Tag Archives: Social Security

COLAs for retirement, Social Security, and health benefits for 2017

With the release of the September 2016 Consumer Price Index (CPI) by the Bureau of Labor Statistics, the Social Security Administration (SSA) and the Internal Revenue Service (IRS) have announced cost-of-living adjusted figures for Social Security and retirement plan benefits, respectively, for 2017. The 2017 adjusted figures for high-deductible health plans (HDHPs) and health savings accounts (HSAs) included in this Client Action Bulletin were released by the IRS earlier this year and are provided here for convenience.

Generation X: Savings, pensions, and Social Security

pink-lesleyThis is the second blog in a three-part series exploring the economic history and future of Generation X. The series also focuses on what this generation can do to prepare for retirement. In the first installment, we highlighted some of Generation X’s financial predicaments.

Generation X faces major retirement challenges.

Besides the issues of job security and stagnant wages, there is the topic of cold hard cash—saving enough, having enough, allocating enough.

Some Gen Xers know that they started saving too late and wouldn’t be able to make up the difference. Others were worried because they’d been saving since they got their first jobs—20+ years ago—and felt that that money still wouldn’t be enough when they reach retirement age. And others just couldn’t save. As one fellow Gen Xer put it, “My wife and I don’t make enough together to save for retirement and the kids.” And let’s not fool ourselves—“retirement age” no longer has a firm definition.

We Gen Xers aren’t alone. According to the 2015 Retirement Confidence Survey published by the Employee Benefit Research Institute, “Almost two-thirds of workers (64 percent) say they feel they are behind schedule when it comes to planning and saving for retirement.” This survey also notes that cost of living and day-to-day expenses top the list of reasons why workers don’t save (or don’t save enough) for retirement.

Pensions, often referred to as defined benefit (DB) plans, used to be a mainstay. But they are not as common as they once were, and this, too, is affecting Generation X. In fact, according to Jennifer Leigh Parker on CNBC.com, Generation X is the first generation to see its pension leg replaced by 401(k) savings plans, which were increasingly adopted during the 1980s. The 401(k) plans are portable but aren’t designed as a monthly “pension paycheck.” The owner of the account balance has to take significant action to understand and convert any or all of it to that pension paycheck. Gen Xers , in general, will find that its collective savings plan account balances are woefully deficient and for many, sitting in a tax-deferred account. And the Internal Revenue Service (IRS) can’t wait for us to start cashing them out.

Additionally, we Gen Xers, who have been paying Social Security payroll tax for years, may not receive full benefits upon reaching retirement age.

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Retirement, social security, and health benefit limits for 2016

With the release of the September 2015 Consumer Price Index (CPI) by the U.S. Bureau of Labor Statistics, the Social Security Administration (SSA) and the Internal Revenue Service (IRS) have announced the 2016 figures for, respectively, the Social Security program and tax-qualified retirement plan benefits. In most cases, the figures are unchanged from 2015. The 2016 adjusted figures for high-deductible health plans (HDHPs) and health savings accounts (HSAs) included in this Client Action Bulletin were released by the IRS earlier this year and are provided here for convenience.

When to begin Social Security: The conundrum

Bradley_JeffIn retirement planning, especially in discussions involving those who retired early or are thinking of retiring early, this question usually comes up: When do you plan to start taking Social Security?

To answer this question, we have to look at two alternatives:

1) If one defers payment to age 70 (currently the latest permissible date for increased benefits) or some other age, a higher monthly benefit is payable.
2) Instead, if one decides to commence payment early, say at age 62, the question then becomes how many years it takes to come out ahead by deferring. In other words, how many years does it take to reach the “break-even” point?

For example, a maximum earner, retiring at age 62 in 2015 could expect a monthly benefit of approximately $2,014. Instead, if he or she defers to age 70, that amount is estimated to be $3,544 (in 2015 dollars).

If we assume 2% CPI, the total benefits received from age 62 through age 78 are approximately $484,000. If deferred to age 70, the total benefits received from age 70 through age 78 are approximately $486,000. Thus, the breakeven point is somewhere between 16 and 17 years from age 62.

Why is it difficult to pick one or the other? Let’s examine the issues.

Many financial advisers suggest that a retiree would always be better off deferring commencement as long as possible as this maximizes the benefit. However, this may not always be the case and is really a decision that depends on several factors, many of them personal.

Obviously, to make the best decision, retirees will need to know if they (and their spouses, if applicable) will be alive at the “breakeven” point(s). Because no one knows the answer to this question, one possible approach would be to look at the present value of the two options at age 62. Using the current mortality table to calculate minimum lump sum distributions under the Internal Revenue Code and a 2% real interest rate assumption (note that the actual real rate of interest used will vary based on individual expectations), the present value of the benefit payable at age 62 to a single person is approximately $430,000 and the present value of the deferred benefit is approximately $452,000. However, if a 4% real interest rate is used, the present values are $347,000 and $327,000, respectively. Thus, the present value depends on the underlying assumptions which will vary by individual, making it somewhat subjective.

What about the “utility” of the immediate cash? In this regard, you should consider cash needs, both immediate and long-term. This would mean no Social Security cash now but more in the future versus some Social Security cash now but less in the future. We should note that it doesn’t do any good to have more money in the future if we aren’t alive or aren’t able to enjoy it. To assess cash needs, you will have to run the numbers because everyone’s situation is different.

Also, many proponents of delaying Social Security note that deferring it is a significantly lower-cost alternative than buying commercial longevity insurance. The key decision point here is that it shouldn’t matter which is a lower-cost alternative. What matters is whether longevity insurance is needed or wanted in the first place. If so, then deferring Social Security may be the right move. If you don’t want longevity insurance, deferring Social Security may not be the right move.

Don’t forget taxes! Social Security can be taxable to some individuals and can affect Modified Adjusted Gross Income (MAGI) which is used to determine eligibility for Federal tax subsidies under the Affordable Care Act.

And then we have the latest Social Security Trustee’s Report. Here’s an excerpt:

“The theoretical combined OASDI trust funds have a projected depletion date of 2033, unchanged from last year’s report. After the depletion of reserves, continuing tax income would be sufficient to pay 77 percent of scheduled benefits in 2033 and 72 percent in 2088.”

So what does this mean? Taking Social Security early may be the bird in the hand. Modeling a 23% haircut may be the deciding factor on whether Social Security should be taken as soon as possible. On the other hand, 2033 is a long way out, and we will have to wait and see.

Regulatory roundup

More retirement-related regulatory news for plan sponsors, including links to detailed information.

IRS issues guidance expanding preapproved determination letter program
The Internal Revenue Service (IRS) has issued Revenue Procedure 2015-36, which expands the scope of the preapproved program to include defined benefit plans containing cash balance features and defined contribution plans containing employee stock ownership plan (ESOP) features and extends the deadline for submitting on-cycle applications for opinion and advisory letters for preapproved defined benefit plans to October 30, 2015.

In addition, this revenue procedure updates Rev. Proc. 2011-49 to reflect changes made to the determination letter program in 2012. Rev. Proc. 2011-49 is superseded.

Revenue Procedure 2015-36 will appear in IRB 2015-25 dated June 22, 2015.

To read the entire Revenue Procedure, click here.

SSA issues final rule on 60-month period of employment requirement for government pension offset exemption
The Social Security Administration (SSA) has issued a final rule that adopts, with clarifying changes, the proposed rule previously published in the Federal Register on August 3, 2007. This final rule revises the SSA’s Government Pension Offset (GPO) regulations to reflect changes to the Social Security Act (Act) made by section 9007 of the Omnibus Budget Reconciliation Act of 1987 (OBRA 1987) and Section 418 of the Social Security Protection Act of 2004 (SSPA). These regulations explain how and when the SSA will reduce the Social Security spouse’s benefit for some people who receive federal, state, or local government pensions if Social Security did not cover their government work.

To read the entire final rule, click here.

IRS updates listing of required modifications for cash balance and employee stock ownership plans
The IRS has published a collection of information packages designed to assist sponsors who are drafting or redrafting plans to conform with applicable law and regulations related to cash balance and employee stock ownership plans.

Document release: ERISA Form 8955-SSA, 2-D Barcode Standards
This document covers only the 2D barcode on ERISA Form 8955-SSA, valid for plan years 2009 to 2011. The 2D barcode is intended to represent the information on the paper form. Barcodes for this form are generated from two sources:

  • The IRS Form 8955-SSA Fill-able PDF produces a barcode after printing the form in Adobe.
  • The approved software vendors for Form 8955-SSA produce a barcode when printing their forms from their software packages.

To read the entire document, click here.

IRS explanation, worksheet (alert guidelines), and deficiency check sheets
The IRS has issued three explanations, worksheets (alert guidelines), and deficiency check sheets:

IRS posts nonqualified deferred compensation audit techniques guide
The IRS has posted a guide on nonqualified deferred compensation audit techniques. The guide provides:

  • An overview
  • Audit potential
  • Compliance focus
  • General audit steps

To access the guide, click here.

IRS issues latest Employee Plans News
The IRS has issued the June 10, 2015, edition of its newsletter Employee Plans News. The latest edition contains the following content:

  • Preapproved plan program expanded to include cash balance plans and ESOPs
  • Sample plan language (listings of required modifications) for ESOPs, and cash balance and 403(b) plans
  • Guidance for permanent program for late 5500EZ filers
  • IRS Nationwide Tax Forums begin in July
  • Changes to Forms 5500 for 2014
  • IRS names seven new members to Advisory Committee on Tax Exempt and Government Entities (ACT) panel
  • Updated Voluntary Correction Program fee chart

To read the newsletter, click here.

IRS updates 403(b) fix-it guide
The IRS has updated its 403(b) Plan Fix-It Guide. The document contains charts and explanations that address potential issues in plan administration. It includes how to find, fix, and avoid common plan errors, with hypertext links to online forms and guidance.

To access the fix-it guide, click here.

COLAs for retirement, Social Security, and health benefits for 2015

With the release of the September 2014 Consumer Price Index (CPI) by the U.S. Bureau of Labor Statistics, the Social Security Administration (SSA) and the Internal Revenue Service (IRS) have announced cost-of-living adjusted (COLA) figures for Social Security and retirement plan benefits, respectively, for 2015. The 2015 adjusted figures for high-deductible health plans (HDHPs) and health savings accounts (HSAs) included in this Client Action Bulletin were released by the IRS earlier this year and are provided here for convenience.