|List By Date
|Health Care and Entitlements
Faced With Social Security Shortcomings, Workers Who Fail To Plan May Be Celebrating
A Few More Labor Days Than Theyd Like To, Says CCH
(RIVERWOODS, ILL., August 28, 2001) With several recent government
reports indicating that the Social Security trust fund will be insolvent before many
taxpayers reach retirement, workers may want to take this Labor Day to review their
retirement savings plans so that theyre not forced to celebrate too many more of
these holidays in the future, according to CCH INCORPORATED (CCH), a leading provider of
tax, pension and business law information.
"Its just beginning to hit home for many workers that the changing
demographic of the American population is going to take a bite out of their Social
Security benefits unless Congress increases the retirement age, and/or provides additional
revenue by changing the way in which Social Security is funded," said Avram Sacks, an
attorney and Social Security analyst for CCH.
"When Social Security was established in the 1930s, there were more than five
workers for each retiree. Today, with the baby boomers entering retirement and retirees
living longer, there are only 3.4 workers for each retiree and by 2025, there will only be
2.3 workers," said Sacks.
The expected effect of fewer workers to pay into the Social Security fund, and more
retirees to support, is that the trust fund will begin paying out more in benefits by 2016
than it receives in taxes, and that it will be insolvent by 2038.
Politicians on both sides are busy looking at possible options to shore up the Social
Security trust fund. And, a special panel created by President Bush is examining the
controversial issue of allowing workers to set aside a small percentage of their payroll
taxes for personal investment accounts. But workers should not expect a comprehensive
solution soon, according to CCH.
"The message should be clear to those who want to truly enjoy retirement: Social
Security wont cut it," said Nicholas Kaster, an attorney and senior IRA and
pension analyst for CCH. "You have to take a proactive approach to investing to
accumulate the reserves youll need to see you through retirement."
Among the retirement planning steps employees may want to mull over as they head into
the long weekend include:
- Start Investing Early and Invest Regularly. Just like with voting, the adage early
and often applies to saving for retirement. Studies indicate that more than one-third of
employees have not yet planned for retirement. But the longer you put it off, the harder
it will be to obtain your investment objectives.
- Invest Appropriately to Your Age. Many studies also have indicated that workers are
allocating too much of their retirement savings to low-interest investment vehicles.
"If youre young and have a long investment horizon, investing more
aggressively in equities has historically shown a significantly higher rate of
return," said Kaster.
- Contribute the Maximum to your Employer-Sponsored Retirement Account. This is a
relatively "painless" method of investing because the amount is deducted
automatically from your paycheck. For 2001, the maximum contributions are $10,500 for
401(k) and 403(b) plans. Under the Economic Growth and Tax Relief Reconciliation Act of
2001, passed earlier this year, maximum contribution levels will rise to $15,000 by 2006,
allowing employees to shelter even more pre-tax income for retirement.
- Take Advantage of "Catch-Up" Contribution Rules. Also under the new tax
Act, those nearing retirement age 50 and over will be allowed to make
"catch-up" contributions of up to an additional $1,000 next year to 401(k),
403(b) and 457 plans, and up to $5,000 by 2006. Participants in SIMPLE plans will be
allowed catch-up contributions of up to $500 next year and $2,500 by 2006. Catch-up
contributions for IRAs also will allow these taxpayers to contribute up to an additional
$500 next year and $1,000 as of 2006 to their accounts.
"If youre an older worker and you have not been investing to the extent you
should, this offers you the opportunity to get your retirement planning back on
track," said Kaster. "And, even if you have been saving diligently, if you have
additional income you can put toward retirement now, youll be able to take advantage
of the catch-up rules to further fund your retirement."
- Evaluate the Benefits of Roth IRA Accounts. If your company does not offer a
retirement plan or youve contributed the maximum to your employers plan and
still have income you want to set aside for retirement, Roth IRAs may be a useful
investment vehicle for you. Once you meet the withdrawal requirements for Roth IRAs,
distributions dont count as income, so you can still qualify for itemized deductions
that are limited for people with higher incomes. Also, if youre receiving Social
Security benefits, your Roth IRA distributions wont push your income up to make
those benefits more taxable.
- Dont Take Possession of a 401(k) When You Switch Jobs. To defer current
taxation, distributions from qualified retirement plans, including 401(k) and 403(b)
plans, must be rolled over within 60 days. To avoid the 20-percent withholding, make sure
your distributions are directly rolled over from your employer to an IRA or another qualified
- Encourage Your Employer to Offer a Retirement Plan. If youre not covered by a
retirement plan, you may want to speak to your employer. A nonrefundable tax credit for
small businesses is included in the new tax Act to encourage small businesses to establish
retirement plans, and those that do so will receive a credit of up to 50 percent of the
startup costs incurred setting up a plan, up to $500 for the first three years of plan.
"Employees of small businesses are often not covered by retirement plans, but as
workers increasingly realize that Social Security is not something they can rely on, the
value of employee-sponsored retirement plans will continue to increase, meaning small
businesses competing for the best workers are going to have to take a closer look at the
importance of offering retirement plans," said Kaster.
About CCH INCORPORATED
CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has
served four generations of business professionals and their clients. The company produces
more than 700 electronic and print products for the tax, legal, securities, insurance,
human resources, health care and small business markets. CCH is a wholly owned subsidiary
of Wolters Kluwer North America. The CCH web site can be accessed at www.cch.com. The CCH Human Resources Group web site can be
accessed at http://hr.cch.com.
-- ### --