The recent weeks brought some rollercoaster results with respect to the equity markets. The volatile days may require some of us to seek medication for the resulting motion sickness.
The recent turbulence in the markets likely has made a dent in the retirement accounts we may hold. For some, it may have changed their thinking of the timing of when to retire and what assets they have available to support their retirement. Others have taken an approach of treating it as a bump in the road and nothing to lose sleep over.
Retirement is as inevitable as death and taxes.
When Benjamin Franklin made his famous statement on the certainties in life being death and taxes, he didn’t comment on retirement. Franklin accomplished many things in his life and remained busy even after stepping away from some of his successful business ventures. His counsel and role in the American Revolution and in our country’s early days was critical to its success. He was 77 years old when he concluded the Treaty of Paris with the United Kingdom that ended the American Revolutionary War.
I am thinking I will not be keen to take on international diplomacy when I am 77. Perhaps Franklin’s genius was that he never retired.
Many of us in our working years don’t take the time to reflect and focus on what retirement may mean for our financial situation. The impact of the recent stock market activity has taken its toll on some retirement accounts. For many, 401(k) and IRA accounts hopefully will provide some financial cover given that Social Security benefits may not provide all the income one will need in retirement.
I found myself reflecting on this subject recently. It was tripped by receiving a piece of mail from the Social Security Administration. It was a document relating to my historical earnings, Social Security and Medicare taxes paid, and estimated future Social Security benefits. The SSA used to send such statements annually and then decided to scale back on the frequency.
I took some time to read both the large and fine print in the SSA statement. I found it interesting to see the detail of earnings back to my high school days in the 1970s through 2014. The wage base for Social Security taxes has grown nearly eight times since my first year of earning a wage. The rate of tax also has increased during this period of time. The SSA statement also reported how much I have paid in Social Security taxes over the years.
The SSA statement contained some guidance or warnings. The first is that Social Security benefits are not intended to be the only income earned in retirement. Most of us know this fact.
The SSA statement also makes the specific comment that other savings and retirement accounts will be needed to live comfortably in retirement. Most of us also know this but, unfortunately, some retire with limited savings or retirement accounts. This creates a difficult situation as Social Security retirement benefits (per the SSA) generally replace 40 percent (or less) of annual preretirement earnings.
Another item of precautionary guidance in the SSA information is that, by the year 2033, Social Security tax receipts will only cover 77 percent of benefits payouts on an annual basis. Given the large amount allocated in the federal budget to social security benefits, the 23 percent shortfall is a large amount to be made up by the general fund.
I took a few minutes to search the SSA website to better understand the amounts of the tax receipts and benefits that are paid. Currently, Social Security benefits are approximately the same as the Social Security taxes collected. As recently as 2006, 2007 and 2008, the surplus was running at nearly $200 billion a year. A 23 percent shortfall today is more than $200 billion. Just think what the shortfall will be in 2033.
I also took a few minutes to search the web and locate the latest financial information on the Social Security Trust Fund. This is the fund that 2000 presidential candidate Al Gore wanted to preserve in his “lock box.”
Currently, there is a large fund balance (more than $2.7 trillion as of Sept. 30, 2014) in the Social Security Trust Fund. But recall most of that balance has been lent to the general fund to cover deficits. So, the Trust Fund currently holds more than $2.7 trillion of interest-bearing securities backed by the federal government.
Of course, the interest rate on those securities has been very low, given the low interest rate environment in the U.S. In the near future, the annual receipts of Social Security taxes will be exceeded by the payment of benefits, and the $2.7 trillion fund balance will start to decline as the baby boomers draw their benefits.
I took a couple of items away from reviewing the SSA statement. The estimated retirement benefits I am projected to receive during my golden years will likely not be sufficient to support a retirement lifestyle without the benefit of retirement savings and income from other assets. Unfortunately, many individuals have not set aside enough in retirement savings to make up the gap between expenses and Social Security benefits.
The amount of taxes I have paid during my working years is a significant amount. Projecting out what I may pay in the additional years I work will result in significant payments into the system that I may not necessarily recover during my benefit years. Many will find themselves in a similar situation.
The anticipated gap in tax receipts and benefit payouts in 2033 shows that serious discussion needs to occur to make some significant changes in the level of tax receipts and the amount of benefits. Unfortunately the reality of the situation is that it may require payroll tax increases and some adjustments in benefits.
The test will be whether our elected representatives in Washington act in a meaningful way. Benjamin Franklin also said, “By failing to prepare, you are preparing to fail.” That advice should apply to all for retirement.
Bill Roth is a tax partner with the local office of BDO USA LLC. The views expressed are those of the author and not necessarily of BDO. The comments are general in nature and not to be considered specific tax or accounting advice and cannot be relied upon for the purposes of avoiding penalties. Readers are advised to consult their professional advisers before acting on any items discussed herein.