Benefits July 28, 2014

No Change to Social Security Depletion Date

July 28, 2014 (PLANSPONSOR.com) – The Social Security Board of Trustees reports the combined asset reserves of the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) Trust Funds are projected to become depleted in 2033.
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This is unchanged from the last two years, with 77% of benefits still payable at that time. The DI Trust Fund will become depleted in 2016, also unchanged from last year’s estimate, with 81% of benefits still payable.

The combined trust fund reserves are still growing and will continue to do so through 2019. Beginning with 2020, the cost of the program is projected to exceed income. The projected actuarial deficit over the 75-year long-range period is 2.88% of taxable payroll—0.16 percentage point larger than in last year’s report.

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“The projected depletion dates of the Social Security Trust Funds have not changed, and three-fourths of benefits would still be payable after depletion. But the fact remains that Congress can ensure the long-term solvency of this vital program by taking action,” says Carolyn W. Colvin, Acting Commissioner of Social Security. “The Disability Insurance Trust Fund’s projected depletion year remains 2016, and legislative action is needed as soon as possible to address this financial imbalance.”

Other highlights of the Trustees Report include:

  • Income including interest to the combined OASDI Trust Funds amounted to $855 billion in 2013. ($726 billion in net contributions, $21 billion from taxation of benefits, $103 billion in interest, and $5 billion in reimbursements from the General Fund of the Treasury—almost exclusively resulting from the 2012 payroll tax legislation);
  • Total expenditures from the combined OASDI Trust Funds amounted to $823 billion in 2013;
  • Non-interest income fell below program costs in 2010 for the first time since 1983. Program costs are projected to exceed non-interest income throughout the remainder of the 75-year period;
  • The asset reserves of the combined OASDI Trust Funds increased by $32 billion in 2013 to a total of $2.76 trillion;
  • During 2013, an estimated 163 million people had earnings covered by Social Security and paid payroll taxes;
  • Social Security paid benefits of $812 billion in calendar year 2013. There were about 58 million beneficiaries at the end of the calendar year;
  • The cost of $6.2 billion to administer the program in 2013 was a very low 0.7% of total expenditures; and
  • The combined Trust Fund asset reserves earned interest at an effective annual rate of 3.8% in 2013.

The 2014 Trustees Report is available at www.socialsecurity.gov/OACT/TR/2014/.

Benefits July 28, 2014

HSAs Offer a Good Boost to Retirement Savings

July 28, 2014 (PLANSPONSOR.com) – Using health savings accounts (HSAs) can boost savings for medical expenses in retirement as well as save employees tax dollars now.
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Research from the Employee Benefit Research Institute (EBRI) shows an individual who saves in an HSA for 10 years could accumulate between $53,000 and $68,000, depending on the rate of return realized and on the contribution rates assumed, while those saving for 20 years could wind up with between $118,000 and $193,000. After saving for 40 years, an individual could have $360,000 if the realized rate of return were 2.5%, $600,000 if it were 5%, and nearly $1.1 million if it were 7.5%.

EBRI made a number of assumptions in its research, including that the maximum contribution was made each year; individuals eligible to make catch-up contributions (those ages 55 and older) made those contributions; and there were no distributions made from the HSA to pay for any health care claims or services received while covered by the HSA-eligible plan, among other things.

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In order to maximize the savings in an HSA to cover health care expenses in retirement, HSA owners would need to pay the medical expenses they incur prior to retirement on an after-tax basis using money not contributed to their HSA. EBRI concedes that many individuals may not have the means to both save in an HSA and pay their out-of-pocket health care expenses. Also, HSA balances may not be sufficient to pay all medical expenses in retirement even if maximum contributions were made. In prior work, EBRI has found a married couple, both age 55 in 2008, would need a combined $325,000 to $654,000 by the time they reach age 65 in 2018 to have enough money to cover their premiums and out-of-pocket expenses 50% of the time, and would need $511,000 to $1 million to have a 90% chance of having enough savings.

EBRI pointed out HSAs provide account owners a triple tax advantage: Contributions reduce taxable income; earnings on the account build up tax free; and distributions for qualified expenses from the account are not subject to taxation. Its research shows an individual earning 2.5% on his or her HSA would save about $36,000 in federal income tax over 40 years if he or she were in the 10% tax bracket, while an individual in the 39.6% tax bracket would save about $143,000. By comparison, an individual earning 7.5% on his or her HSA would save about $106,000 in federal income tax over 40 years if in the 10% tax bracket, and about $420,000 if in the 39.6% bracket.

HSAs also provide potential savings from payroll tax (Social Security and Medicare paid under the Federal Insurance Contributions Act (FICA)), and any direct employer contributions to an HSA are also excluded from the employer’s payroll tax base.

The full report, “Lifetime Accumulations and Tax Savings from HSA Contributions,” is published in the July EBRI Notes, online at www.ebri.org.

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