This year’s cost of living adjustment (COLA) for Social Security recipients is expected to be 2.5 percent.[1] Last year’s increase was over 8 percent. This is overshadowed by the Social Security Administration’s board of trustees report in May that “the trust funds for the Old-Age and Survivors Insurance and Disability Insurance programs are on course to be depleted (2035) and will only be able to pay out 83% of scheduled benefits.”[2] Potential and current beneficiaries of the program don’t seem to be panicking. The assumption seems to be that the elected politicians will not have the stomach to reduce benefits or stop annual increases. The economists who believe cutting taxes increases federal revenue assert that we can grow our way out of the problem with the right fiscal policies. Comparing percentages to gross domestic product (GDP), “it is hard to find a sustained reduction in government receipts attributable to tax cuts”[3] from the 1980s to now.
Other economists believe that controlling “means-tested social-welfare spending,” which is three times larger than the net spending on Social Security and Medicare combined, is the solution and the only adjustment that needs to be made is to require “all able-bodied Americans to work as a condition for receiving welfare.”[4] Honesty should require that there is no “Trust Fund.” Social Security and Medicare withholdings and taxes go into the federal government’s General Fund and are spent every year by the government. No savings plan. Every Fall, the trustees send out a statement to working Americans showing what they have paid in and what their expected benefit would be at various times in retirement. It is easy to calculate how long it takes you to get your own money back, before the government chips in, at least from an accounting, if not from a real-life, perspective.
Tax-Sheltered Accounts
A recent list of “tax-sheltered account options” highlighted one that is not ordinarily on such a list: “taxable accounts.”[5] The author of the Wall Street Journal article first discusses traditional IRAs and 401(k)s that require “years of withdrawals…that are highly taxed” and describes Roth accounts as “the gold standard,” which, however, assumes that a future Congress will not change the rules retroactively—at best, not a gold-plated guarantee. The author then describes the benefits of taxable accounts. “Investments are made with after-tax dollars, but typically there is no tax on growth until an asset is sold. Long-term capital gains on sales qualify for rates of 0%, 15% or 20%, much lower than rates up to 37% on (ordinary) income. Another major break is the ‘step up,’ an exemption for unrealized capital gains on assets held at death. This can be a massive benefit to heirs of long-held assets.”
Long-term planning around Social Security and all the options for tax-sheltered accounts can be very worthwhile. If you would like an overview of some of the key tax provisions you need to be aware of, please visit our website to download our 2024-2025 Tax Planning Guide (https://www.woodstockcorp.com) The guide offers a variety of strategies for minimizing your taxes in the current tax environment. Working with your tax advisor, you can use the guide to identify the best ones for your particular situation.
If you or any other advisors have questions about the issues raised here, please contact your investment manager or one of us.
William H. Darling, CPA – Chairman & CEO
Jeanne M. FitzGerald, CPA – Tax Manager
1 Anne Tergesen, “Social Security Raise to Shrink Next Year,” WSJ, 9/12/24, p. A2.
2 Nathan Place, “What Should Advisors Tell Clients about Social Security?”, Financial Planning, July/Aug 2024, p. 22.
3 John Carlson, “Tax Cuts Won’t Reduce Government Receipts,” Letters to the Editor, WSJ, 9/21-22/24, p. A12.
4 Phill Gramm and Jody Arrington, “Welfare Is What Is Eating the Budget”, WSJ, 9/12/24, p. A15.
5 Laura Saunders, “Five Tax Breaks that Will Give Your Portfolio a Boost,” WSJ, 8/17-18/24, p. B4.