Thursday, October 28, 2010
2011 COLA Limits for Retirement Plans
IRS announced cost-of-living adjustments affecting dollar limitations for retirement-related items. Many limits remain unchanged; see our COLA Table.
Friday, October 15, 2010
Former Commissioner Blasts IRS’s Social Mission
http://www.webcpa.com/news/Former-Commissioner-Blasts-IRS-Social-Mission-55981-1.html
By Roger Russell, Senior Editor, Accounting Today
There may be some jobs tougher than beach master for the initial landing force at Omaha Beach during the Normandy invasion, or Commissioner of Internal Revenue, but off-hand I can’t think of any. Both positions are intense, all-consuming, and attract a great deal of incoming fire. And Mortimer Caplin has done both.
Yet Caplin, the commissioner during the terms of Presidents Kennedy and Johnson, believes the Internal Revenue Service is currently facing a tougher task than it did back when he was commissioner as a result of the additional roles handed it by Congress through the enactment of new social programs.
“I’m a great defender of our tax system, with all its pockmarks,” he said. “What people forget is that a sound tax system is at the heart of a democracy. Without it, we couldn’t maintain our defenses and continue as the leader of the free world.”
However, IRS responsibilities today revolve not only around tax collecting, but also include policing social and economic policies with limited resources. The passage of the health care bill add exponentially to an already packed list of administering homebuyer credits, economic stimulus disbursements, and work pay credits, among others, he noted. You can listen to a podcast of the interview with Caplin here.
“It tends to move the IRS from its basic responsibilities, which is to help raise the revenue of this country,” he said. “IRS personnel are people with accounting, economic and investigative abilities. The new programs require them to carry out other functions for which they’re not qualified.”
For example, he noted, “Even the Earned Income Tax Credit could have been handled by Health and Human Services. What has happened is that there are a tremendous amount of fraud and deficiencies associated with the program. This has produced a great loss of revenue, because the Service has to focus attention on the wrong returns. Rather than looking at high-income returns, with, say, foreign investments, they have to examine the EITC. Their mission has been watered down.”
Moreover, socially oriented programs involve sympathy for the underlying recipient, and the Service isn’t attuned to this, according to Caplin. “HHS could examine the qualifications and send out the checks,” he said. “You would have people handling it that understand the program more.”
And instead of having an annual appropriation, which gets examined yearly, the programs get into the Tax Code but never get out. “Congress has to be more selective,” said Caplin. “They’re leaning more on giving credits than on appropriations.”
And adding credits to the Tax Code is like getting trapped in a roach motel — you can check in, but you can’t check out.
“It’s more difficult to amend the Internal Revenue Code than cut an appropriation,” he observed. “Congress should not be in the habit of just automatically adding another credit to the code.”
Part of the remedy is to make related agencies the main part of the process, suggested Caplin. “There may be a need for the IRS to play backup, but it should not have the full responsibility imposed on it. I’m concerned that it’s distorting the mission, which is to collect the proper amount of tax and encourage voluntary compliance.”
“Our record is better than any other country, and as a result we’re highly respected throughout the world. The American public is entitled to courtesy and fairness and the total integrity of the revenue service, but in recent years taxation has had a bad connotation,” he said. “There has not been enough emphasis on the underlying obligation of Americans to fund our democracy.”
By Roger Russell, Senior Editor, Accounting Today
There may be some jobs tougher than beach master for the initial landing force at Omaha Beach during the Normandy invasion, or Commissioner of Internal Revenue, but off-hand I can’t think of any. Both positions are intense, all-consuming, and attract a great deal of incoming fire. And Mortimer Caplin has done both.
Yet Caplin, the commissioner during the terms of Presidents Kennedy and Johnson, believes the Internal Revenue Service is currently facing a tougher task than it did back when he was commissioner as a result of the additional roles handed it by Congress through the enactment of new social programs.
“I’m a great defender of our tax system, with all its pockmarks,” he said. “What people forget is that a sound tax system is at the heart of a democracy. Without it, we couldn’t maintain our defenses and continue as the leader of the free world.”
However, IRS responsibilities today revolve not only around tax collecting, but also include policing social and economic policies with limited resources. The passage of the health care bill add exponentially to an already packed list of administering homebuyer credits, economic stimulus disbursements, and work pay credits, among others, he noted. You can listen to a podcast of the interview with Caplin here.
“It tends to move the IRS from its basic responsibilities, which is to help raise the revenue of this country,” he said. “IRS personnel are people with accounting, economic and investigative abilities. The new programs require them to carry out other functions for which they’re not qualified.”
For example, he noted, “Even the Earned Income Tax Credit could have been handled by Health and Human Services. What has happened is that there are a tremendous amount of fraud and deficiencies associated with the program. This has produced a great loss of revenue, because the Service has to focus attention on the wrong returns. Rather than looking at high-income returns, with, say, foreign investments, they have to examine the EITC. Their mission has been watered down.”
Moreover, socially oriented programs involve sympathy for the underlying recipient, and the Service isn’t attuned to this, according to Caplin. “HHS could examine the qualifications and send out the checks,” he said. “You would have people handling it that understand the program more.”
And instead of having an annual appropriation, which gets examined yearly, the programs get into the Tax Code but never get out. “Congress has to be more selective,” said Caplin. “They’re leaning more on giving credits than on appropriations.”
And adding credits to the Tax Code is like getting trapped in a roach motel — you can check in, but you can’t check out.
“It’s more difficult to amend the Internal Revenue Code than cut an appropriation,” he observed. “Congress should not be in the habit of just automatically adding another credit to the code.”
Part of the remedy is to make related agencies the main part of the process, suggested Caplin. “There may be a need for the IRS to play backup, but it should not have the full responsibility imposed on it. I’m concerned that it’s distorting the mission, which is to collect the proper amount of tax and encourage voluntary compliance.”
“Our record is better than any other country, and as a result we’re highly respected throughout the world. The American public is entitled to courtesy and fairness and the total integrity of the revenue service, but in recent years taxation has had a bad connotation,” he said. “There has not been enough emphasis on the underlying obligation of Americans to fund our democracy.”
Wednesday, October 13, 2010
Reporting of Health Coverage Costs on W-2 Deferred
http://www.webcpa.com/news/IRS-Defers-Requirement-Reporting-Health-Coverage-Costs-55956-1.html
Washington, D.C. (October 12, 2010)
By WebCPA Staff
The Internal Revenue Service has released a draft Form W-2 for 2011, which employers use to report wages and employee tax withholding.
The IRS also announced Tuesday that it will defer the new requirement for employers to report the cost of coverage under an employer-sponsored group health plan, making that reporting by employers optional in 2011.
The draft Form W-2 includes the codes that employers may use to report the cost of coverage under an employer-sponsored group health plan. The Treasury Department and the IRS have determined that this relief is necessary to provide employers the time they need to make changes to their payroll systems or procedures in preparation for compliance with the new reporting requirement. The IRS will be publishing guidance on the new requirement later this year.
Although reporting the cost of coverage will be optional with respect to 2011, the IRS said it continues to stress that the amounts reportable are not taxable. Included in the Affordable Care Act passed by Congress in March, the new reporting requirement is intended to be informational only, and to provide employees with greater transparency into overall health care costs.
Washington, D.C. (October 12, 2010)
By WebCPA Staff
The Internal Revenue Service has released a draft Form W-2 for 2011, which employers use to report wages and employee tax withholding.
The IRS also announced Tuesday that it will defer the new requirement for employers to report the cost of coverage under an employer-sponsored group health plan, making that reporting by employers optional in 2011.
The draft Form W-2 includes the codes that employers may use to report the cost of coverage under an employer-sponsored group health plan. The Treasury Department and the IRS have determined that this relief is necessary to provide employers the time they need to make changes to their payroll systems or procedures in preparation for compliance with the new reporting requirement. The IRS will be publishing guidance on the new requirement later this year.
Although reporting the cost of coverage will be optional with respect to 2011, the IRS said it continues to stress that the amounts reportable are not taxable. Included in the Affordable Care Act passed by Congress in March, the new reporting requirement is intended to be informational only, and to provide employees with greater transparency into overall health care costs.
Friday, October 8, 2010
When Should You Apply for Social Security?
http://finance.yahoo.com/focus-retirement/article/110909/when-should-you-apply-for-social-security.html
by Barbara Whelehan
Friday, October 8, 2010
Retirement planning is complicated, beginning with the decision about when to begin taking your Social Security benefits. On one hand, if you need the money and don't expect to live into your 80s, it is tempting to take Social Security as early as possible — at age 62 — to benefit from the income stream. On the other hand, you can increase your monthly payment considerably by waiting until age 70. Most people underestimate how long they are going to live.
"I like to frame the Social Security benefits issue discussion with my clients by offering a definition of it as an inflation-protected joint and survivor annuity backed by the U.S. government," says Tim Kober, a Certified Financial Planner with Cedar Financial Advisors in Portland, Ore.
"This provides context for the 'when to claim' question," he says. "The present value of Social Security payments is equal over your expected lifetime, regardless of when you claim it. If, as Clint Eastwood would say, 'You're feeling lucky,' claiming late makes sense."
Differences in Benefits Can be Substantial
As a first step in this retirement planning exercise, find out approximately how much of a monthly benefit you'll get under different scenarios. Use Bankrate's Social Security calculator to get an estimate; actual benefits will depend on your personal work history. For a more accurate idea, the Social Security website offers a secure retirement estimator calculator.
As an example, the table below illustrates the monthly benefit due to a fictitious worker at various ages. If the worker waits until full retirement age, his or her monthly income will be about 63 percent higher than if he or she begins drawing benefits at age 62 -- his or her earliest opportunity. If the worker waits until age 70, his or her monthly income from Social Security will be more than double the amount collected at age 62.
Retirement Savings, Benefits Influence Decision
Social Security benefits are just one piece of the retirement income puzzle. You also need to take into account how much you -- and your spouse, if you're married -- have in retirement savings, whether you have pension benefits and if you have company retirement health benefits. Tally up how much income you expect you'll need, says Michael Kay, CFP, CPA and a financial planner with Financial Focus in Livingston, N.J.
"You have to look at your cash-flow needs," he says. "How important is it to your financial survival or to your cash-flow plans to have that money early in retirement versus several years down the road?
More Complicated for Married Couples
When engaging in retirement planning, married couples have two decisions to make. It makes sense to run the calculators for both spouses, looking at the different scenarios and combinations of income that could result from claiming Social Security benefits at different intervals, says Kay.
"It makes sense to play some 'what if' games to see how it will work on a cash-flow basis and a tax basis," he adds.
In some cases, where, for example, a wife had stayed home with the kids and didn't make as much money as her husband, Social Security benefits may be significantly lower, says Kober. In such cases, a wife can collect the equivalent of half of her husband's benefit if it's higher than the benefit she would receive based on her own earnings record. If the wife begins collecting checks earlier than full retirement age, however, she'll receive less than half of her husband's benefit.
Widowed, Divorced Have Options
Divorced spouses who have not remarried have the option of claiming their own benefits or those based on the record of a former spouse if that would be more beneficial, provided the marriage lasted at least 10 years.
Widows or widowers may claim survivor's benefits even if their spouse dies after they have already started receiving Social Security. Of course, if your deceased spouse's benefit is less than yours, it doesn't make sense to apply for survivor's benefits.
Many financial planners advise men to delay claiming benefits for as long as possible so they can leave a better benefit for their wives, since women generally have a longer life expectancy than men.
According to the Social Security website, these are the typical payouts for survivors:
Working Impacts Benefits Due to Taxes
If you continue to work, or go back to work, while claiming Social Security benefits, your benefits could be reduced, depending on how much money you make. These benefits are not lost forever, but deferred until you reach full retirement age.
"For people who are still working, or who may go back to work after claiming benefits, you need to realize that some or most of your benefit will be reduced, depending on how much money you're making," says Kay.
Here's how it works, according to the Social Security Administration:
In addition, keep in mind that if your income exceeds a certain threshold, your Social Security benefits can be taxed.
by Barbara Whelehan
Friday, October 8, 2010
Retirement planning is complicated, beginning with the decision about when to begin taking your Social Security benefits. On one hand, if you need the money and don't expect to live into your 80s, it is tempting to take Social Security as early as possible — at age 62 — to benefit from the income stream. On the other hand, you can increase your monthly payment considerably by waiting until age 70. Most people underestimate how long they are going to live.
"I like to frame the Social Security benefits issue discussion with my clients by offering a definition of it as an inflation-protected joint and survivor annuity backed by the U.S. government," says Tim Kober, a Certified Financial Planner with Cedar Financial Advisors in Portland, Ore.
"This provides context for the 'when to claim' question," he says. "The present value of Social Security payments is equal over your expected lifetime, regardless of when you claim it. If, as Clint Eastwood would say, 'You're feeling lucky,' claiming late makes sense."
Differences in Benefits Can be Substantial
As a first step in this retirement planning exercise, find out approximately how much of a monthly benefit you'll get under different scenarios. Use Bankrate's Social Security calculator to get an estimate; actual benefits will depend on your personal work history. For a more accurate idea, the Social Security website offers a secure retirement estimator calculator.
As an example, the table below illustrates the monthly benefit due to a fictitious worker at various ages. If the worker waits until full retirement age, his or her monthly income will be about 63 percent higher than if he or she begins drawing benefits at age 62 -- his or her earliest opportunity. If the worker waits until age 70, his or her monthly income from Social Security will be more than double the amount collected at age 62.
| Age | Monthly benefit |
| 62 | $1,100 |
| 67 full retirement age) | $1,791 |
| 70 | $2,369 |
Retirement Savings, Benefits Influence Decision
Social Security benefits are just one piece of the retirement income puzzle. You also need to take into account how much you -- and your spouse, if you're married -- have in retirement savings, whether you have pension benefits and if you have company retirement health benefits. Tally up how much income you expect you'll need, says Michael Kay, CFP, CPA and a financial planner with Financial Focus in Livingston, N.J.
"You have to look at your cash-flow needs," he says. "How important is it to your financial survival or to your cash-flow plans to have that money early in retirement versus several years down the road?
More Complicated for Married Couples
When engaging in retirement planning, married couples have two decisions to make. It makes sense to run the calculators for both spouses, looking at the different scenarios and combinations of income that could result from claiming Social Security benefits at different intervals, says Kay.
"It makes sense to play some 'what if' games to see how it will work on a cash-flow basis and a tax basis," he adds.
In some cases, where, for example, a wife had stayed home with the kids and didn't make as much money as her husband, Social Security benefits may be significantly lower, says Kober. In such cases, a wife can collect the equivalent of half of her husband's benefit if it's higher than the benefit she would receive based on her own earnings record. If the wife begins collecting checks earlier than full retirement age, however, she'll receive less than half of her husband's benefit.
Widowed, Divorced Have Options
Divorced spouses who have not remarried have the option of claiming their own benefits or those based on the record of a former spouse if that would be more beneficial, provided the marriage lasted at least 10 years.
Widows or widowers may claim survivor's benefits even if their spouse dies after they have already started receiving Social Security. Of course, if your deceased spouse's benefit is less than yours, it doesn't make sense to apply for survivor's benefits.
Many financial planners advise men to delay claiming benefits for as long as possible so they can leave a better benefit for their wives, since women generally have a longer life expectancy than men.
According to the Social Security website, these are the typical payouts for survivors:
- A widow or widower, at full retirement age or older, generally receives 100 percent of the worker's basic benefit amount;
- A widow or widower, age 60 or older, but under full retirement age, receives about 71-99 percent of the worker's basic benefit amount; or
- A widow or widower, any age, with a child younger than age 16, receives 75 percent of the worker's benefit amount.
Working Impacts Benefits Due to Taxes
If you continue to work, or go back to work, while claiming Social Security benefits, your benefits could be reduced, depending on how much money you make. These benefits are not lost forever, but deferred until you reach full retirement age.
"For people who are still working, or who may go back to work after claiming benefits, you need to realize that some or most of your benefit will be reduced, depending on how much money you're making," says Kay.
Here's how it works, according to the Social Security Administration:
- If you start receiving benefits before your normal or full retirement age, which depends on when you were born, your monthly benefit is reduced by $1 for each $2 you earn above a certain amount ($14,160 in 2010).
- If you start getting benefits in the year that you reach your full retirement age, your monthly benefit will be reduced by $1 for every $3 you earn above a certain amount ($37,680 in 2010).
- If you wait to collect benefits until after you reach your full retirement age, you can continue to receive your benefits without reduction no matter how much you earn.
In addition, keep in mind that if your income exceeds a certain threshold, your Social Security benefits can be taxed.
Thursday, October 7, 2010
Delays to Tax Tables May Dent Paychecks
http://online.wsj.com/article/SB10001424052748704689804575535861229293800.html?mod=dist_smartbrief
By LAURA SAUNDERS
Lack of congressional action on 2011 income taxes may force the Treasury Department to make unprecedented moves to prevent U.S. workers from seeing large tax increases in their January paychecks.
The issue: 2011 tax-withholding tables. Treasury officials usually release the tables, which determine the take-home pay of millions of wage-earners, by mid-November because it takes payroll processors weeks to adjust their systems before Jan. 1.
But congressional leaders recently postponed voting on taxes until after the election and lawmakers don't reconvene until Nov. 15. The Senate is scheduled to take up several nontax issues when it returns and is expected to leave for Thanksgiving soon after, possibly pushing a vote on taxes into December.
"Things get very dicey after the first of December" because of employers' need to know the 2011 rates, said Michael Graetz of Columbia University Law School, a former Treasury official.
Lawmakers' recent track record on dealing with tax matters doesn't inspire confidence that they will act with dispatch. Congress has yet to resolve the estate tax, which expired at the end of last year and is set to snap back to high rates come January. Nor has it tackled the alternative minimum tax for 2010, a levy that is set to hit 32 million taxpayers this year, compared with five million last year.
Some Capitol Hill tax staffers have suggested that the Treasury could set 2011 withholding at current levels for joint filers earning less than $250,000 ($200,000 for single filers), on the assumption that Congress seems likely to enact this change. Others have suggested that if Congress doesn't act in time, Treasury officials might consider a one- or two-month grace period in which it maintains current tables until Congress passes tax legislation.
Treasury officials declined to discuss what they will do if lawmakers don't come to a quick decision.
"The president and Secretary [Timothy] Geithner are confident Congress will vote to pass middle-class tax relief before the end of the year," but Treasury "will maintain flexibility on the release of the withholding tables for 2011," said a spokeswoman.
Any Treasury move to extend the status quo involves risks: If lawmakers don't follow through, taxpayers could wind up owing big tax bills at the end of the year.
And such moves would be a radical departure from past practices, said Dennis Danilewicz, a recent president of the American Payroll Association who has done payroll work for three decades.
"I have never seen withholding tables based on assumptions about the law," he said.
Treasury officials' most obvious option is the least attractive. If they publish tables based on expiration of the Bush tax cuts, which occurs Jan. 1, millions of low- and middle-income taxpayers who have paid little or no income taxes for a decade would likely see increases in January. Prof. Graetz estimates that higher withholding could take up to $10 billion a month out workers' pockets due to higher tax rates alone. Other benefits also are expiring.
A childless couple earning $40,000, for example, could see their monthly take home pay shrink by about $100, according to the nonpartisan Tax Policy Center. If they had three children, they might face a further cut of $125 a month, said Scott Mezistrano, an official with the American Payroll Association. (See table.)
If paychecks get smaller, even temporarily, taxpayer reaction is likely to be intense.
"The amount withheld from employee paychecks is one of the most politically sensitive issues faced by Treasury, Congress and the Internal Revenue Service," said former IRS Commissioner Lawrence Gibbs, now an attorney with Miller & Chevalier in Washington. He led the agency during an earlier withholding fracas, when taxpayers received smaller-than-expected refunds after the 1986 tax reform.
More recently, in 2009, confusion over withholding for the Making Work Pay tax credit angered taxpayers because many wound up underwithheld.
Payroll officials are "very concerned" about next year's withholding, said Mr. Danilewicz, head of payroll at New York University's Langone Medical Center, which has 15,000 employees. "It takes large employers three to four weeks to process and test these changes, and the government needs time before that to determine and publish them."
He adds that large firms often run payrolls a week or two ahead of time, further pressuring the process.
A spokeswoman for Paychex Inc., which handles payroll for about 8 million employees of more than 500,000 small and midsize firms, said it takes two weeks to update systems properly.
A spokeswoman for Intuit Inc., which provides payroll programs to smaller firms, says it takes "fewer than 30 days" to incorporate withholding changes.
Payroll processor Automatic Data Processing Inc. declined to comment on the issue.
Even if Congress plans to extend current tax rates, it needs to do so quickly to avoid disruptions. There are enough differences between 2010 and 2011 numbers, such as inflation adjustments, that payroll executives still need weeks to update and test their systems.
"We need to get it right," Mr. Danilewicz said. "Withholding is a sensitive subject, especially in a down economy when people live paycheck to paycheck."
By LAURA SAUNDERS
Lack of congressional action on 2011 income taxes may force the Treasury Department to make unprecedented moves to prevent U.S. workers from seeing large tax increases in their January paychecks.
The issue: 2011 tax-withholding tables. Treasury officials usually release the tables, which determine the take-home pay of millions of wage-earners, by mid-November because it takes payroll processors weeks to adjust their systems before Jan. 1.
But congressional leaders recently postponed voting on taxes until after the election and lawmakers don't reconvene until Nov. 15. The Senate is scheduled to take up several nontax issues when it returns and is expected to leave for Thanksgiving soon after, possibly pushing a vote on taxes into December.
"Things get very dicey after the first of December" because of employers' need to know the 2011 rates, said Michael Graetz of Columbia University Law School, a former Treasury official.
Lawmakers' recent track record on dealing with tax matters doesn't inspire confidence that they will act with dispatch. Congress has yet to resolve the estate tax, which expired at the end of last year and is set to snap back to high rates come January. Nor has it tackled the alternative minimum tax for 2010, a levy that is set to hit 32 million taxpayers this year, compared with five million last year.
Some Capitol Hill tax staffers have suggested that the Treasury could set 2011 withholding at current levels for joint filers earning less than $250,000 ($200,000 for single filers), on the assumption that Congress seems likely to enact this change. Others have suggested that if Congress doesn't act in time, Treasury officials might consider a one- or two-month grace period in which it maintains current tables until Congress passes tax legislation.
Treasury officials declined to discuss what they will do if lawmakers don't come to a quick decision.
"The president and Secretary [Timothy] Geithner are confident Congress will vote to pass middle-class tax relief before the end of the year," but Treasury "will maintain flexibility on the release of the withholding tables for 2011," said a spokeswoman.
Any Treasury move to extend the status quo involves risks: If lawmakers don't follow through, taxpayers could wind up owing big tax bills at the end of the year.
And such moves would be a radical departure from past practices, said Dennis Danilewicz, a recent president of the American Payroll Association who has done payroll work for three decades.
"I have never seen withholding tables based on assumptions about the law," he said.
Treasury officials' most obvious option is the least attractive. If they publish tables based on expiration of the Bush tax cuts, which occurs Jan. 1, millions of low- and middle-income taxpayers who have paid little or no income taxes for a decade would likely see increases in January. Prof. Graetz estimates that higher withholding could take up to $10 billion a month out workers' pockets due to higher tax rates alone. Other benefits also are expiring.
A childless couple earning $40,000, for example, could see their monthly take home pay shrink by about $100, according to the nonpartisan Tax Policy Center. If they had three children, they might face a further cut of $125 a month, said Scott Mezistrano, an official with the American Payroll Association. (See table.)
If paychecks get smaller, even temporarily, taxpayer reaction is likely to be intense.
"The amount withheld from employee paychecks is one of the most politically sensitive issues faced by Treasury, Congress and the Internal Revenue Service," said former IRS Commissioner Lawrence Gibbs, now an attorney with Miller & Chevalier in Washington. He led the agency during an earlier withholding fracas, when taxpayers received smaller-than-expected refunds after the 1986 tax reform.
More recently, in 2009, confusion over withholding for the Making Work Pay tax credit angered taxpayers because many wound up underwithheld.
Payroll officials are "very concerned" about next year's withholding, said Mr. Danilewicz, head of payroll at New York University's Langone Medical Center, which has 15,000 employees. "It takes large employers three to four weeks to process and test these changes, and the government needs time before that to determine and publish them."
He adds that large firms often run payrolls a week or two ahead of time, further pressuring the process.
A spokeswoman for Paychex Inc., which handles payroll for about 8 million employees of more than 500,000 small and midsize firms, said it takes two weeks to update systems properly.
A spokeswoman for Intuit Inc., which provides payroll programs to smaller firms, says it takes "fewer than 30 days" to incorporate withholding changes.
Payroll processor Automatic Data Processing Inc. declined to comment on the issue.
Even if Congress plans to extend current tax rates, it needs to do so quickly to avoid disruptions. There are enough differences between 2010 and 2011 numbers, such as inflation adjustments, that payroll executives still need weeks to update and test their systems.
"We need to get it right," Mr. Danilewicz said. "Withholding is a sensitive subject, especially in a down economy when people live paycheck to paycheck."
Tuesday, October 5, 2010
Social Security: No 2011 increase expected
http://money.cnn.com/2010/10/05/news/economy/Social_Security_cost_of_living_adjustment/index.htm
By Jeanne Sahadi, senior writer October 5, 2010: 1:10 PM ET
NEW YORK (CNNMoney.com) -- Chances are high that for the second year in a row Social Security beneficiaries will see no increase in their benefit checks.
The official word won't come until mid-October when the Social Security Administration announces whether there will be a cost-of-living adjustment (COLA) for 2011. But those who've crunched the numbers say there just hasn't been enough inflation to justify a bump in benefits.
The last time there was an inflation adjustment was in 2009: Social Security beneficiaries got a higher-than-normal 5.8% increase because of a temporary spike in energy prices in the third quarter of 2008.
Soon after, however, energy prices plummeted. Then the bottom fell out of the economy and by the third quarter of 2009 overall price levels had fallen 2.1% from the same period a year earlier. That meant no increase in 2010 Social Security benefit checks.
This year, there has been some inflation, but prices still are lower than they were in the third quarter of 2008 -- and that's the quarter that counts. By law, the Social Security Administration is required to track inflation using the most recent third quarter that led to an adjustment. So the 2011 decision will be based on the change in inflation between the third quarter of 2008 and the third quarter of 2010. (See 'What deflation -- prices are rising!')
"[There has been] an increase [in prices] relative to 2009, but it's still below the 2008 level, so no COLA again," said Donald Marron, a former director of the Congressional Budget Office.
The CBO in August said it expects beneficiaries will not receive a COLA in 2011, and will receive only a 0.4% increase for 2012.
If the CBO is right, that would mean a monthly Social Security retirement check of $1,170 -- the average among current retirees as of June -- would be the same next year, and rise by about 5 bucks in 2012. (See 'Why I took Social Security early')
More recently, the finance and economics blog Calculated Risk looked at the COLA formula and came to the same conclusion for 2011. But it also noted that even though retirees may go two years without an increase, "those receiving benefits are still ahead because of the huge increase [they got in 2009]."
There's a bit of bright news for high-income earners still working for the Man: If there is no COLA for 2011, that also means there would be no increase in the amount of earnings subject to the Social Security tax, which is currently assessed on the first $106,800 of a person's wages.
Even if the inflation math is correct, the idea of another year without a pay hike isn't likely to be popular with the nearly 58 million people who receive Social Security retirement, disability or supplemental income benefits, particularly those who may face higher Medicare premiums.
Last year, it wasn't popular news either. There was a failed push to offer $250 payments to Social Security recipients to compensate for the lack of a COLA and to serve as economic stimulus. Such a move would have cost roughly $14 billion.
But critics of the extra payments pointed out that Social Security benefits are intended to maintain purchasing power -- which by the inflation measures used they have. And, they noted, benefits don't decline when prices decline, which happened in 2009.
- CNNMoney.com senior writer Chris Isidore contributed to this report
By Jeanne Sahadi, senior writer October 5, 2010: 1:10 PM ET
NEW YORK (CNNMoney.com) -- Chances are high that for the second year in a row Social Security beneficiaries will see no increase in their benefit checks.
The official word won't come until mid-October when the Social Security Administration announces whether there will be a cost-of-living adjustment (COLA) for 2011. But those who've crunched the numbers say there just hasn't been enough inflation to justify a bump in benefits.
The last time there was an inflation adjustment was in 2009: Social Security beneficiaries got a higher-than-normal 5.8% increase because of a temporary spike in energy prices in the third quarter of 2008.
Soon after, however, energy prices plummeted. Then the bottom fell out of the economy and by the third quarter of 2009 overall price levels had fallen 2.1% from the same period a year earlier. That meant no increase in 2010 Social Security benefit checks.
This year, there has been some inflation, but prices still are lower than they were in the third quarter of 2008 -- and that's the quarter that counts. By law, the Social Security Administration is required to track inflation using the most recent third quarter that led to an adjustment. So the 2011 decision will be based on the change in inflation between the third quarter of 2008 and the third quarter of 2010. (See 'What deflation -- prices are rising!')
"[There has been] an increase [in prices] relative to 2009, but it's still below the 2008 level, so no COLA again," said Donald Marron, a former director of the Congressional Budget Office.
The CBO in August said it expects beneficiaries will not receive a COLA in 2011, and will receive only a 0.4% increase for 2012.
If the CBO is right, that would mean a monthly Social Security retirement check of $1,170 -- the average among current retirees as of June -- would be the same next year, and rise by about 5 bucks in 2012. (See 'Why I took Social Security early')
More recently, the finance and economics blog Calculated Risk looked at the COLA formula and came to the same conclusion for 2011. But it also noted that even though retirees may go two years without an increase, "those receiving benefits are still ahead because of the huge increase [they got in 2009]."
There's a bit of bright news for high-income earners still working for the Man: If there is no COLA for 2011, that also means there would be no increase in the amount of earnings subject to the Social Security tax, which is currently assessed on the first $106,800 of a person's wages.
Even if the inflation math is correct, the idea of another year without a pay hike isn't likely to be popular with the nearly 58 million people who receive Social Security retirement, disability or supplemental income benefits, particularly those who may face higher Medicare premiums.
Last year, it wasn't popular news either. There was a failed push to offer $250 payments to Social Security recipients to compensate for the lack of a COLA and to serve as economic stimulus. Such a move would have cost roughly $14 billion.
But critics of the extra payments pointed out that Social Security benefits are intended to maintain purchasing power -- which by the inflation measures used they have. And, they noted, benefits don't decline when prices decline, which happened in 2009.
- CNNMoney.com senior writer Chris Isidore contributed to this report
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