While any serious debate over whether to privatize Social Security could turn messy, the message from federal lawmakers regarding your personal retirement plans is crystal clear.
The advice coming from Washington, financial planners say, is to stash away as much as you can, because it may get tougher to make it on a monthly government allowance with an uncertain future.
Evident again in this year's changes to the tax law, which has become friendlier since a 2001 makeover, are across-theboard increases to the amount of money you can contribute to your retirement plans.
"It is definitely an incentive on the part of the government saying, 'Look, folks, you're getting older and you need to do something about your retirement,'" said Grace Worley, president of locally based Worley Financial Group. "It's becoming more and more the individual's responsibility to see that you have adequate retirement funds."
The maximum amount workers can contribute to their 401(k) plans in 2005 jumps from $13,000 to $14,000. The amount increases again in 2006 to $15,000. Employees who are at least 50 years old can contribute even more under what's known as the "catch-up" clause. Older workers can set aside up to $18,000 of their annual income in 2005 and $20,000 the following year.
Financial planners say the larger amounts are a generous enhancement, if workers can afford to put away that much, given the fact that up until 2002 the contribution limit could not exceed $11,000.
"It really is a significant improvement," said Bob Campbell, an investment representative and regional leader for Edward Jones in Greenfield. "It is a stronger and stronger message from the federal government that you better be planning to take care of yourself."
The amount one can invest in a Roth IRA has jumped as well this year, climbing from $3,000 to $4,000. The amount won't increase again until 2008, when the annual limit becomes $5,000. For Roth IRA investors over 50, the amount remains at $4,500 this year but increases to $5,000 in 2006.
And workers who invest in a Savings Incentive Match Plan for Employees, or SIMPLE IRA that small businesses might provide instead of a 401(k) plan, can set aside $10,000 this year instead of $9,000. Workers over 50 can invest $12,000 annually now instead of $10,500.
Encouraging workers to sink more of their paychecks into retirement plans is a small part of the larger battle to save Social Security. Privatizing the 70-year-old, New-Deal-era program has become the centerpiece of President Bush's secondterm domestic policy agenda.
Bush wants to restructure Social Security by letting younger workers open private investment accounts. The approach could alleviate a serious cash-flow deficit in the years ahead as members of the baby boom generation retire and benefits escalate faster than revenue.
The Social Security Administration predicts 79 million baby boomers will begin retiring in 2008. And, in about 30 years, there will be nearly twice as many older Americans as there are today. The age in which workers become eligible for benefits will increase from 65 to 67 for those born after 1959.
Opponents argue the retirement program was designed to provide elderly Americans with a guaranteed source of retirement income, not to serve as a vehicle for speculative investments.
Although Bush has not endorsed a specific restructuring plan, the most likely scenario would allow, but not require, workers under the age of 55 to divert a portion of their payroll taxes into private investment accounts, which the administration thinks would earn a greater return than the Social Security fund. Workers who chose to invest a portion privately would face a cut in future benefits. Current retirees and workers nearing retirement would experience no changes.
Michael J. "Mick" Meiners, a certified financial planner and attorney at Financial Plans & Strategies Inc. in Greenwood, is opposed to privatizing Social Security.
"I see Social Security as a safety net for the people we most need to be concerned about," he said. "If you let people play with just a portion of that safety net, there will be some problems."
Meiners based his concerns on the fact that Social Security is a pay-as-you-go retirement system, meaning Social Security taxes paid by today's workers and their employers are used to pay the benefits for today's retirees and other beneficiaries.
Social Security currently is taking in more money than it pays out in benefits, while the remaining money goes into the program's trust funds. But the administration estimates that, in 2018, benefits owed will overtake taxes collected, causing the government to tap into those trust funds to pay benefits. The agency further predicts the trust funds will be exhausted in 2042.
Despite the attention the issue is receiving, John Reuter, vice president of investments at the Indianapolis office of brokerage UBS Financial Services Inc., doubts a fix is in the cards anytime soon. More pressing needs, such as health care reform, will take precedence, he said.
But if a solution is reached, it will most likely involve strict safeguards to protect workers from investing in speculative funds, he said.
Other tax changes effective in 2005 include:
Allowing capital gains to be sold at a 5-percent tax rate instead of the normal 15 percent. If you're thinking about cashing in a large amount of stock or selling a vacation home, for instance, you might consider gifting the holding to a child to help pay for college. Here's why: The capital gains tax owed on those types of transactions drops to 5 percent this year for the two lowest tax brackets. Children have to be at least 14 years old to qualify for the deduction.
Decreasing the amount (from $100,000 to $25,000) that can be written off on vehicles weighing at least 6,000 pounds. Business owners who are considering buying that trendy but monstrous sport-utility vehicle now may want to rethink that decision and opt for a more practical truck or van instead. Congress increased the deduction following 9/11 to encourage manufacturers to buy equipment and applied the same rules to larger vehicles.
"All of a sudden now, the Suburban is fully deductible," said Cris Halter, an owner of locally based Halter Ferguson Financial Inc., "and that was never the intent."
Giving individuals who itemize their deductions the option to deduct state and local sales taxes instead of state and local income taxes. The provision, which is retroactive to 2004, would benefit someone buying an expensive item such as a car.
"Any of us are motivated to reduce our taxable income," Halter said. "The objective here is to try to reduce your total income as much as you can."