Social Security Trust Funding Gains Year to 2035

Social Security board’s annual report says strong economy, job growth boost funding; calls on Congress to act for the future.

A strong job market has helped buy the Social Security Trust Funds another year, according to the annual report from the Social Security Board of Trustees report released Monday. The combined asset reserves of the Old-Age and Survivors Insurance and Disability Insurance Trust Funds are forecast to have enough revenue to pay all benefits and associated administrative costs until 2035, one year more than projected last year.

Without Congressional action, the funds are projected to be depleted in 2035, with income sufficient to cover 83% of scheduled benefits, according to the board of trustees’ report.

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The news of strengthened funding in part on the robust job market and wage growth comes as the Federal Reserve considers whether these relatively strong indicators, in addition to persistently strong inflation, should keep it from planned interest rate cuts this year. Decisions around Social Security have also been the subject of campaigning ahead of the November elections, with outcomes for the presidency and Congress potentially having an impact on the benefit.

According to this year’s report, the combined trust funds dropped by $41 billion in 2023 to a total of $2.788 trillion. Meanwhile, the total annual cost of the program is projected to exceed total annual income in 2024 and remain higher going forward; total costs began to be higher than total income in 2021.

“Congress can and should take action to extend the financial health of the Trust Fund into the foreseeable future, just as it did in the past on a bipartisan basis,” Martin O’Malley, Commissioner of Social Security, said in a statement. “Eliminating the shortfall will bring peace of mind to Social Security’s 70 million-plus beneficiaries, the 180 million workers and their families who contribute to Social Security, and the entire nation.”

Social Security paid total benefits of $1.379 trillion in 2023 to about 67 million beneficiaries, with total expenditures of $1.392 trillion. Meanwhile, an estimated 183 million people had earnings covered by Social Security and paid payroll taxes, leading to total income, including interest, of $1.351 trillion in the year.

The combined trust fund asset reserves earned interest at an effective annual rate of 2.4 percent in 2023.

The projected actuarial deficit over the 75-year long-range period is 3.50% of taxable payroll, according to the report. That is lower than the 3.61% projected last year.

The board did note that, when taken separately, the OASI trust fund alone would be depleted in 2033. It also found that the ratio of reserves as compared to annual cost is projected to drop from 188% at the beginning of 2024 to just 84% at the start of 2030, staying below 100% for the next 10 years. Because of that ratio drop below 100%, the trust funds will fail the board’s test of short-range financial adequacy.

The Social Security board has space for six members, with four currently serving due to their position in the Federal Government: Janet Yellen, Secretary of the Treasury and managing trustee; Martin O’Malley, commissioner of Social Security; Xavier Becerra, Secretary of Health and Human Services; and Julie Su, acting Secretary of Labor.

Two public trustee positions are currently vacant.

IRS Releases Explain SECURE 2.0-Related Tax Form Changes

Participation incentives and Roth employer contributions will have to be reported as gross income.

The Internal Revenue Service has issued guidance and a FAQ for retirement plan sponsors and participants concerning tax form filings affected by the SECURE 2.0 Act of 2022. The releases clarify how W-2 forms are affected and how major disaster distributions are to be documented.

De Minimis Incentives

On May 2, the IRS issued a release explaining how SECURE 2.0 provisions could alter W-2 reporting. The release explained that de minimis incentives, such as cash or gift cards, offered by plans to encourage eligible participants to enroll in a plan are taxable income and are subject to ordinary tax withholding.

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The IRS stated this once before in a “grab bag” release in December. That release stated that the incentive amount cannot exceed $250 and cannot be paid out of plan assets. It also stated that incentives can be staggered to encourage continued participation, such as a $100 gift card for enrollment and another $100 for continued participation after one year.

Roth Employer Contributions

Section 604 of SECURE 2.0 also permits plans to allow participants to receive employer contributions to a Roth source. According to the release, “these contributions are not subject to withholding for federal income tax, Social Security or Medicare tax.”

However, since they are post-tax contributions, the participant will still owe income tax on the contribution. The IRS previously stated in January that “designated Roth matching contribution or designated Roth nonelective contribution is includible in an individual’s gross income for the taxable year in which the contribution is allocated to the individual’s account.” This income would be reported on Form 1099-R I boxes 1 and 2a.

Roth SIMPLE and SEP Plans

Section 601 of SECURE 2.0 permits SIMPLE and SEP IRA plans to allow participants to contribute to a Roth source. The employee contributions “are subject to federal income tax withholding, the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA).”

However, “employer contributions to a Roth SEP or Roth SIMPLE IRA are not subject to withholding for federal income tax, FICA or FUTA. These contributions should be reported on Form 1099-R for the year in which they’re allocated to the individual’s account.”

Major Disaster Distributions

The IRS also issued a FAQ on major disaster distributions on May 3. Though the FAQ is not formal guidance, the release said that “a taxpayer who reasonably and in good faith relies on these FAQs will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax.”

Section 331 of SECURE 2.0 permits participants to withdraw up to $22,000 from a plan or IRA without an early-withdrawal penalty to cover costs related to a major disaster and allows the participant to report the distribution as gross income over three years.

The FAQ explains that in order to be qualified for the penalty-free withdrawal, a participant must have their primary residence in an area that is designated as a federal major disaster area and have suffered economic damage related to that disaster. The participant would have 180 days to take the distribution from the later of: the day a major disaster is declared; the first day of the disaster; or in the case of disasters that occurred prior to the passing of SECURE 2.0, December 29, 2022. In the case of previous disasters, participants can withdraw for disasters that occurred as early as January 26, 2021.

The IRS previously stated in the grab bag notice that plans are not required to permit participants to take disaster distributions. In that case, participants may still take qualified distributions and can report it as such on Form 8915-F on their own taxes to avoid the penalty and receive three years to pay the resulting income tax liability in equal increments. The FAQ reiterated this same policy.

Plans are permitted to rely on a participant’s self-certification that they are qualified for a disaster distribution.

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