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Posts Tagged ‘retirement’

Social Security Groundhog Day

You may have seen the movie “Groundhog Day” which was released in 1993.  In the movie, Bill Murray plays weatherman Phil Connors who was sent to Punxsutawney , PA to cover Groundhog Day, only to find himself repeating the same day over and over again.  No matter what he does, he can’t seem to escape Groundhog Day.

The annual report from the Trustees of the Social Security Administration seems like its own version of Groundhog Day.  Every report seems to be a repeat of the prior one.  The reports warn of the coming insolvency of Social Security and Medicare, but it’s projected to be far enough into the future, that no one seems to worry too much.

The 2012 report estimates the Social Security system will become insolvent in 2033, three years earlier than what was predicted a year ago.  The fiscal status of Social Security has been known for years, yet Congress and President Obama reduced the employee’s contribution rate to the Social Security system from 6.2% to 4.2% for 2011 and 2012.  The rate reduction was intended to stimulate the economy, and they argued it would have no long-term impact on the solvency of Social Security.  Anyone with a rudimentary understanding of economics and finance could tell you paying less taxes into a system that is already paying out more than it receives, will have a negative effect.  Only Washington politicians are surprised by the updated figures, or at least act surprised.

The staunch defenders of this ridiculous argument also contend the system is solvent for more than the next two decades.  They point to the trillions of dollars in the Social Security Trust Fund as the saving grace to the system.  You can read this article to learn the fallacy of this belief.

There are a couple of other facts in the report which might cause concern.  In 2011, the government collected $691 billion of Social Security Taxes and paid out $736 billion in benefits.  It appears there was a $45 billion shortage in 2011, but there wasn’t.   The Social Security Administration collected $111 billion of interest on its IOU’s from the US government, so it reported a surplus of $66 billion, rather than a deficit.  So where did the $111 billion of interest come from?  It’s part of the $1 trillion of additional debt the U.S. Treasury issued over the past year.

It’s easy to get lost and confused by the Federal government’s accounting methods, which may be intentionally arcane.  So here is the bottom line… call it what you want, but the U.S. government borrowed an additional $45 billion to pay out Social Security benefits in 2011.  If you read the report and analyze the projections, you’ll see this number is only going to grow exponentially over the next two decades.

What is it going to take to change the situation?  I really don’t know if we’ll ever realize what’s happening as long as the government keeps sending out checks.  But what happens if they stop?  It’s unlikely to occur, at least for a long time, but what would have happened if the U.S. Treasury wasn’t able to borrow the additional $45 billion? Since there are no real assets in the Social Security Trust Fund, $45 billion in checks would not have been sent.

So in essence, it’s like we’re stuck in our own Social Security Groundhog Day, but there is a difference between us and the character Phil Connors; Phil Connors recognized he was stuck and tried to change it.  Sadly, most of us don’t believe we’re living our very own Groundhog Day.

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Bill Gates Rips Government Accounting Practices

I would encourage you to read this short article published by the Wall Street Journal.  Last week, Bill Gates, co-founder of Microsoft and one of the richest men in the world, called out state and local government on their dubious accounting practices.   

Mr. Gates claimed that states use “tricks” to balance their budgets and the reporting is “riddled with gimmicks.”  He also said that some of the governmental accounting practices are “so blatant and extreme,” that “Enron would blush.”  Several former Enron executives are serving prison sentences for their role in the collapse of the company.  Do you think any government leaders will be facing charges for accounting improprieties any time soon?

Having practiced public accounting for the past twenty years, I agree with Mr. Gates’ general premise.  Governmental entities have some of the most bizarre accounting practices and principles.  Of course, it helps when you get to write your own rules.  Like Enron, the government may be following the technical provisions, but they may be obscuring the real financial picture.  Private enterprise would not be able to get away with the same shenanigans that our state, local and federal government perpetrates on a continual basis.

The article mentions Mr. Gates’ concern about the way states are accounting for their pension liabilities.  If you’re watching the news, you know that public workers’ pensions are a hot political issue nationwide.  Although I don’t know specifically what Mr. Gates was referring to, I do have at least one idea of what it might be – the rate of return used to calculate the future pension obligations.

A friend and former colleague of mine recently asked a state treasurer in a public forum what rate of return they were using to calculate the state’s future pension obligations.  The treasurer nonchalantly replied that it was 8%.  Without being too antagonistic, my friend queried if this was a little aggressive given the current market conditions.  The state treasurer replied that is was a rate allowed by the Governmental Accounting Standards Board.  He further explained that the rate was acceptable for governmental accounting purposes since no state had ever gone bankrupt, unlike private companies.  He also made mention that every 0.25% decline in the assumed rate of return increased the state’s current pension contribution by $___ million.

Given the current market conditions, you must invest fairly aggressively to receive an 8% rate of return.  Being aggressive is not the investment strategy most government pension plans use, nor should they.  The bottom line… a lower rate of return could exponentially increase the future obligation, making a current budget crisis worse.  Although a lower rate might be more reflective of the current market conditions, states continue to use the same rate to minimize to help balance their budgets.

Keep in mind these accusations are not coming from some uneducated, right-wing radical with a political axe to grind.  This is coming from one of the richest men in the world, who knows a little about money and financial principles.

Although it’s wonderful that Mr. Gates is raising this issue, I doubt much will change.  Accounting theory and principles can be esoteric and hard for people to understand en masse.  However, common sense is fairly simple, and the more these issues are raised, the more people will realize that this is another examples of politicians who live by a different set of rules than the rest of the world. 

We can only hope things change before it’s too late.

Tax Tip: Self-Employed Health Insurance

While the debate over health care and health insurance continues in the U.S., there is one thing we call agree on… health insurance is expensive.  If you are paying for health insurance, any tax benefits you receive will help reduce the effective cost of your coverage.

A majority of people in the U.S. receive their health insurance coverage as a tax-free employee fringe benefit.  You may contribute to the expense, but the portion your employer pays is typically tax-free to you.  In order to attain parity between an employer and someone who is self-employed, self-employed taxpayers are allowed to deduct 100% of their premiums in calculating their adjusted gross income.  While it may seem logical and fair, it was not always this way.

In order to take the deduction, you must have self-employment income equal to or greater than your health insurance premiums.  Your salary, wages, interest, dividends, pension and other income are not considered self-employment income.  Thus, the portion of insurance you are contributing to your employee benefits and premiums you are paying while unemployed do not count.  The premiums may be deductible as an itemized deduction, but they do not qualify for the self-employed health insurance deduction.

There are a couple of changes that can affect your 2010 tax liability.

  • Your health insurance premiums are treated as a deduction for calculating your net self-employment income, which will reduce the self-employment taxes you pay.  This benefit is only applicable for 2010, unless otherwise extended by Congress.
  • The IRS has determined that Medicare Part B premiums can be treated as self-employed health insurance premiums.  Thus, if you are over 65 and are having Medicare Part B premiums deducted from your Social Security check, you can deduct the premiums if you have net self-employment income greater than or equal to your Medicare Part B premiums.
  • After March 30, 2010, any premiums paid for a child who is under age 27 will qualify for the deduction.
  • After March 30, 2010, the deduction is not allowed for anyone who is eligible to participate in any subsidized health insurance plan for themselves, their spouse or dependent (i.e., you can’t deduct your portion of the premiums paid as part of a subsidized employer health plan).

If you are self-employed or have self-employed income, the self-employed health insurance deduction may help reduce the cost of maintaining health insurance coverage.  The tax savings may not make get you over the affordability hump, but if you are paying, you might as well take advantage of whatever tax breaks you can.

The Fight Over Social Security Reform

February 4, 2011 1 comment

If you’re tuned into the political scene, you know the fight for Social Security is heating up.  Irrespective of your political allegiances or persuasion, this is a battle that you should pay attention to. 

Social Security and Medicare currently cost approximately $1.5 trillion annually, which was 43% of all federal spending in 2010.  The Congressional Budget Office has predicted that the Social Security will pay $130 billion more in benefits in the coming year, than it receives in Social Security taxes.  The 2% reduction in employee Social Security taxes for 2011, which was part of the tax compromise between President Obama and the Republicans, caused the shortfall to increase substantially.

Recently, a couple of influential House Republicans floated the idea of raising the retirement age again, allowing younger taxpayers to invest a portion of their Social Security dollars in private investments, and issuing vouchers for seniors to purchase medical coverage.  Not surprisingly, these proposals sparked an impassioned response from the more ardent advocates of the current system.  Sen. Charles Schumer claimed, ““They want to privatize Social Security. Privatize equals end — no more.”  Such bold statements may be expected as some political strategists have suggested that Social Security is an issue favorable to Democrats, and one that they should try to use to regain some of the political clout they lost in the 2010 mid-term elections.  

If you read through some of my prior posts, you’ll discover that I believe the current system is broke and needs to be reformed.  I may not agree with any or all of these ideas, but I give the proponents credit for taking on this politically-charged issue and considering ideas for reform.  It may not be popular to talk about Social Security reform, but it needs to be done.

Exaggeration and misleading information is part of the fabric of modern American politics, but we need to get beyond it.  Social Security touches the lives of virtually every American.  Accordingly, we need to debate the issues and work towards a solution and not get bogged down in the typical Washington political spin cycle.

The Social Security Trust Fund is one area of this debate where few politicians are willing to be truthful with the American people.  As I pointed out in a prior article, the Social Security Trust Fund doesn’t exist.  Despite what you hear about trillions of dollars in this so-called trust fund or lockbox, it’s not real money.  It’s nothing more than paper IOU’s from the government to itself. 

Personally, I believe many politicians are too afraid to tell the truth, especially the ones who have been in Washington for years.  I think the American people would be outraged if they fully understood how Congress has spent so much money and put our nation on a path that is not fiscally sustainable.  Thus, it’s far easier for politicians to perpetuate the lie that this huge pile of money exists, rather than admit the truth.

The fight for the future of Social Security is just beginning.  I welcome you to join the discussion and debate, whether on this forum, or somewhere else.  I’m all for vigorous debate of the ideas and issues surrounding Social Security.  I’m less concerned about pontificating my ideas than trying to communicate the facts and truth, so you have the information necessary to make well-informed decisions on this issue.  This is why I keep harping on the non-existent Social Security Trust Fund.  Congress can’t make good decisions based upon a faulty premise that they have $2.5 trillion of money which doesn’t really exist.  I hope you’ll join the discussion.

Tax Tips – Make an IRA Contribution

With the start of a new year, there is little that you can do to change your tax liability for last year.  It’s history now.  About all that is left is preparing your tax return correctly and making sure you don’t miss any deductions that you may be allowed. Like most tax rules, there are a few exceptions. 

One exception is making a contribution to an Individual Retirement Account (IRA).  You have until April 18, 2011 to make a 2010 IRA contribution. 

Be advised that there are many different rules regarding the amount you can contribute and deduct as an IRA contribution. 

The maximum contribution to an IRA for 2010 and 2011 is $5,000.  If you are at least age 50 by the end of the year, you can contribute an additional $1,000.

There are several rules regarding the deductibility of your IRA contribution.

  • Your deduction is limited to the lesser of the contribution limit ($5,000 or 6,000) or the amount of taxable compensation included in your gross income.
  • You can deduct the full amount if you are not an active participant in an employer-sponsored retirement plan (there is a box on your W-2 that will be checked if you are an active participant).
  • If you participate in an employer-sponsored pension plan, your contribution is fully deductible if your Adjusted Gross Income (AGI) is less than $109,000 if you’re a joint filer or $56,000 if you file as a single or head of household.  Your contribution will be limited if your AGI is above these amounts.
  • No deduction is allowed for a tax year in which the taxpayer turns 70½, or in subsequent years.
  • If your spouse doesn’t participate in an employer-sponsored pension plan, you can make a contribution on behalf of your spouse, provided that you have sufficient taxable compensation.

If you participate in an employer-sponsored pension plan, you can still make a nondeductible contribution.  The contribution will not be deductible, but the earnings of the IRA will continue to be tax-deferred, which means the earnings of the IRA will not be taxable until you withdraw the funds.

If you have not yet made a 2010 contribution to an IRA, it’s not too late.  You have until April 18th to make the contribution.  It is one thing that you can do in 2011 to reduce your 2010 tax liability.

A Financial Resolution for 2011

Happy New Year!  New Year’s resolutions often accompany the celebrations and revelry.  A majority of resolutions are related to personal health and fitness, which is understandable following a season dominated by parties and indulgent eating.  Christmas is also the time of year when people spend more money than expected.  The stress of the bills coming due can also lead to financial resolutions. 

January 1 is a great time to lose weight, get in shape and stop smoking.  It’s also a fantastic time to get your financial affairs in order.  What is one financial objective that you would like to achieve for 2011?

I won’t be surprised if your answer involves reducing debt, saving more money or living by a budget.  While these are common financial goals, they are not an exclusive list.  You can also include things like giving more money away, drafting a will, reviewing your insurance policies or buying a new home.

Whatever your objective, here are a few principles that will help to ensure your success.

  • Be Reasonable: If the goal is unreasonable, you’ll quickly become frustrated and discouraged.  It may not be reasonable to get out of debt in one year.  Instead, set a goal to reduce your debt by $__ or pay off certain credit cards.
  • Be Specific:  Vague goals like eating healthier or being a better money manager are hard to evaluate.  Your goals should be quantifiable and measurable.
  • Develop a Plan: Whatever you want to achieve isn’t going to miraculously happen.  Think about the steps needed to accomplish your goal. Your plan should also include a timetable.  Identify the actions and the dates for completion.
  • Write it Down: It’s easy for the urgent things of the day to overtake the important. Writing down your goals and plan will help keep you on track.
  • Measure Progress:  Don’t wait until December 31 to determine success or failure.  Periodically evaluate your advancement.  You may need to adjust your plan in order to still achieve your goals.
  • Be Accountable: Behavioral changes are not easy, and being accountable to someone can be the difference between success and failure.  You must have enough of a relationship to trust the person, be honest with them, and listen to their feedback.  They must also be willing to ask you the tough questions.
  • Reward Yourself: Develop appropriate rewards as you accomplish your interim goals.  It doesn’t have to be big or lavish.  It just needs to be something that motivates you.

I know it’s kind of morbid, but by December 31, 2011 you’ll either be dead or one year older. Assuming that you expect to be alive, would you rather have accomplished your financial goal or not?  If so, then develop a plan and have the resolve to see it through to completion.

If you do… it will truly be a Happy New Year… for the entire year and not just one day.

Saving Social Security

Because Social Security impacts the lives of so many people, reforming the Social Security system is probably going to be one of the greatest fiscal and political challenges facing this generation. 

Nearly one-sixth of the population is receiving benefits, and this percentage will grow as the Baby Boomers move into retirement.   The increasing number of beneficiaries will also make it harder for the government to pay the promised benefits.  Social Security and Medicare already consume over one-third of the federal budget, and cost over $1 trillion each year.  The cost will only increase, and despite what politicians say, there is no Social Security Trust Fund to draw upon.  It’s only a bunch of paper IOU’s from the government to itself.  The excess Social Security taxes have been spent on other programs.

Unless some significant reforms are made, I predict a crisis will occur in the next decade.  Here are a few examples of modifications that will help sustain Social Security.

  • The retirement age should be adjusted every decade.  As the average life expectancy goes up or down, so should the age for receiving benefits.
  • Benefits should be adjusted based upon financial need, especially for disability and survivor benefits.
  • Increase taxes, but only after other benefit reductions have been enacted.  In the 75-year history of Social Security, benefits have not been curtailed, but the tax rate has nearly quadrupled.

I don’t see any way that current beneficiaries can be paid if money is taken out of the system, so complete privatization is off the table.  However, there needs to be a lot more transparency of the amount of taxes you pay on an annual basis, and the calculation of your projected benefits.  If Social Security must benefit everyone paying into the system, then let’s treat it more like a private pension plan. 

Having squandered nearly $2 trillion of excess Social Security taxes that was intended to pay benefits to the Baby Boomers, politicians and the Social Security administrators need to be held more accountable for their management of our money.  Social Security is not a 401(k), but more information can be provided than simply showing how much you have earned each year and the estimate of your future benefits.

Ideally, I think Social Security benefits should transition back to a program that is primarily a benefit for people who have little retirement assets or other income to support themselves.  Stop treating it like a private pension plan, where you pay a lot of money into the system, and expect to receive it back with a rate of return.   There will need to be a grandfathering for those who are currently receiving benefits and those close to retirement, but over time, the benefit structure can change.

Allow Social Security to be part of the safety net for those who are vulnerable and in need.  The benefits may not be great, but that’s okay.  It’s not intended to give you a lavish or comfortable lifestyle.  The purpose is to provide basic sustenance so that you can still live independently.  The cost of such a program should decrease dramatically, which should also reduce the tax burden and free up more money for you and I.  Therefore, the reduction in benefits should also be coupled with greater incentives for people to put more money into their own retirement plans.

 In the past few articles, I have made my case for why Social Security is in trouble, and offered some ideas of how to reform the system.  I hope that I’m wrong and the system won’t face a major crisis within the next few years, but from what I know I don’t see how that’s possible. 

I doubt you have agreed with all of my analysis, opinions and ideas.  Good.  My intention was to provoke your thinking and encourage a discussion.  The problem is enormous and no one has all the answers, especially not me, but I do believe that by working with all different types of people, we can avert a crisis and keep Social Security sound for many years to come.