Social Security holds. The proceeds from the purchase of these bonds by has been used to run the government just like the proceeds from the sale of bonds to China, etc. When the Social Security Trust Fund needs to cash in those bonds to pay benefits, where does the Treasury get the cash to give to Social Security? Well, it sells more bonds to someone else and or it prints money.

That’s not a problem? Perhaps not for you and me, but it surely is for our children and grandchildren.

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How IRA Owners Invest Their Assets

29 May

New Research from EBRI:

How IRA Owners Invest Their Assets

WASHINGTON—Where do individual retirement account (IRA) owners put their money? New research from the unique EBRI IRA Database finds that almost 40 percent of IRA assets are invested in equities, just over 20 percent is in money funds, 12 percent are in balanced funds, and almost 14 percent are in other types of investments.
 

These findings represent the first look at detailed IRA asset allocation information from the only database that is able to anonymously link individual IRA owners across multiple IRA providers. This allows for more accurate measurement of IRA assets and ownership, and the tracking of retirement assets as they move through different types of retirement plans.

The EBRI IRA Database is an ongoing project of the Employee Benefit Research Institute (EBRI) that collects data from IRA plan administrators, and currently contains information on 14.1 million accounts of 11.1 million unique individuals with total assets of $732.9 billion, as of year-end 2008.  The assets in the IRAs are broken down into equities, which include individual equities, equity mutual funds, and other 100-percent equity investments; bonds (individual, mutual fund, and other 100-percent bond investments); balanced funds, which include traditional 60 percent equities/40 percent bonds, as well as target-date funds; money funds (money market mutual funds, money market accounts, and certificates of deposit); and other investments, which include annuities, real estate, and other such investments.

Other findings in the EBRI IRA Database:

Allocation by Balance Size: As the account balance of the IRA increases, the percentage of assets in equities and balanced funds combined declines. For instance, among those IRAs with balances from $10,000−$24,999, 50.4 percent of the assets were in equities and 20.1 percent in balanced funds (70.5 percent combined), compared with 37.6 percent in equities and 11.7 percent in balanced funds (49.3 percent combined) for IRAs with account balances of $150,000−$249,999.

Gender Allocations: The asset allocation of male and female IRA owners is very similar across all age groups.  For instance, females and males under age 25 had 49.1 percent and 49.5 percent, respectively, in equities, while women had 33.1 percent and men had 33.6 percent in equities among those age 70 or older. Furthermore, a decreasing percentage of equities and an increasing percentage of bond and other assets were found as age increased for both genders.
Extreme Allocations (defined as having less than10 percent or more than 90 percent of the account balance in one particular asset):

               * Type: The most significant difference among the IRA types is that Roth owners are much more likely to have 90 percent or more of their assets in equities than those who own the other IRA types. Furthermore, Roth owners are correspondingly more likely to have less than 10 percent of their assets in bonds, money, or both. Traditional and SEP/SIMPLE IRA owners have relatively similar likelihoods of extreme allocations across the assets studied, while rollover IRA owners are much less likely to have 90 percent or more of their assets in equities and more likely to have larger allocations to bonds and money.

              * Account Balance: IRA owners with higher account balances are less likely to have extreme asset allocations. For instance, 38.3 percent of those with an account of $5,000−$9,999 had 90 percent or more of their assets in equities, compared with 5.9 percent of those with an account balance of $250,000 or more. Furthermore, these accounts with higher balances are less likely to have less than 10 percent combined in money and bonds.

“It’s interesting to note that IRA assets are invested in stocks (equities) at a level that’s very close to what’s in 401(k)s,” said Craig Copeland, senior research associate at EBRI and author of the report. The full results are published in the May 2011 EBRI Notes, online at www.ebri.org

Specifically, Copeland said, the latest data from the EBRI/ICI 401(k) database, the largest of its kind, shows that 37.4 percent of all 401(k) assets are invested in equities. That matches closely to the equity level that was found in IRA accounts (38.5 percent).

“The next step in our research is to examine how IRA owners with more than one account allocate their assets across accounts.  The results could show that accounts with extreme allocations are only a part of an individual’s total portfolio instead of the only assets the owner has.”

The Employee Benefit Research Institute (EBRI) is a private, nonprofit research institute based in Washington, DC, that focuses on health, savings, retirement, and economic security issues.

401(k)s, HSAs and why your payroll deductions will keep you working to age 70 and beyond

9 May

Some of us delight in accusing politicians of being shortsighted and failing to consider the long-term consequences of their actions or inaction. However, upon further reflection it seems to me that employers are running a very close second.

The disappearance of the defined benefit pension has caused more and more Americans to be on their own saving for retirement. Even before this trend, it was known that Americans were not great savers, especially for things far in the further such as retirement. That didn’t matter as employers were determined to cut long-term liabilities and embraced the defined contribution pension in the form of 401(k) plans. Today we are amazed at the low retirement account balances of many boomers nearing retirement and we worry about not only the savings rate, but their investment choices along with the ability to make the funds last over a multi-decade retirement.

Leveraging this success, employers concluded that the defined contribution approach was also appropriate for health care benefits and so we have a rush to consumer driven health care, high deductible plans and health savings accounts (HSA). Now workers not only are asked to fund most or all their retirement, but also an increasing portion of medical expenses and to accumulate funds for future medical costs in retirement. We have created a thriving business for companies taking payroll deductions. The secret behind consumer driven health care is that individuals have less money to consume with, be it the health plan’s money or their own.

Soon early retiree medical coverage will not be an issue as retirement before age 70 will be non-existent. Hey, perhaps there is a method to this madness as long as employers don’t mind a cadre of seniors on the payroll.

I’m trying to set priorities. Do I save for retirement first or health care expenses? Should I also purchase long-term care insurance to protect my assets? No, protecting assets is not an issue, you must have assets after all and I’m trying to decide if I put mine into retirement or my HSA.

My personal feelings notwithstanding, this wellness stuff may not be a bad idea. Knowing the status of my health will help me make the best decision whether to put my money into a retirement or health care account. If I’m lucky the wellness program will help me keep working forever. Isn’t that what employers want?

I’ve considered one other scenario. I call it the eat now or later diet. If I diligently save for the future I get to eat later and lose considerable weight today. If I choose to eat today I get to lose considerable weight during what may be left of my poverty-stricken retirement years. It’s a complicated choice as you must figure in all those early bird specials and senior discounts.

My government promises me more and more it can’t pay for and my employer takes away more and more it doesn’t want to pay for. This consumer is being driven… nuts.

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Do Workers Think They Are On Track For Retirement?

8 May

EBRI 2011 Retirement Confidence Survey:

Do Workers Think They Are On Track For Retirement?

When it comes to evaluating their progress in planning for retirement, do most workers feel like they are behind schedule, ahead of schedule, or right on track?

According to 2011 Retirement Confidence Survey (RCS), more workers than ever state that they are a lot (40 percent) or a little (30 percent) behind schedule—fully 70 percent say they are not where they need to be.

The percentage of workers who say they are ahead of schedule has changed little (7 percent in 2005, 8 per-cent in 2011). However, the portion of those saying they are on track has declined from 37 percent in 2005 to 21 percent in 2011.  Not surprisingly, the RCS found that the likelihood of feeling a lot behind schedule is inversely related to household income, household assets, health status, and education: The less income, assets, education, and health status, the more behind workers tend to feel.

Other data from the RCS:

• Attitudes by type of worker : Among those more likely to describe themselves as a lot behind schedule are single workers (compared with married workers), those who have not saved for retirement (compared with savers), those who have not done a retirement needs calculation (compared with those who have), those who are not participating in a retirement savings plan at work (compared with participants), and those who do not currently have benefits from a defined benefit retirement plan (compared with those who are entitled to benefits).

• Retiree health coverage: In addition, those who do not expect employer-provided health insurance in retirement are more likely than those who do to say they are a lot behind schedule.

Full details of the 2011 RCS are in the March 2011 EBRI Issue Brief and online at www.ebri.org/surveys/rcs/2011/

A reality check on retirement income-where is it coming from? A 50% cut in pay!

5 May
 
From "Why Social Security?" (1937)
Image by Tobias Higbie via Flickr

Let’s say you are sixty-five in 2011 and as is typical today you have accumulated $200,000 in your 401(k) plan which except for Social Security, represents your retirement income.

Upon retirement you were earning $68,000 a year.

Based on that your monthly Social Security benefit is estimated (using the SSA estimator) at $1,534.00. If you are married your spouse can receive a benefit equal to half your payment (another $767 a month in this example). To assure a stream of income for life you can take your $200,000 and purchase an annuity. That will generate about $1269.00 per month income.

That gives you a monthly income of $2,803 or $33,636 which replaces less than 50% of your pre-retirement income. Can you maintain your lifestyle with a 50% cut in pay? They say that in retirement your expenses go down. Let’s hope they are right. On the other hand many expenses increase or keep going up.  In the first year of retirement my health care spending increased by over $600 per month, my property taxes by another $300 per month, and filling the old gas tank…well you get the idea.

So far you have the good news.

The rest of the story is that the monthly annuity will never increase so you are on the hook for inflation reducing its value. In addition, the payment stops at your death. You could buy an annuity with survivor benefits, but that will lower your monthly payment.

Your Social Security benefit may increase with inflation, but so will your Medicare premium which is deducted from your benefit.

Where did the $200,000 go?

 

The really good news is that upon your death your spouse will receive your full primary Social Security benefit.  She now has $1,534 a month to live on (less her Medicare premium of course).  By the way, that is $18,408 a year, a whopping 150% of the poverty level.

Then there are taxes. The annuity you purchased is taxable income and a portion of your Social Security may also be taxable.

So how are you doing so far?

Whoa, wait a minute you say, “I’m not turning over $200,000 to some insurance company.”  What if I die the next day, it’s all lost! Right you are, you can keep the $200,000 and manage it yourself. All you have to do is figure out how to make it last and generate a stream of income for your life. You do know exactly how long you are going to live, right? And no doubt you have figured out where to invest the money so you can spend what you need to live on. Keep in mind too that if you and your spouse are both age 65 there is a 50% chance one of you will reach age 90.

I’ll leave it to you to sort out the good news and bad news, but please don’t wait too long.

You may find some help here.

If you are one of those Americans fortunate to have an old-fashioned pension plan, you are a bit better off.  Your starting income may be seventy or eighty percent of your pay.  However, don’t be overconfident.  You still must deal with higher health care costs, inflation, survivor benefits and a fixed income.

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Live long and prosper-The great dichotomy that affects your secure retirement.

3 May

Look almost anywhere in the world and you will see a growing retirement crisis. Pensions are underfunded, retirement ages are too young and the population supporting seniors collecting benefits is dwindling. The United States is no exception. Social Security is headed for a crisis in revenue versus promised benefits, private defined benefit pensions are no more and workers with unrealistic expectations of an early retirement do not understand the realities of the future they face.

Perhaps more than in other countries there is a great imbalance in the US. The US has two systems for government pensions, Social Security and other broad federal programs such railroad retirement and pensions for government workers in the fifty states. Until recent months the state systems were largely ignored even while they were underfunded in many cases and promised benefits not seen in the private sector for decades, if ever.

While states ignored the growing liabilities, underfunding and unrealistic expectations of workers, private companies were eliminating or greatly cutting defined benefit pensions. The burden and risk for funding retirement has largely been placed on employees. The average person is not up to this challenge either in resources, temperament or knowledge. Just as state officials ignored the reality of their promises and operated with overly optimistic assumptions for costs and funding, the average person faced with his own retirement challenge is doing the same.

The great imbalance comes now that states are addressing past sins. They must do so in large measure by requiring the citizens of the state to bail them out through various taxes, budget cuts and higher fees. Just when the average citizen is being required more and more to finance her future, she is also being asked to help preserve the generous promises to state workers. Current retirees are also faced with this additional tax burden.

If both public and private retirement systems had stayed in balance and both were prudently funded, we would not be facing these issues, but with politics on one side and corporate profits on the other driving short-sighted decisions we are left with this imbalance and cost-shifting that places citizens in an intolerable and dangerous situation.

We are past the time for rationalizing the benefits deserved by government workers or breaking of “promises” by corporations. The fact is that America’s expectations for a long, secure retirement are fast disappearing.

“Live long and prosper” is now a dichotomy. What are you doing to change that for your future?

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