Financial Planning

Social Security has been around since 1935 and was designed as a contributory system where workers pay into a fund that will provide benefits when they retire.

The program has two parts: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI), each supported by a Trust Fund and overseen by a Board of Trustees.

The Social Security Act requires that the Trustees report annually to Congress on the actuarial status and financial operations of OASI and DI Trust Funds. The latest report was released on March 31, 2023.

Issues regarding the long-term health of Social Security have been raised by the Trustees responsible for the Social Security system.

Having some perspective on the current state of the fund, and its future solvency, is important for retirees who receive benefits, and for those who expect to rely on benefits in the future.

At the end of 2022, OASI and DI were providing benefits to about 66 million people, and during the year, an estimated 181 million people had earnings covered by Social Security and paid payroll taxes on those earnings.

The total cost of the program in 2022 was $1.244 trillion, and total income was $1.222 trillion. Income comes from two sources: non-interest income (contributions from workers) which was about 95% of total income, and interest earned on investments, which accounts for the remaining 5%.

Under the Trustees’ current assumptions, Social Security’s total cost is projected to be higher than its total income in 2023 and all later years. Total cost first exceeded total income in 2021.

From an actuarial standpoint, the Social Security program remains solvent for the next ten years. The chart below from the Social Security Administration shows the projected Trust Fund balance through 2033.

The problem is that, unless changes to the system are made soon, the Trust fund reserves will be depleted by 2034 and collections from workers will not be enough to maintain the benefits of recipients.

The reason for the impending depletion is demographics: the retirement of Baby Boomers is increasing the number of beneficiaries faster than the increase in the number of workers paying into the system.

To put the Trust fund and the system on a path of long-term sustainability (which the actuaries define as the next 75 years), the Trustees suggest the following:

1. Revenue would have to increase by an amount equivalent to an immediate and permanent payroll tax increase of 3.44 percentage points, to 15.84%;
2. Or scheduled benefits would have to be reduced by an amount equivalent to an immediate and permanent reduction of 21.3% applied to all current and future beneficiaries
3. Or scheduled benefits would have to be reduced by 25.4% if applied only to those who become eligible for benefits in 2023 or later
4. Or some combination of the above

The Trustees conclude with a call to action for lawmakers to address the projected Trust fund shortfalls in a timely way so that necessary changes can be phased in gradually to give workers and beneficiaries time to adjust to the changes.

The Trustees’ sentiment of giving workers and retirees time to prepare and adjust to impending changes is prudent.

Demographics are unlikely to change quickly, and the action that Congress decides to take (or not take) is unknowable. The proverbial “can” could be kicked down the road by politicians for several years until the problems become more acute.

One way to prepare for potential future changes to Social Security benefits is to ‘stress test’ your financial plan. Our MoneyGuide financial planning software allows us to do this. The Social Security module in the software facilitates testing for a range of benefits reductions and helps you see how this affects the long-term results of your financial plan.

Susan and I recognize that contemplating negative impacts to your financial plan can cause discomfort. We’re able to model different Social Security outcomes and work with you to think through financial planning options.

 Visualizing a range of outcomes and having a plan for adjusting to different circumstances prior to any change in Social Security may ease anxiety and help you look more confidently toward the next decade and beyond.

The IRS set January 23 as the official start to the 2023 tax filing season. Many of us are now busy gathering tax-related documents for tax preparation purposes. The filing deadline to submit 2022 tax returns or to submit an extension to file is Tuesday, April 18.

Even if you go on extension until October 16, you still have to pay any tax you expect to owe by April 18 or the IRS will add penalty and interest charges to the amount owed.

The IRS provides a useful reference page on their website, which includes ‘Tips to Help People with the 2023 Tax Season’ at irs.gov

Also, you might find this two-page reference sheet of important tax-related numbers for 2023 helpful. The data includes: 

• Federal Income Tax Brackets
• Capital Gains Rates
• Medicare Premiums
• IRMAA Surcharges
• Retirement Plan Contribution Limits

Susan and I will also gladly address your tax planning questions.

Here’s wishing you many happy returns!

RK

Last month I wrote about Secure 2.0, the collection of provisions intended to build upon the retirement system improvements that were implemented under the Secure Act of 2019.

Secure 2.0 became law on December 29, 2022.

There are many provisions to this new law. I participated in a webinar led by a leading consultant to financial planners, who said that in Secure 1.0, there were twelve or so changes to the law. Secure 2.0 brings almost one hundred additional changes.

Susan and I will be digesting Secure 2.0 in the weeks ahead to better understand how these changes might affect you and your financial plan.

Here are a few of the key changes to be aware of:

Required Minimum Distributions (RMDs)

• For individuals who turn 72 in 2023, RMDs will be pushed back one year compared to current rules and will begin at age 73
• Age 73 will continue to be the age at which RMDs begin through 2032
• Then, beginning in 2033, RMDs will be pushed back further to age 75
• Beginning in 2024, surviving spouses can elect to be treated as the decedent for RMD purposes from an inherited retirement account. This is beneficial for older spouses inheriting retirement accounts from younger spouses.

Retirement Plan Catch Up Contributions

• Effective in 2025 and in future years, Secure 2.0 adds a special catch-up contribution limit for employees aged 60, 61, 62, and 63: the greater of $10,000 or 150% of the regular catch-up contribution amount (indexed for inflation)
• Starting in 2024, Secure 2.0 requires all catch-up contributions for workers with wages over $145,000 during the previous year to be deposited into a Roth

Qualified Charitable Distributions (QCDs)

• The maximum annual QCD amount of $100,000 is now indexed for inflation
• There is no change to the age for being able to make QCDs from your retirement accounts – you may start at age 70.5

529 Plans

• For 529 plans that have been in existence for 15 years or longer, you are allowed to transfer them into a Roth IRA for the beneficiary, and it appears that you will be able to change the beneficiary of the 529 before transferring it to the Roth
• Any contributions to the 529 plan within the last five years are ineligible to be moved to a Roth IRA
• The maximum amount that can be moved from a 529 plan to a Roth IRA in an individual’s lifetime is $35,000

There are also a host of new rules for accessing retirement funds during times of need.