IRS Retirement Plans Explored

U.S. employers have successfully adopted “employee self-directed” retirement plans designs.
Formal retirement plans are underutilized by U.S. workers and personal savings are inadequate to fund retirement needs.
Adopt expanded ERISA rules that require employees to participate in retirement savings plans.

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IRS Compliance & Governmental Retirement Plans Explored

Contact: Timothy Speiss

November 09, 2011

Timothy P. Speiss
Partner-in-Charge, Personal Wealth AdvisorsIRS Compliance & Governmental Retirement Plans Explored 

Timothy Speiss, partner-in-charge of EisnerAmper’s Personal Wealth Advisory practice, was a guest presenter at a webinar speaking on the topic: Internal Revenue Service Compliance & Governmental Retirement Plans Explored. Tim’s presentation covered a variety of themes: U.S. Demographics, pointing out, for instance, that today’s total population is 309 million with 40 million people aged 65 and older (13% of population); Plan Participants’ Savings Accumulations; Plan Savings Accumulations and Funding Cash Needs through Life Expectancy; and Social Security. Tim made a number of observations regarding the state of retirement planning in this country including:

  • For many reasons, U.S. employers have successfully adopted “employee self-directed” retirement plans designs
  • Formal retirement plans are underutilized (and underfunded) by U.S. workers; personal savings are inadequate to fund retirement needs
  • We should adopt expanded ERISA rules that require employees to participate in retirement savings plans, and financial literacy education programs
  • We should adopt required financial literacy education in U.S. high schools, colleges, universities
  • Social Security long term solvency models and assumptions deserve close Congressional oversight;  formalize the Balanced Budget Payroll Tax Rate , monitor compliance with The Anti-deficiency Act. Expand worker participation in Social Securit

IRS Compliance & Governmental Retirement Plans Explored: Plan Participant Perspectives

U.S. Demographics 

Plan Participants' Savings Accumulations 

Plan Savings Accumulations and Funding Cash Needs Through Life Expectancy 

Social Security 

Observations and Additional Considerations 

U.S. Demographics
  • Today's total population is 309 million
  • And, 40 million people are age 65 and older (13% of population)
  • Today's age 65, male/female blended life expectancy, is 18.5 years; median income is $32,200 (present value pre-tax is $500,000 at 2%)
  • In 2030, persons 65 and older are forecasted to comprise 20% of the population (71 million people)
  • The age 55 to 64 population will be fastest growing segment of the population to 2018

Global Demographics   

  • In the world today, there are more people aged 65 and older than the entire populations of Russia, Japan, France, Germany and Australia—combined
  • U.S. - In 2030, persons 65 and older are forecasted to comprise 20% of the population
  • Globally - By 2030, 55 countries are expected to see their 65 and older populations at least 20 percent of their total. Read more: http://transgenerational.org/aging/demographics.htm#ixzz1dE3t9fNT

Global Income Dispersion  

  • The Gini Coefficient (Corrado Gini, 1912) is usually defined as mathematically based on the Lorenz curve, which plots the proportion of the total income of the population (y axis) that is cumulatively earned by the bottom x% of the population
  • A measure of the inequality of income or wealth; the dispersion of education, mobility, compensation, public program spending.
  • Applied in the study of inequalities in disciplines as diverse as sociology, economics, health science, ecology, chemistry, engineering and agriculture
  • Zero is perfect equality, 100 is perfect inequality (one person has all the wealth)
    • 1960: Mexico 55, France 50, U.S. 35, Bulgaria 22,
    • 2000: Brazil 60, Mexico 50, U.S. and China 43, UK 38, Bulgaria 25
    • Current Global Index (2011): Between 56 and 66
     

U.S. Census Bureau, Social Security Administration  

Household Savings Rates: 1992 to 2011 

  • Defined: Household income less consumption
  • As a percentage of household income (2007/2008)
    • France 11.6%
    • Germany 11.2%
    • Japan 3.8% (11.5% in 1996)
    • Canada 3.8 (9.4% in 1995)
    • United States – 2.7% (5.7 in 1995)
     
  • Observation: U.S. has one of the lowest savings rates

OECD Economic Outlook  

  • Personal Disposable Income (Per Capita): 2001 to 2009 In International Dollars Using IMF Purchasing Power Parity Rates, Less Personal Taxes (All countries cited are in the top 30 rankings)
    • U.S. – 19,800 (#1)
    • Switzerland – 17,300
    • Germany – 17,000U.K. - 16,700
    • France – 14,500Japan – 12,100
    • Israel – 9,100
    • Russia – 6,400
    • Mexico – 3,100
    • China – 3,000
    • Philippines – 2,600 (# 30)
     
  • Observation: U.S. has the highest PDI

The World Salaries Group 

U.S. Demographics – Who Participates in Retirement Plans? 

  • State and local government workers – 84% offered participation in a traditional pension plan (2010), compared to only 20% in private sector
  • 63% of companies with more than 500 employees offer pension participation, compared to only 10% of companies with under 50 employees
  • 60% of employees nearing retirement age participate in 401k-type plans
  • Self-employed workers have the ability to fund defined benefit and defined contribution plans
  • However, considering the above the median household headed by a person aged 60 to 62 with a 401(k) plan has less than 25% of what is needed to maintain a standard of living in retirement

Employee Benefits Research Institute, Center for Retirement Research at Boston College, Other Sources 

Plan Participants' Savings Accumulations
  • For persons age 65 to 75 (2009), average retirement savings was $56,000 (at age 65, $437,400 is the calculated present value plan savings target assuming median income of $32,200 (pre-tax, $27,900 after tax))
  • Average monthly Social Security benefits paid (per beneficiary) was $1,082 in September 2011; there were 55 million beneficiaries
  • In 2008/2009, 75% of persons attaining age 62 elected to receive Social Security benefits. 25% elected to delay Social Security benefits (presumably for reasons including not being ready to retire, or a preference to keep working)
    • For persons age 55 to 64 (2009), average retirement savings was $70,000 ($94,000 is the future plan savings value at age 65, and at age 65 an additional $343,400 is the calculated present value target needed to fund $437,400 and to replace a median annual income of $27,900 for 19 years)
     

Plan Participants' 2009 Savings Accumulations and 2005 Median Earnings  

  • For persons age 45 to 54 - average retirement savings was $44,000; median earnings were $28,000
    • Age 65 total targeted retirement savings: current age is 50 - $360,000 (including the future value of $44,000 estimated to be $68,500 at age 65). Additional savings needed is $291,000 or $15,700 per annum (at 3% growth) to age 65
     
  • For persons age 35 to 44 - average retirement savings was $22,400; median earnings were $27,000
    • Age 65 targeted retirement savings: current age is 40 - $322,000 (including the future value of $22,400 estimated to be $47,000 at age 65). Additional savings needed is $275,000 or $14,800 per annum (at 3% growth) to age 65
     
  • Observation: Annual savings rates of 55% to 56% of current income?
  • For persons under age 35 – average retirement savings was $6,300
  • Age 70 targeted retirement savings: current age is 30 – the future value of $6,300 is $21,000 at age 70; assuming $27,000 (2011 dollars) is an annual retirement income rate ($88,000 at age 70), and life expectancy is 30 years post retirement, total savings needed at age 70 is $1.724 million or $22,600 per annum (at 3% growth) through age 70
  • Observations:
    • Education and professional experience increases earnings
    • Social Security benefits are excluded from the cited examples
    • What is a realistic annual savings rate ?
    • Inflation and rate of return assumptions ?
    • Longer life expectancies, additional comments
     

U.S. Census Bureau, Social Security Administration, Employee Benefits Research Institute  

Plan Savings Accumulations and Funding Cash Needs Through Life Expectancy: Modest Plan Balance
  • Assume a person age 65 (2011) has retirement savings of $56,000. If retiring at age 65, an additional $344,400 would be needed to fund (replace) a median income of $32,200 (after-tax) at age 65 to age 84. Social Security Income (SSI) models:
  • $32,200 earned compensation; $1,000 in interest income; joint filers age 65; standard deduction; Federal and New York income, and OASDI tax, of $4,300
  • $32,200 less $4,300 is $27,900 or $2,325 per month (after –tax cash flow)
    • Retirement at age 65 results in a $1,400 monthly SSI benefit (pre-tax)
    • Defer retirement to 67, $1,600 per month (pre-tax)
      • Defer retirement to age 70 (maximum), $2,000 per month (pre-tax)
      • 2% pre-tax yield on $56,000 is $100 per month
        • $2,325 less $2,100 is a $225 per month deficit 
Social Security- 2011
  • Workers covered by Social Security pay a 12.4% payroll tax on their first $106,800 in annual wages. The maximum taxable amount is increased whenever there is a Social Security cost-of-living adjustment (COLA)
  • The payroll tax is split 50/50 between workers and employers
  • Social Security beneficiaries with income above $25,000 (single) or $32,000 (couple) pay income taxes on as much as 50% of their benefits; these income thresholds are not adjusted for inflation
  • Separately, Medicare benefits are provided to retirees
  • Self-employed persons pay the tax as well

Social Security – Statistical Observations 

  • 2008 aggregate payroll tax contributions were $689 billion; outlays were $618 billion (21% of total U.S. government outlays); year end 2010 Trust Fund balance was $2.429 billion
  • Forecasted SSA surplus and deficit models. U.S. GDP and budget matters
  • Accurate SSA forecasting is critical; mortality is most important data assumption, followed by fertility rates, legal (immigration), economics (compensation, unemployment, disability, interest rates, inflation rates), other factors. Forecasted estimates:
    • The 2030 "Aged Dependency Ratio" is 41 elderly persons (over 65) per 100 persons age 20 to 64
    • Biological considerations include smoking and obesity, a net cost and gain to SSA funding
    • Annual SSA program net income (taxes collected less benefits paid) will decline starting in 2026 (a negative $ 200 billion, rounded)
    • Annual SSA program costs (as a percent of taxable payrolls) will rise from 11% in 2006 to 18% in 2030
    • SSA program costs as a percentage of GDP will rise to 6.7%, program income as a percent of GDP will be 5%
     

Soneji and King "Statistical Security for Social Security" February 17, 2011 

  • There are four Social Security Trust Funds (SSI, Disability, Health Insurance/ Medicare, and Supplemental Medical) ; all had positive balances at year end 2010
  • Net SSI Funding as a percent of GDP: 3% in 1970, 4% in 2000, 5% in 2010, 6% in 2030 and flat to 2080
  • Health Insurance and Supplemental Medical payroll taxes generally equal benefit outlays
    • General government revenues are forecasted to fund net benefit costs
    • SSI Trust balances are scheduled to be exhausted in 2038, Disability in 2018, and aggregate Medical in 2024
     

2011 Social Security Board of Trustees Report,  

Social Security – Remedies to Potential Deficits  

  • The Antideficiency Act (31 U.S.C. Sec. 1341) prohibits government spending in excess of available funds (i.e. accumulated trust funds and current payroll tax receipts)
  • The 'Balanced Budget Payroll Tax Rate" is the tax rate required to offset annual benefit payments, with the revenue generated from payroll taxes and interest from the trust fund (Lee and Tuljapurkar, 1997)
    • A hypothetical budget provision, never has been imposed to address future estimated SSA deficits
    • The 2011 tax rate is 12.4%; by 2031 would increase to 16% (an increase of $38 billion annually)
    • Workers and employers split the payroll tax; hence a shared burden
    • Self-employed persons pay 100% of the tax, with a tax deduction for one-half of the tax paid, and a 7% (rounded) income exclusion
     

Soneji and King "Statistical Security for Social Security" February 17, 2011 

Observations and Additional Considerations
  1. For many reasons, U.S. employers have successfully adopted "employee self-directed" retirement plans designs
  2. Formal retirement plans are underutilized (and underfunded) by U.S. workers; personal savings are inadequate to fund retirement needs
  3. Adopt expanded ERISA rules that require employees to participate in retirement savings plans, and financial literacy education programs
  4. Adopt required financial literacy education in U.S. high schools, colleges, universities
  5. Social Security long term solvency models and assumptions deserve close Congressional oversight; formalize the Balanced Budget Payroll Tax Rate , monitor compliance with The Antideficiency Act. Expand worker participation in Social Security
  6. Additional observations

EisnerAmper LLP is an independent member firm of PKF International Limited 

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