Secure Your Future
Trustees find Social Security OK, but Medicare has problems
Apr 14, 2005 2:16 AM
The Social Security trustees’ recent report showed little change in the program’s financial condition. It confirms that Social Security is secure today and only faces modest long-term financial challenges, just as this column has been pointing out.
Under the trustees’ projections, using conservative estimates of future economic activity, Social Security has enough money to cover 100 percent of benefits until 2041 and 74 percent after that, even if nothing is done to strengthen the system. That date is one year earlier than last year’s estimate. As we reported, the non-partisan Congressional Budget Office disagrees with this and has calculated that Social Security will have enough money to cover 100 percent of benefits until 2052 and more than 80 percent thereafter.
Many people have difficulty believing the trustees’ projection since it has been reported that a high level Social Security actuary was threatened with firing if he gave an estimate for the cost of the Medicare Part D program that was higher than the Bush Administration’s figure. It is now generally accepted that the administration’s claim that Medicare Part D will cost $400 billion was greatly understated and, in fact, the cost is closer to $800 billion. Some people also believe that the Social Security System figures are suspect.
The independent Social Security trustees emphasized the financial outlook for Medicare was “much worse” than Social Security’s, given soaring health care costs and an underfunded prescription drug benefit (Medicare D). By 2020 Medicare taxes will cover only 79 percent of benefits.
Not surprisingly, the Bush administration trustees seized upon the report to bolster its Social Security proposal to divert payroll taxes into private individual accounts. Yet, even President Bush now acknowledges that individual private accounts will do nothing to insure Social Security’s long-term solvency. In fact, private individual accounts would accelerate insolvency.
One suggestion to help resolve any possible long-term financial problems is to set the total wage base taxed by Social Security to the historic level of 90 percent of nationwide earnings. Currently, the maximum salary that is taxed is $90,000 a year, which represents about 85 percent of nationwide earnings. The increase would not affect the vast majority of our members who would need to work multiple jobs to earn $90,000. This would result in about 6 percent of highly compensated American workers paying more in Social Security taxes.
President Bush stopped paying his 6.2 percent of earnings to Social Security on March 24, while 94 percent of Americans pay their 6.2 percent until Dec. 31.
April investment changes
Both in-service members and retirees, who joined the Teachers’ Retirement System prior to July 27, 1976, have the right to invest their Annuity Savings Fund (ASF) and Increased-Take-Home-Pay (ITHP) accounts in three investment choices. All members have the right to invest their tax-deferred annuity (TDA) funds in the same three choices. In February, we wrote in some detail about these three choices, the Fixed, Variable A, and Variable B funds.
April is the month both in-service and retired members can make changes in their ASF and ITHP investments and for the almost 5,000 retirees who get a TDA check each month in addition to their Qualified Pension Plan (QPP) check to make changes in their TDA. Any changes will take effect in July and will take a year to complete.
The question, of course, is should a person make any changes? Some things to think about in deciding are:
- Can I stand the volatility of the stock market?
- Do I believe the financial experts who state that a stock market investment is the best investment for growth of funds over the long term?
- Are my total assets, those in the retirement system and those outside of the retirement system, well diversified?
Financial experts tell us that there is no way to successfully time the financial markets. Making changes in one’s investment elections should be done for a sound reason, like those above, and not to try to guess the direction of the financial markets.
The accompanying “Investment Performance” chart shows the track record for active accounts as well as deferred TDA accounts. The fixed return for retirees depends on the retirement date and the annuity factor used to calculate the benefit.
To change the way QPP accounts (ASF & ITHP) are invested, the TRS must receive the change application by April 29 (the last business day in April this year).
In-service TDA participants and retirees who have TDA deferred accounts may make investment election changes during the month of May. Changes will begin on July 1.
Investment performance average annual return | |||
| Period Ending February 2005 | |||
| 1 Yr. | 5 Yrs. | 10 Yrs. | |
| Variable Annuity A | 9.30 % | 0.55 % | 10.74 % |
| Variable Annuity B | 3.53 % | 4.59 % | 5.19 % |
| Fixed Dollar Annuity | 8.25 % | 8.25 % | 8.25 % |
TDA flexibility
A March 11 Wall Street Journal headline blares: “Investing Flexibility That Teachers Enjoy May Get ‘F’ From IRS.” What this refers to is that our TDA plan, 403(b), has a feature that the corporate savings plan, 401(k), does not have and the IRS is considering a rules change that would affect us.
The 401(k) plan does not allow corporate employees to transfer their account while they are working. But TDA participants do have the right to transfer their account even while they are still working.
The proposed elimination of outside transfers is part of the Bush administration’s effort to bring retirement savings plans offered to different groups of employees more in line with one another. President Bush has reiterated his intention to consolidate several types of savings plans (403(b), 457, 401(k), etc.) into a single Employer Retirement Savings Account (ERSA) that would look more like today’s 401(k).
Both the AFT, our national affiliate, and the TRS have petitioned the IRS to keep the best features of the TDA, such as the right to transfer TDAs, in any new savings plan design.
The TRS’ TDA is by far the most popular TDA program in the country. More than twice as many TRS members who are eligible participate in our TDA than the number of eligible members in other school districts. About 75 percent of New York City’s eligibles participate compared to 30 percent of eligibles elsewhere. Most retiring members decide that the best place to continue investing the TDA is with TRS.
The UFT will continue to monitor the TDA program in order to keep it as important to the retirement security of our members as it has been.
Speaking of the TDA program, now is a good time for those who are not contributing, or those who wish to increase their contributions, to contact the TRS. The earlier you start, the better off you will be later.
Planning to retire this semester?
July 1 is the most common retirement date of the year. If you are planning to retire at the end of this school year, call the Pension Department at 1-212-598-6866/7 for an appointment for a final pension consultation. You will be given the next available appointment with a consultant at your local borough office.
Do not delay in making your appointment. You may jeopardize getting one if you wait too long. We do not want you to retire without this valuable UFT service.
“On retirement” is compiled and written by Mel Aaronson, Sandra March and Mona Romain, teacher-members of the NYC Teachers’ Retirement Board. For further information on items discussed, call your UFT borough office or the TRS. BRONX: 1-718-379-6200; BROOKLYN: 1-718-852-4900; MANHATTAN: 1-212-598-6800; QUEENS: 1-718-275-4400; STATEN ISLAND: 1-718-605-1400; Teachers’ Retirement System: 1-888-8NYC-TRS (692-877).
