Compliance September 13, 2023

Low Birth Rates Are Not the Main Threat to Social Security Insolvency

Income inequality is a greater threat, according to the Social Security Administration’s chief actuary.

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Stephen Goss, the chief actuary of the Social Security Administration, argued that economic setbacks and income inequality were the primary drivers of Social Security’s cash flow deficit.

In remarks made at the 2023 Harkin Retirement Security Symposium, hosted by the Harkin Institute, Goss said Social Security is currently projected to become insolvent by 2034. At that time, benefits will be cut to about 80% “of what is necessary to continue paying full benefits.”  

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If left unaddressed, this cliff could dramatically compromise the financial well-being of many retirees and the retirement planning for workers, according to Goss.

The prevailing narrative on Social Security’s precarity is that it is due to declining birth rates, Goss noted. He then explained that 1980s Social Security reforms, which raised the retirement age, reduced benefits for certain workers receiving public sector pensions and made Social Security earnings taxable, actually anticipated declining birth rates. Costs in the main Social Security Old-Age and Survivors Insurance Trust Fund have exceeded the program’s income including interest since 2021, and about “80% of the shortfall comes from unanticipated economic setbacks,” Goss explained, not from declining birth rates.

These setbacks are the combination of the Great Recession and what he called “dispersion of earnings,” or the concentration of total U.S. wage growth among those earning more than the cap on Social Security taxable income, set at $160,200 for 2023.

Goss explained that “average earnings increased more than expected, but real growth was 62% for the top 6% of workers, while only 17% for the lower 94% of workers” since the 1983 amendments to Social Security were made. This “reduced the share of earnings subject to [the Social Security] payroll tax.”

Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare, shared this sentiment later at the conference. Richtman recommended that Congress explore taxing investment income at the same level as wages and/or lifting the cap on wages subject to payroll tax, both of which were also suggested by Goss.

The Social Security Expansion Act, sponsored by Senators Bernie Sanders, I-Vermont, and Elizabeth Warren, D-Massachusetts, in February, would create a 12.4% investment income tax on individuals making more than $200,000 to help fund Social Security. It would gradually lift the cap on wages subject to payroll tax until the cap would be fully removed in 2035.

The bill is the only Social Security reform bill proposed this Congress that would keep Social Security solvent for 75 years, according to Goss’s office. Since the bill raises revenue, it must begin in the House of Representatives. It was referred to the House Committee on Ways and Means on February 14 and has not advanced since.

In Practice September 13, 2023

ADP Exec: Start Auto-Enrollment With New Clients Now

With SECURE 2.0 deadlines pending, plan advisers should also start talking to plan sponsors about providing company matches as post-tax Roth contributions and student loan matches.

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Retirement plan advisers can leverage forthcoming changes instigated by SECURE 2.0 legislation with plan sponsors by focusing on areas such as implementing automatic enrollment for new clients today, as opposed to waiting for the 2025 mandatory deadline, a retirement executive with ADP Inc. said during the 2023 PLANADVISER National Conference in Scottsdale, Arizona.

The SECURE 2.0 Act of 2022, passed last year, requires all new 401(k) and 403(b) plans to include an automatic enrollment feature beginning in 2025. But as advisers engage clients on the plethora of SECURE 2.0-mandated changes that will debut in coming years, implementing auto-enrollment with new clients now may save precious time later, said Ron Ulrich, vice president of product consulting and compliance for ADP Retirement Services.

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“Don’t wait until the last minute,” Ulrich told an audience of plan advisers. “The industry itself is going to have a lot of work to do January 1, 2025, and when you think about teeing up your clients for amendments and changes and notices and all those things that have to happen … think about doing [auto-enrollment] this year and getting it done early.”

As part of an effort to bridge the gap in retirement coverage, new plans will be required to auto-enroll employees at an initial contribution amount between 3% and 10%. Companies in business for less than three years, church plans and governmental plans are excluded from this requirement, Ulrich noted.

Some questions about the mandate remain, and one tricky area may occur when a company has been spun off and merged with another firm in terms of whether the plan is “new” or not, Ulrich said.

“We’re going to want to get some guidance on that from the IRS,” Ulrich said, noting that for a “spin-off considered a continuation of an existing plan, it would make more sense to not be subject [to the mandate].”

Matching as Roth

Ulrich highlighted a host of areas in which advisers can engage clients on the new legislation. They included talking about the mandatory use of Roth for higher earners to make catch-up contributions now due in 2026; setting up emergency savings “sidecars” to retirement plans; and more lenient rules around getting long-term or part-term workers into a plan.

One area he stressed actually came into effect when SECURE 2.0 was passed: allowing an employee to treat employer contributions as post-tax Roth. It is an area with “a lot of potential” for employees, as well as for employers who can use it as a tax advantage in certain cases, Ulrich said.

However, a combination of administrative management and the need for participant decisionmaking will likely mean widespread implementation takes time.

Employers wonder whether employer contributions designated as Roth contributions are taxable to a participant in the year they are made, even if they pertain to the prior plan year, he said, and they wonder whether employer contributions designated as Roth are “considered wages for purposes of FICA taxes or income tax withholding.”

Meanwhile, while Roth designations provide additional options for employees,, it also adds another element of complexity for participants who already have many choices to make.

“Think about it from the participant angle,” Ulrich said. “It’s hard enough to get them to decide between pre-tax or Roth for their own deferrals, and now [a plan sponsors is] adding another element of whether to do pre-tax or Roth for employer contributions.”

Plan advisers can speak with their clients about the potential for Roth options and whether they want to include it in the future. Ulrich noted that many “payroll providers, third-party administrators and recordkeepers” are waiting for further guidance from the IRS on how to implement the Roth match option.

Student Loan Matching

Ulrich said that, while the provision to allow for student loan payment matching from an employer is in its early stages (it may be offered beginning in 2024), it can be a key area of discussion—and concern—for employers. In many cases, he said, plan participants are weighing whether to defer savings to retirement or pay off loans.

“This seems like a great idea,” Ulrich said. “But, ultimately, it’s a personal choice [for the participant] … on whether to save for retirement or pay off student loan debt. It’s a big question, right? And there needs to be a lot of education around this.”

Ulrich said advisers can help plan sponsors consider this option by asking a few questions, including:

  • Do you have a tuition reimbursement program?
  • Do you compete for talent that may benefit from this?
  • Would this feature prevent someone from otherwise contributing to the plan?
  • Do you want to rely on employee attestations or do you want a more formal mechanism for tracking loan payments?

At the moment, Ulrich said, the industry is still waiting for guidance from the IRS on how the student loan program can operate in terms of both the timing of distributions and testing details to ensure they are working properly.

 

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