Is Social Security Headed for Bankruptcy?

Beginning next year, for the first time in 39 years, Social Security is projected to dispense more money than it takes in, which means that the money being collected by the program will soon not be enough to cover the benefits being paid out. Does this mean that Social Security is going bankrupt?

How the Program Came to Be and How it Works

In 1935, after decades of American workers advocated for a social insurance program that could help support retired workers, President Franklin D. Roosevelt signed the Social Security Act into law. Social Security taxes were first collected in 1937 with payments to retired workers beginning in 1940.

A dedicated tax on earnings funds the Social Security program, and the collected money is disbursed as retirement benefits for retirees in the form of a monthly check. How much money a retired worker gets from the program is measured in “work credits”, which are based on total income earned during their career. The program also supplies survivor benefits in many cases to widowed spouses.

What Went Wrong?

Social Security was signed into law over 80 years ago, and there have been significant shifts in demographics since then. The baby-boom generation is retiring, tipping the scale on the worker-to-beneficiary ratio, but other contributing factors include:

  • growing income inequality
  • sizable decline in birth rates
  • legal immigration, which has been cut in half over the last two decades
  • Longer life expectancy as a result of modern medicine, which means people are collecting checks for more years than earlier generations

Is Bankruptcy in the Future for Social Security?

Rumors of the program’s impending bankruptcy have been circulating for years, and some people believe that Social Security funds are going to run out, leaving the workers who are paying into the system now without benefits. This is unlikely to be the case, but lawmakers rightfully continue to discuss proposals to Social Security legislation that would protect the program in coming years. While GOP lawmakers have expressed a desire to raise the minimum age at which you can begin to receive payments, Democrat lawmakers have proposed increasing the payroll tax that pays for Social Security. Neither plan is perfect. The GOP proposal would take years before any savings are realized, and the democrats’ plan to tax the rich would only put the program on borrowed time until it’s back in the same position. A bipartisan plan is needed for the future of Social Security, but how long it will take lawmakers to get there remains to be seen.

How the SECURE Act Made Employer-Sponsored 401(k) Plans More Accessible

The Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the rules for employers on retirement plans, making it easier for employers to offer 401(k) plans and for employees to take part in them. Here’s how.

Multiple Employer Plans

Known as MEPs, multiple employer plans permit businesses to band together to offer employees a defined contribution plan such as a 401(k) or SIMPLE IRA, effectively allowing workers access to the same low-cost plans offered by large employers. While MEPs existed before the SECURE Act, here’s how they are now easier to establish and maintain.

  • The “one bad apple rule”, where one employer’s failure to comply jeopardized the entire plan, was done away with.
  • The “common nexus” requirement, which restricted the MEP option to small business employers who operated either in the same industry or same geographic location, was eliminated, permitting an “open MEP” that can be administered by a pooled plan provider (typically a financial services firm).
  • MEPs with fewer than 1,000 participants (and no more than 100 participants from a single employer) are excluded from a potentially expensive audit requirement.
  • Small business employers are also eligible for new tax credits for offering retirement savings options to employees.

Changes to Safe Harbor Plans

A provision of the SECURE Act provides more flexibility for employers who offer safe harbor 401(k) plans, which are 401(k) plans with an employer match that allows for avoidance of most annual compliance tests. If a 401(k) includes a Safe Harbor provision, the employer makes annual contributions on behalf of employees, and those contributions are vested immediately. Flexibility offered by the SECURE Act includes:

  • Increasing the automatic enrollment escalation cap under a qualified automatic contribution arrangement (QACA) 401(k) plan from 10 to 15%.
  • Removing the notice requirement for nonelective contributions. (The notice requirement is still applicable, however, for plans that implement the safe harbor match.)
  • Whereas pre-SECURE Act, switching to a safe harbor plan had to be done before the start of the plan year, employers are now allowed to switch to a safe harbor 401(k) plan with nonelective contributions anytime up to 31 days before the end of the plan year. Amendments after that time are approved if (1) a nonelective contribution of at least 4% of compensation is granted for all eligible employees for that year, and (2) the plan in amended by the close of the following plan year.

Automatic Enrollment Credit

The SECURE Act added an incentive for small businesses to feature automatic enrollment in their plans by allowing businesses with fewer than 100 employees to qualify for a $500 per year tax credit when they create a new plan that includes automatic enrollment. Business can also take advantage of this by converting an existing plan to one with an automatic enrollment. The tax credit is available for three years following the year the plan automatically begins enrolling participants.

Part-Time Employee Participation

Previously, employers could exclude employees who work fewer than 1,000 hours per year from defined contribution plans, including 401(k) plans. Starting in January of 2021, the SECURE Act requires employers to include employees who work at least 500 hours in three consecutive years. This means that in order to qualify under this rule, employees would need to meet the 500-hour requirement for three years starting in 2021 in order to become eligible in 2024.

Choosing the Right Plan for Your Business

  • Research 401(k) plan options for your business, keeping in mind that retirement plans can be customized to meet the needs of you and your employees.
  • Carefully read through costs and fees of each plan. Recordkeeping fees, transaction fees, and investment fees are some to be mindful of, and these fees might increase if you add more employees and the plan grows (i.e. low-cost plans upfront might not be the best plan for your business in the long term.)
  • Look for a 401(k) plan that presents a variety of investment opportunities for employees in terms of stocks, bonds, broad-based international exposure, and emerging markets.

Work with a financial expert who can help you establish and oversee a 401(k) plan. These professionals can include third-party administrators, recordkeepers, and investment advisors and managers.

How to Keep Your Credit Score in Check During the Pandemic

The COVID-19 virus has spread unease and fear in 2020, and not just from a health standpoint. With millions of Americans out of work and small businesses forced to close shop due to the pandemic, financial fears have pushed front and center over the past few months. This article will address a common financial fear as of late: How to ride out this storm while keeping your credit score as stable as possible.

Check Credit Score Regularly

You should already be regularly monitoring your credit report during the best of times, but it’s especially important to do so during this tumultuous season in order to spot possible mistakes before they have a chance to negatively affect your credit score. Contact the creditor immediately if you do catch a mistake. Recent mistakes can typically be rectified with minimal headache while ones that sit on your credit report longer can take longer to get resolved. With COVID scams happening and many Americans’ income in flux, it’s good practice for the time being to check your credit reports monthly. In fact, the three national credit reporting agencies—Equifax, Experian, and Transunion—are offering free weekly credit reports until April of next year. You can access your reports at AnnualCreditReport.com.

Make On-Time Payments or Contact the Creditor

When possible, continue to make on-time payments, even if it’s just the minimum amount due, through the pandemic. A positive payment history is a major step in ensuring that your credit score stays the course. However, if your income has been affected and emergency savings accounts have been drained, this might not be possible. If this is the case, the best course of action is to contact the lender or creditor as soon as possible as they may have workable payment options available to help you get through this time. Proactive and early communication is paramount. Be prepared to discuss how much you can afford to pay and when you expect to resume regular payments.

Consider a Balance Transfer

You may have found over the past few months that you’ve needed to rely more on credit cards while simultaneously being unable to pay them off each month. If so, now might be a good time to explore a balance transfer where your debt would be transferred to a card that offers a lower interest rate on that balance and may reduce your monthly payment. The low-interest rates are typically temporary, but the payment reduction from lower-interest rate cards can at least help to keep your credit card debt from escalating out of control until you can get back on your feet.
Budget and Make a Plan / Prioritize Payments / Revisit Budget
This crisis is affecting almost everyone, whether you’ve lost your job, you’ve experienced a reduction in work hours, or you’re anxious about the economic fallout of the pandemic, so there’s no better time to rework your budget following these steps:

  • Assessing any take-home income.
  • Examine your financial commitments and variable spending
  • Determine where you can cut back, even temporarily

Taking steps to free up more money in your budget helps to decrease financial stress, which allows you to focus on the most necessary financial commitments while better positioning yourself to protect your credit. If needed, that money can be used for essential expenses, like food and bills, but if you’re in a better position, you can sock away some of it in an emergency savings account for future use.

What the Next Stimulus Package Could Look Like

As Congress begins working on a new coronavirus relief bill, the White House looks to target aid more specifically and cap the overall expense of the package at $1 trillion. Here’s what else we know about a second stimulus package.

Direct Stimulus Payment

Another round of stimulus checks could be coming to American households, but the amount is yet to be determined. While early talks of a second stimulus package were largely jobs focused, recent nationwide spikes of confirmed coronavirus cases have some states rolling back their reopening plans. The effect could be further layoffs for American workers and economic hardship for families, which increase the urgency for additional cash payments. However, the amounts and income thresholds could differ from the first round of stimulus checks, which were approved for individuals whose income was no greater than $75,000 and for married couples whose combined income was no greater than $150,000. Payments were phased out for incomes above those thresholds. It remains unclear at this point how Congress will move forward with this.

Changes to Unemployment Benefits

The CARES Act approved a weekly $600 bonus unemployment benefit to workers who’ve been laid off or furloughed as a result of COVID-19. This is in addition to state-provided unemployment benefits. However, this $600 weekly bonus is set to expire at the end of the month. Some lawmakers would like to see it extended while others would like unemployment benefits to be capped at no more than 100% of a worker’s compensation when employed. Though the additional unemployment benefit has proven to be a financial lifeline to workers who were suddenly laid off or furloughed, the risk is that it potentially incentivizes citizens to stay unemployed.

Back to Work Bonuses

Some lawmakers have put forth proposals for return-to-work bonuses. Such legislation could be an alternative to extending the enhanced unemployment bonus. So far talks of this bonus indicate a weekly $450 bonus for a limited time targeted at unemployed workers who return to work.

More Relief for Businesses

The CARES Act introduced the Paycheck Protection Program (PPP), which provided businesses that have been impacted by COVID-19 with forgivable loans. The second stimulus package could include an extension of the PPP, but some lawmakers would like to repurpose its unused funds for other kinds of assistance, which would be more clearly targeted at businesses that need the help. The White House also continues to advocate for tax breaks to promote new hires.

Liability Protection for Employers

The second stimulus package could see liability protections for employers who could possibly face lawsuits related to COVID-19, but any bill that permits sweeping immunity for employers will likely receive pushback from some lawmakers.

State and local aid, infrastructure spending, payroll tax cuts, and a tax credit for domestic travel are further probable points of discussion when Congress returns from recess.

Could the Coronavirus Lower Home Prices? Well, Maybe.

Since early March, the COVID-19 pandemic has been making a substantial financial impact on millions of people across the country.  With 22 million jobless claims in just one month and a slowly moving economy, many homeowners are left wondering if their properties will see a decline in value as workers continue to lose their jobs and minimize personal spending. Spring is traditionally the prime time for buying and selling homes, but thanks to COVID-19, listings have dropped significantly. 

What We Already Know

Beginning in March, mortgage rates have fluctuated significantly. They’ve fallen to record lows—the average for a new 30-year fixed-rate mortgage currently falls near 3.33% – and may continue to drop. For those who already own homes, applications to refinance their homes are up almost 168% from March 2019. 

Mortgage rates and home values, while related, are two separate entities. History shows us that home prices are likely to fall during recessions, but to what degree is specific to your local market. If available homes in a particular area are already highly sought-after (places like San Francisco, Los Angeles, or Seattle), it is unlikely homeowners will see their property values go down much at all. That said, with such low mortgage rates available, buyers who haven’t suffered from layoffs or unemployment could find their opportunity to purchase a property. If there is still a demand for homes in an area, home prices are likely to remain steady. 

Past research from Zillow shows us that during previous pandemics in the US that home prices remained stable with only small declines in home prices. The research also showed that there were fewer real estate transactions and NOT sales happening at a loss. 

COVID-19 is already an oddity, and its impact cannot be denied around the world. With that, all homeowners with interest in selling should be prepared for the likelihood of home values dropping until this pandemic passes and the economy settles. While a drop in home values could leave sellers in a challenging situation, it’s also not ideal for anyone who may be looking to draw upon their home equity in the not-so-distant future. 

While so much of our lives remain up in the air, and while the economy is so unsettled, this is an opportunity to pull back and see what happens. If the panic around COVID-19 dies down sooner than anticipated, buyers and sellers may not even notice a change in the market. 

Protect Your Retirement from Coronavirus – 3 Ways to Preserve Your Cash

The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress at the end of March provides direct economic assistance to Americans during the COVID-19 pandemic. In the bill, certain provisions allow people to withdraw from their retirement accounts, including their 401(k)s and IRAs, without the usual early withdrawal penalty. Individuals must have been directly affected by coronavirus – through personal, spousal, or dependent diagnosis or furloughed, laid off, or reduced hours from their job to be eligible for the fee-free withdrawals.

While pulling from retirement funds seems like a simple and fast fix, it may not be the best option based on an individual’s circumstances. Those who stand to suffer the most amid the pandemic are those who are nearing retirement and those already in retirement. The unexpected ups and downs, current unemployment, and new potential health costs in this unprecedented time leave many Americans wondering how they’ll be able to retire comfortably in the current economic climate. 

Consider these Options to Counteract the Effects of COVID-19 on Retirement Funds

Keep Current Costs Low

Take a look at current expenses and determine if anything can be eliminated or reduced. Any unused subscriptions? Are you paying for the right amount of insurance? Consider shopping around for lower rates. Can you negotiate any current bills – cell phone, credit cards, internet, anything with an interest rate, even your cable? Hold off on any major home or equipment upgrades and work with what you already have before adding on another expense. 

Use Your Home

Assess your risks for taking out a second mortgage or a reverse mortgage. If your mortgage is already paid off, look into home equity loan options. A cash-out refinance may also be available if you’re still paying the mortgage. Over one-third of Americans have their wealth tied up in their homes, so it may be worth it to see if downsizing your home is an option. If so, it might be possible to pay for your smaller home in cash and use the remaining proceeds from the sale of your old for any outstanding debts or liabilities as you near retirement. The location of your home should also be considered – the cost of living can vary significantly from state to state, so moving to a new state or country may bring you more bang for your buck. 

Plan for the Long-Term

Health care and long-term care can be an extreme cost for senior citizens. Assisted living and nursing home facilities usually top $60k+ for just one year. Long-term care insurance is costly but can help prepare you and your loved ones to pay the necessary costs. With Americans living longer each year, it’s worth it to plan on trying to stretch your retirement savings to last until age 90. Calculate how much you (and/or a spouse) would need with the assumption you’ll live to be 90. It’s also worth looking at final expense insurance, which could help cover final expenses at the end of your life. Planning for the event in advance can take the financial stress off family members left behind, whether it’s through final expense insurance or setting up a savings account with the express purpose of paying for any final expenses. 

While we’re in a global pandemic, everything isn’t all doom and gloom. COVID-19 has hit the country, and our bank accounts hard, but people will bounce back after this economic crisis – much like investors after other recessions in our nation’s history.