Save Our Social Security Act

What a novel idea -- Congressman Reid Ribble (R-WI) who I was completely unfamiliar with previous to today, has introduced into the House of Representatives a bill that incorporates ideas espoused by both parties. That's right, it's somewhat of a compromise bill designed to save our Social Security system by adding some burden to high earners while also increasing retirement ages.

The sad part is that I think that most people will look at this bill and focus on the parts that they, philosophically, don't like rather than emphasizing that it represents an excellent effort at potential bipartisan compromise. I hope I'm wrong.

What's in the bill?

• The Social Security Wage Base, that is the amount subject to the 6.2% OASDI tax that is currently at $118,500, will increase as follows:
• $156,550 in 2017
• $194,600 in 2018
• $232,650 in 2019
• $270,700 in 2020
• $308,750 in 2021
• after 2021, to be determined by the Secretary of the Treasury to capture 90% of all FICA-covered wages
• Change the current 3-band formula for calculating Social Security benefits to a 4-band formula thus allowing that all compensation considered for purposes of Social Security taxes also be considered for Social Security benefits, but not increasing Social Security benefits for the highest earners.
• Beginning in 2022, the Social Security Normal Retirement Age (SSNRA) would again begin to gradually increase. This would have little, if any, effect on people currently close to SSNRA, but would reflect longer work spans and life spans for younger workers. This piece of the bill would be reexamined by actuaries every 10 years to study the effects of mortality improvements.
• Change the basis for calculating the annual COLA for current SS beneficiaries by putting more weight on, for example, food, clothing, and transportation, and by putting relatively lower weight on housing, medical care, and recreation. The intent is to more closely mirror the necessary spending of a senior citizen as compared to that of an average urban wage earner.
• Create a minimum benefit at 125% of the poverty level
• Increase the benefit amount (I can't quite determine how this will work) after a person has been eligible to have been in pay status for 20 years
• Base the SS benefit on 38 years of SS wages rather than 35
• No legislation can be considered that would temporarily lower SS revenue for a year

Is this what I think is the best solution for Social Security? Probably not.

On the other hand, is this the best solution that I have seen that has a chance of passing Congress and being signed into law by the President? In my opinion, it has the best chance since 1983.

Let's see where it goes.

Everything You Should Know About the American Jobs Act

Ever needy for material to blog about, I eagerly awaited President Obama's address to a Joint Session of Congress where he would introduce his American Jobs Act (AJA). I listened carefully.

I did hear about cuts in FICA taxes. I did hear about small business tax credits. I really didn't hear much, though, that is relevant to what we discuss here.

So, I searched the internet. Google couldn't find text of AJA. Bing couldn't find AJA. Yahoo couldn't find AJA. Only Steely Dan could find AJA (if you get that one, you must either be old like me or old at heart).

We are supposed to learn in a week and a half how it is that the President plans to pay for this stimulus (my word, not his). Here are some things to look for (and everything on this list is 100% speculation on my part):

• Reduction in the defined contribution 415 limit to $20,000. That is, workers who can afford to make large 401(k) deferrals will not be able to get much in the way of company contributions.
• Limits on corporate tax deductions for so-called Cadillac health plans for non-union workers. That is, if your employer gives you "too" rich a health benefit, they can't get a tax deduction for all of it.
• Further erosion of the $1 million limit on deductible compensation under Code Section 162(m). As the President seems to believe that "CEOs and CFOs" make too much money, and he can't stop companies from paying that much money, he will seek to limit the tax deductions that they get. My feeling is that if you limit the deduction much more, most companies will just ignore the deductibility issue and pay their executives however they like.
• Means testing of Social Security (and perhaps Medicare) benefits so that those who are better financially prepared for retirement will not receive the full benefits to which they thought they were entitled.
• Some sort of restriction on the tax deductibility of equity compensation.

Ultimately, if the first bullet [above] becomes reality, it may result in joblock. That is, employees currently in the workforce will have difficulty being able to retire and thus will not open up jobs to those not in the workforce. Of course, it's possible that all of my thoughts are incorrect and misguided.

Perhaps Donald Fagan and Walter Becker know.

What Happened to Federal Retirement Policy?

This afternoon, Senator Tom Harkin (D-Iowa) will convene a hearing to determine the role that pensions play in building a strong and vibrant middle class as well as stimulating the economy and fueling job creation. This, not all that long after the National Commission on Fiscal Responsibility and Reform (Debt Commission) proposed that the limitation on contributions on behalf of an employee to defined contribution plans be limited to the lesser of 20% of pay or $20,000. And, finally, to make it a trifecta, the general consensus among politicians who are opening their mouths is that we need to raise the Social Security Normal Retirement Age (SSNRA), cut back on Social Security Cost of Living Adjustments (COLAs), and increase FICA taxes on current workers.

With the Pension Protection Act (PPA) already having done a better job of gutting (rather than protecting) the private pension system than all legislation before it, how will workers ever manage to retire?

Let's look at some facts and some opinions (I'll let you figure out which are which, but I think it will be pretty obvious).

• Americans are living longer -- much longer
• American companies constantly look for ways to legally discharge older workers
• Periods from retirement until death are longer than they have ever been before
• Median savings (outside of qualified retirement plans) among Americans are at modern lows

And, you know what, while it is a commonly held opinion that workers need to work longer (perhaps the same percentage of the period from, say, age 25 to life expectancy that they always have), many companies look for ways to get rid of those older workers. In fact, under the Age Discrimination in Employment Act (ADEA), the protected class consists of people between the ages of 40 and 69. Turn 70, sayonara! From the worker's standpoint, if you always had it in your mind that you were going to retire at age 65 (how could that happen other than that when you started working, you had all kinds of employer-sponsored and government-sponsored plans that specified a retirement age of 65), then it gets tougher and tougher to work at later ages. Your golden years don't seem so golden. 

Oh, yeah, Congress still has the most lucrative retirement plan of all. They don't place the same limits on their plans that they place on yours and mine. They don't get it.

So, the next lovely plan that comes out will probably have some wonderfully constructed name like the Save our Country's Retirement for Employees and Workers who Really Expected The Ideal Retirement to End Most Every Nice Tale. I know -- it doesn't make sense. But, the acronym seems to -- SCREW RETIREMENT.

Getting Ready for the Budget Debate

I can see it coming now. Its magnitude and its long-term effects could dwarf them all -- Lincoln-Douglas, Kennedy-Nixon, Reagan-Mondale, Bentsen-Quayle, Burr-Hamilton (well, that one was really more of a duel). I'm talking about the budget debate of 2011.

The war has started. I'm not sure just what the first shot was. Was it the failure of the 111th Congress to send a budget to the President? Was it the Tea Party forcing the more traditional Republicans to insist on cuts for the remainder of fiscal 2011? Was it Paul Ryan's (R-WI) proposal to cut roughly $6 trillion from the budget over 10 years, not leaving untouched the sacred cows known as Social Security and Medicare? Was it President Obama's proposal to similarly make some significant budget (and tax) changes, perhaps in response to the Ryan proposal?

For purposes of this post, I'm going to focus a bit on the Ryan proposal. As I read it, his proposed budget would make fairly sweeping changes to both Social Security and Medicare. With regard to Social Security, I think I'm safe. That "Fund", and I use the term loosely as it operates as nothing more than a bookkeeping entry is not in as bad shape as its younger sister, so the biggest changes appear to be set up to come in 25 year chunks. As I will be eligible for my unreduced Social Security benefit before 2025, I only need to worry about the program's ability to pay. But, for me, this will almost be found money, as I have assumed for years that I would never see a dime from Social Security (and I still may not, but that is for another day).

Medicare, on the other hand, that "Fund" is about as bankrupt as bankrupt can be. When President (Lyndon, not Andrew) Johnson signed it into law, nobody with a voice that could be heard figured that we would have the changes in health care that have occurred. Double-digit health care inflation wasn't even a nightmare, it just wasn't a possibility. Longevity improvement just wasn't a consideration. And, now look what's happened.

All of those employer-provided retiree medical plans - companies had to start accruing costs for them, and they all but disappeared. It's ok, Medicare is there. Well, for those of us not yet age 55, as I understand the Ryan budget proposal, Medicare may not be there, at least not in its current form. Yes, it needs changes, but like the rest of the people in my age cohort, I've paid a lot of money into that system, and I actually have expected, probably naively, that it would take care of a pretty good portion of my health care costs when I make it to age 65. I am beginning to feel betrayed.

It's not just me, though. For as long as I have been in this business, employer-sponsored retirement programs (including health care) have been designed with the presumption that both Social Security and Medicare will remain largely as they are. In these times of a down economy (yes, on the record, I think the economy is still down), global competition, and mark-to-market accounting fanaticism, companies are not feeling the need to provide better and more costly (to employers) health care benefits.

I'm a fan of what Congressman Ryan is trying to do. He is trying to cut runaway spending. I think it's common sense that if your goesoutas (expenditures) exceed your comeintas (revenues, generally from taxes) that you have to either cut your goesoutas or increase your comeintas or both.

Well, in round figures, the federal debt is about $14 trillion and the GDP is about $15 trillion. My very rough analysis of some graphs that I found online say that the economy is healthiest when debt as a percentage of GDP is in the range of 40% to 55%. Let's take a number in the middle, say 50%, because that makes my math easier. That would imply that we need to cut the debt by $6.5 trillion if the GDP doesn't grow. Frankly, growing at about 3% per year, it's change is not that significant to the equation.

So, let's do some math. The population of the United States is about 310 million. Cutting $6.5 trillion from the debt could be accomplished immediately if each American would be kind enough to contribute about $20,000 to Uncle Sam.

Ain't happening.

Among the people who want tax cuts, they surely don't want to see an increase. And among those who are calling for tax increases, very few are saying that those increases should start with their wallets.

So, Social Security and Medicare may truly need some huge changes. And, these changes will have a significant impact (for all the real grammarians and wordsmiths out there, I know that impact implies a physical collision, and because of that, I rarely use the word impact where affect or effect will suffice, but I feel a physical collision here) on benefit plan design and retirement income planning. And, after all, those are among the topics of this blog.

So, we'll try to keep you updated here, and occasionally attempt to both humor and educate the readership with some analysis, but in the meantime, to paraphrase President Reagan, I'm not sure that I am happy that Congressman Ryan wants to make my youth an issue in his campaign.

Senators to Introduce Legislation to Cut Spending, Raise Revenue

Senator John Warner (D-VA) and Senator Saxby Chambliss (R-GA) have announced that they will introduce a spending reduction and revenue raising bill in the Senate. Yes, you read that correctly -- that's one Democrat and one Republican.

While, the bill has not yet been introduced, the Warner camp has leaked enough information that we have some pretty good hints about what to look for. Here is a summary.

• Change the tax treatment for mortgage interest from a tax deduction to a tax credit and place a cap on it that would make it apply to only the first $500,000 of a loan. Further, it would eliminate any deductions related to homes other than principal residences.
• Lower marginal federal income tax rates, presumably to the levels recommended by the Debt Commission (see my earlier post on the topic here: http://johnhlowell.blogspot.com/2010/11/debt-commission-retirement-plans-and.html )
• Gradually increase the Social Security Normal (full) Retirement Age to 68 by 2050 (people born in 1982) and to 69 by 2075 (people born in 2006). 
• Increase the OASDI (Old Age, Survivors and Disability Insurance) portion of Social Security tax on high earners. Presumably this means that the 6.2% OASDI rate will be extended from the Social Security Wage Base to infinity (and beyond for you Buzz Lightyear fans).
• Reduce Medicare benefits.
• Reduce defense spending.

There are a lot of sacred cows in there. This is going to be controversial. But, according to comments from Warner's office, everything needs to be in one bill for an up or down vote. He says that individuals shouldn't pick and choose, but should either say that this bill is right or wrong. As of now, there appear to be roughly 10 co-sponsors for this bill from both sides of the aisle. We'll keep you apprised as we learn more and are able to untangle what this means for compensation and benefits issues.

GOP-Obama Compromise Would Lower 2011 Employee Portion of FICA Taxes

Have you been hiding under a rock? If you are reading this, I'm guessing not. In that case, you know that (surprise, surprise) the President and Congressional Republicans reached a compromise yesterday.

The well-publicized items were that:

• The so-called Bush tax cuts (enacted through EGTRRA in 2001) will become permanent for incomes less than $200,000 (for singles) and $250,000 (for married)
• For higher earners, those cuts will delay their scheduled sunset until the end of 2012 presumably setting up more Congressional warfare after the 2012 elections
• Renew jobless benefits for the long-term unemployed

Not publicized, but perhaps more important to many were these:

• A 2% of pay reduction in the employee-provided portion of FICA (Social Security) taxes for 2011 only. What this means is that workers will get an effective pay increase for 2011 of 2% on the first $106,800 of pay. This may not seem like much, but more US workers than not pay more in FICA taxes than they do in federal income taxes
• Estates would be taxed at a 35% rate for amounts in excess of $5 million

Beware! This is not law yet. House Democrats will need to support this in order to pass it in December. And, whether an associated bill comes to the Senate floor during the lame-duck session of this Congress or during the next Congress, a meaningful number of Senate Democrats would have to support passage in order to make it law.

We'll continue to cover this here.

Debt Commission, Retirement Plans and Retirement Policy

This February, President Obama created National Commission on Fiscal Responsibility and Reform, sometimes referred to in the press as the Debt Commission or Debt Panel. The Commission has made the headlines recently with its draft recommendations ( http://big.assets.huffingtonpost.com/CoChairDraft.pdf ).

What does this mean for your retirement? In this article, we looked at how it might affect both Social Security and qualified (pension, 401(k), etc.) retirement plans. How will it affect your retirement?

Learn more here: http://www.aon.com/attachments/debt_comm_oct2010.pdf