Social Security, Medicare, and You

Each year the Trustees of the Social Security and Medicare trust funds provide a report on the financial status of these programs—current and projected. The information below is from a summary of the 2016 Annual Reports www.ssa.gov, Office of the Chief Actuary, 2016 Trustees Report-Jacob J. Lew, Sec. of the Treasury and Managing Trustee, and Thomas E. Perez, Sec. of Labor, and Trustee).
 
In general, both programs (as currently scheduled) are facing funding shortfalls. Social Security and Medicare accounted for about 41% of Federal program spending in 2015. Both programs will have cost growth in excess of Gross Domestic Product (GDP) growth through the mid-2030s. This shortfall is due to: 1) growth in the aging population (baby boomers beginning retirement—about 10,000 per day) eligible for benefits, and 2) fewer employees entering the labor market (because of lower birth rates) to fund the programs. Medicare expenditures per beneficiary are also projected to increase above the growth in per capita GDP over the same time period.
 
Social Security
 
Social Security has two separate trust funds to provide benefits for two programs: 1) Old Age and Survivors Insurance (OASI), and 2) Disability Insurance (DI). Although the trust funds are technically separate, the Trustees typically combine the funds to provide the actuarial financial status for the total plan. Funding for plan benefits comes from combined payroll taxes from both employees and employers. Current benefit payments to plan recipients are paid from these payroll taxes and any excess payment is scheduled to be added to a “trust fund” to provide for future benefit payments. In the 2016 report, the Trustees project that combined fund asset reserves will exceed projected benefit costs through 2028; benefit payments will then begin to dip into trust fund reserves. Trustees currently project that those trust funds will be depleted in 2034. When the funds are depleted, projected tax income is sufficient to pay about three-quarters of projected benefits through 2090.
 
Medicare
 
The Medicare program also has two trust funds: 1) Hospital Insurance Trust Fund (Part A), and 2) Supplementary Medical Insurance Trust Fund (Parts B and D). Part A of Medicare helps pay for the cost of hospitalization, home health care following hospital stays, skilled nursing care, and hospice care for the elderly and disabled. Part B of Medicare helps pay for the costs of physicians, outpatient hospitalization, and home health services. Part D subsidizes the cost of drug coverage.
 
The Trustees project that the Part A trust fund will be depleted in 2028 (two years sooner than projections in the 2015 report). Part A expenditures have been exceeding income received since 2008; at fund depletion in 2028, revenues are projected to pay 87% of Part A costs. Parts B and D are adequately funded because current law allows funding from both general revenues and beneficiary premiums. However, because of an aging population and increasing health care costs, the cost of Parts B and D are expected to grow from 2.1% of GDP in 2015 to about 3.5% of GDP in 2037.  Trustee projections in the 2016 report are that total Medicare expenditures will grow from about 3.6% of GDP in 2015 to 5.6% of GDP in 2040. The costs are projected to increase to about 6.0% of GDP in 2090.
 
The Bottom Line
 
Social Security and Medicare benefits are a key component in long range planning for most individuals. The 2016 Trustee Report indicates that changes in these plans will be forthcoming. Please contact us at Paragon Financial Advisors to see how your future plans may be affected.  Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

Old Age and Retirement

The World Economic Forum produced a white paper entitled “We’ll Live to 100-How Can We Afford It?” (Lead Author, Rachel Wheeler, Project Lead, May 2017) The basic premise of this white paper was the status of world-wide retirement plans and potential problems and reforms necessary to address those problems. The disclaimer in the white paper is that “…views in this White Paper … do not necessarily represent the views of the World Economic Forum or its Members…” In addition, these papers “… describe research in progress by the author(s) and are published to elicit comments and further debate.” The report is “… part of the Forum’s Retirement Investment Systems Reform project that has brought together pension experts to assess opportunities for reforms that can be adopted to improve the likelihood of our retirement systems adequately and sustainably supporting future generations.” The paper, in its entirety, can be accessed at  http://www3.weforum.org/docs/WEF_White_Paper_We_Will_Live_to_100.pdf  Our discussion in this posting is done without comment or endorsement of the contents of the white paper. However, in light of the positions taken by some candidates in the 2016 US Presidential election, it behooves us to look at some propositions being espoused in the academic community and conditions that exist in the international community.

Old Age

Life expectancy is increasing. For individuals born in 1947, the median life expectancy is 85 years; for those born in 2007, it is age 103. The increased life expectancy leads to a longer working career. If retirement age remains unchanged and current birth rates continue, the global dependency ratio (the ratio of the workforce to retirees) will decrease from 8:1 today to 4:1 by 2050. The position taken in the Forum’s white paper “…focuses on the sustainability and affordability of our current retirement systems.” Retirement “…system needs to be affordable for today’s workers and sustainable for future generations…"

Challenges to Retirement Systems

 

The primary causes of retirement systems problems, according to white paper authors, are increasing life expectancy and a declining birth rate. The authors identify five additional factors affecting global retirement systems:

1. Lack of access to pensions- Many workers (especially the self-employed) don’t have access to pension plans or savings products. Over 50% of global workers work in the informal or unorganized sectors of the economy. Forty-eight percent (48%) of retirement age people don’t receive a pension.
2. Low investment returns- Long term investment returns over the last 10 years have been significantly lower than historical averages. Equities have returned 3-5% below averages; bonds, 1-3% below. These lower returns have exacerbated pension plan shortfalls and reduced individual retirement savings balances.
3. Personal responsibility for pension plan management- Defined benefit plans have been decreasing in number while the number of defined contribution plans has been increasing. Defined contribution plans now account for over 50% of global retirement assets. The investment risk has thus been shifted from the employer to the employee.
4. Low levels of financial literacy- While investment risk has been shifted to the individual, the ability of those individuals to make sound investment decisions appears to be lacking. Most people are not able to correctly answer questions on basic financial concepts.
5. Inadequate savings- Individual savings in all countries are well below the 10-15% level necessary to fund a reasonable retirement income.

The Retirement Savings Gap

 

Historically, retirement income has come from three sources: 1) governmental sources (Social Security, etc.), 2) employer pension plans, and 3) individual savings. According to the authors of the white paper, the world-wide retirement savings gap in 2015 is estimated to be approximately $70 trillion with the largest shortfall being in the US. Of that gap, 75% is in the government and public pension obligation, 1% in unfunded corporate pension plans, and 24% in lack of personal savings. This gap is predicated on a 70% income replacement in retirement.

 

The Findings

 

The authors of the white paper espoused three key areas to address overall financial security:

• Provide a “safety net” pension for all persons
• Improve access to effective, efficient retirement plans
• Increase personal savings initiatives

The authors of the paper state:

 

“Poverty protection for the elderly should be the minimum requirement for any government pension system. It should be the responsibility of the government to provide a pension income for all citizens that acts at a “safety net” and prevents those who miss out on other forms of pension provision from dropping below the poverty line.”

 

“In countries where there are challenges to establish employer-based or individual pension schemes, introducing universal pension benefits may be the only way to significantly reduce poverty among the elderly.”

 

“Technology can make saving automatic by deducting contributions directly from employees’ pay before it reaches their personal accounts.” “Governments can make it compulsory for all employers to automatically enroll new employees into a retirement savings account and to contribute on their behalf.” (italics added)

 

Principles for Change

 

Authors of the white paper identified four principles that they felt should be addressed in retirement plan provisions.

 

Principle 1: The work force is changing. Occupations that are most sought after today didn’t exist 10 years ago. In addition, about 65% of today’s primary school children will work in jobs that don’t yet exist. The number of workers over age 65 is increasing; it has more than doubled since 1995. The number of employers for whom a person works over his/her career is increasing. That requires “re-tooling” work skills and portability of job benefits.

 

Principle 2: There is a gender imbalance. Retirement balances for women are 30-40% below those for men. Longer periods out of the workforce and lower salaries in general contribute to the lower retirement account balances. In addition, the longer life expectancy of women means those reduced assets need to cover a longer period of time. Unisex life expectancy tables and valuing work performed outside the workplace for retirement benefits could help alleviate this disparity.

 

Principle 3: Shared risks could reduce individual burdens. Collective defined contribution systems (as employed in some countries, such as Canada) could help with the burden on individuals for their retirement savings, account management, life expectancy, etc. Pooled money and risks could be based on “target” benefits. An example of such a plan, as presented by the authors, is shown below.

Defined Benefit Plan	Collective Defined Contribution Plan	Defined Contribution Plan
Pooled assets across all accounts	Pooled assets or notional accounts	Individual accounts
Predominantly employer contributions	Combination employer and individual contributions	Combination employer and individual contributions
Trustees determine investment policy and investments	Trustees determine investment policy and investments	Individual makes investment decisions
Trustees takes investment risk	Investment risk pooled	Individual takes investment risk
Trustees takes longevity risk	Longevity risk pooled	No longevity protection
Guaranteed pension	Target pension, not guaranteed	No target or guaranteed pension

Principle 4: All financial needs should be considered. People who save early for retirement will have much larger retirement savings than those who start later. However, retirement savings may not be a priority for younger employees. Therefore, the authors contend, the full financial picture (assets and debts) should be considered for financial need.

The Bottom Line

When one reads the World Economic Forum white paper and analyzes its recommendations, it is obvious that items presented are significantly different than what we have in the US today. However, as we examine our current public benefit systems (Social Security), it is also obvious that some changes must be made. Prudent financial planning means looking at alternatives and trying to plan for what “might happen.” Visit us at Paragon Financial Advisors to review your individual circumstances. Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

 

           

The Long Goodbye

The associate minister at my church once said he lost his mother twice—once when she no longer recognized him and once when she passed away. His mother suffered from Alzheimer’s disease. According to the Alzheimer’s Association “2015 Alzheimer’s Disease Facts and Figures,” more than 5 million Americans are living with Alzheimer’s disease. It was the fastest growing cause of death by disease diagnosis in the U.S. from 2000 to 2013 (up 71%). Currently no way exists to cure, prevent, or effectively slow the progression of Alzheimer’s and other forms of dementia. In addition, more the 15 million Americans are providing care for an individual suffering from Alzheimer’s or another type of dementia. In 2015, dementia and Alzheimer’s was estimated to cost approximately $226 billion (with about $153 billion of that being borne by Medicare/Medicaid). Planning for this type of disease poses many challenges; we will discuss some of them here.

Warning Signs of Dementia

According to the Alzheimer’s Association, the disease has ten warning signs. These signs do not always indicate Alzheimer’s but may be useful in diagnosing the problem. Every individual will not necessarily have all ten symptoms. These ten signs are as follows:

1. Memory loss that disrupts ordinary life—forgetting dates/events or asking the same questions repeatedly.
2. Difficulty with planning or problem solving—monitoring and paying routine bills.
3. Difficulty in completing routine tasks—driving to a familiar place or repeating common tasks at work.
4. Confusing Time and Places—forgetting where they are and how they got there.
5. Trouble understanding visual images and spatial relationships—the inability to judge distances (a significant problem in driving).
6. Having a problem with words in writing and speaking—not remembering the name of common items.
7. Misplacing items—putting an item in an unusual place (car keys in the refrigerator) and not remembering how they got there.
8. Declining or poor judgement—large, unnecessary purchases or donations to telemarketers.
9. Withdrawing from work/social activities—no longer participating in long standing activities which previously had brought enjoyment.
10. Changes in personality---becoming more easily upset, depressed, or confused.

Stages of Decline

Dementia is a progressive disease. The earlier the identification and diagnosis, the easier to plan effectively.

In the early stage, financial mismanagement is one of the most frequently displayed signs of the disease. The inability to manage a bank account or inability to pay routine bills becomes more obvious. Misplacing items and trouble remembering things becomes more prevalent. Family members may begin to see these signs first; this situation becomes more problematic if they lack direct contact with individual on a routine basis. At this stage, work with the individual to begin preparations. Since dementia will progress, a finite “window of opportunity” exists to establish all planning and legal work necessary to prepare for care.

Consult with medical personnel to confirm a diagnosis. Discuss the implications of the disease on the legal, financial, and caregiving items associated with the disease. Elicit comments/preferences from the individual in these matters. Make sure all estate planning documents are up to date and represent the individual’s wishes. Of critical importance is the appointment of powers of attorney (giving another person the power to act on behalf of the diagnosed family member). Ask your family member to take you along on meetings with doctors, attorneys, tax advisors, and financial advisors.

In the second stage of moderate decline, financial skills deteriorate even further. The family member may become more easily frustrated and begin to withdraw socially. Wandering may begin at this stage, and a caregiver may become necessary. At this stage, the appointed power of attorney should become the manager of the family member’s financial affairs. Being the caregiver for a family member at this stage can be extremely time consuming and stressful. If the caregiver is also a family member, preserving the health of the caregiver is extremely important (see below). An excessively stressed caregiver cannot provide the needed care to an affected person in an efficient manner.

In the final stage or severe decline, the dementia patient will have a difficult time remembering (discussions, events, meetings, etc.). Caregivers may notice mood changes or changes in personality, and the patient may need assistance with the activities of daily living (eating, toileting, etc.). At this stage, institutional care may also become necessary.

Caring for the Caregiver

Alzheimer’s patients have an average lifespan of four to eight years after diagnosis of the disease. However, some individuals may not be diagnosed in a timely manner or may have a physical constitution that extends their lifetimes. Caring for family members with Alzheimer’s takes a toll (both physically and mentally) on the caregiver. The Alzheimer’s Association has prepared a list of ten indications of stress on the caregiver:

1. Denial-Mom/Dad doesn’t have this and things will get better.
2. Anger-at the patient (having to answer the same questions over and over again).
3. Withdrawal-from the activities or social life once enjoyed (“I don’t have time for that.”)
4. Anxiety-about what the future holds for both the patient and caregiver.
5. Depression-an inability to cope with the situation.
6. Physical Exhaustion-being too tired to physically perform daily activities.
7. Lack of Sleep-constantly aware of the pressures to avoid the patient’s needs or wandering.
8. Irritability, Moodiness, etc.-things that can lead to negative actions on behalf of the caregiver.
9. Lack of Concentration-pre-occupation that leads to an inability to complete normal tasks.
10. Health Problems-physical deterioration of the caregiver’s own health.

After all, if the caregiver becomes incapacitated, the problems compound. Available resources can help the caregiver. The Alzheimer’s Association Alzheimer’s and Dementia Caregiver Center (alz.org/care) is a good place to begin; it can help gain  a better understanding of what the caregiver can expect as the disease progresses. A support helpline is also available (Alzheimer’s Association 24/7 Helpline- 800-272-3900).

Unfortunately, we at Paragon Financial Advisors have experience with dementia situations. We have worked with clients and/or family members facing these problems on behalf of a loved one. No easy outcome exists, but proper planning can ease some of the stress. If you should see the need in your family, please call us. We can help with the financial preparations required. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

 

Medicare in 2016

All Social Security recipients are aware there was no cost of living increase in Social Security benefits for 2016. However, some recipients are facing a reduction in their Social Security check. The reason: the Medicare Income Related Monthly Adjustment Amount (IRMAA). The amount individuals pay for their Medicare coverage is a function of their modified adjusted gross income (MAGI) as reported on their tax return to the IRS. Higher income levels mean increased cost for Medicare for the same level of Medicare benefit. If the MAGI plus any tax exempt interest income exceeds $85,000 for an individual or $170,000 for a couple, the cost of Medicare Parts B and D increase. There is an increasing increment paid based on 5 levels of income.

Parts B (Doctors) and D (Drug)

For example, at the highest level, an individual making more than $214,000 ($428,000 for a couple) will pay $389.80 per month instead of the standard $121.80 for Part B benefits. That additional amount is paid by both spouses in the case of a couple receiving Social Security benefits. Those individuals in the highest income bracket would pay an additional $72.90 for their Part D drug benefits. The bottom line: each spouse in a couple receiving Social Security benefits (who are in the maximum tax bracket) will pay an additional $340.90 per month with no increase in benefit.

What to Do?

We will not get into the debate of higher income individuals should have to pay more, even though they have been taxed once on wages subject to the Social Security tax. Our point is that prudent financial management dictates managing one’s affairs to minimize tax payments. To that end, there are some basic things that could be done. By managing MAGI, one can possibly eliminate stepping into a higher Medicare bracket. Type of account (taxable or tax qualified) holding various investments, tax loss harvesting on securities held, and required minimum distributions made directly to a church/qualifying charity from an IRA are some examples of actions available.

We at Paragon Financial Advisors will help our clients evaluate possible courses of action the help reduce Medicare (as well as other tax) costs; however, these actions should be verified with your personal tax preparer or CPA to ensure they are appropriate for your circumstances. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.