Social Security Smart

Retirement Plan Limits and Social Security COLAs for 2009

by Randall Luebke RMA, RFC on October 4, 2011

By Elaine Floyd, CFP

Inflation has upped retirement plan, Social Security, and Medicare income and contribution limits for 2009. Keep these charts handy for client reviews and planning sessions.

Inflation marches on, as higher consumer prices triggered cost-of-living
adjustments in retirement plan contribution limits, Social Security benefits,
and Medicare premiums for high-income beneficiaries, all due to take effect in
2009. Through September
2008, the Consumer Price Index for All Urban Consumers—the CPI-U—was 4.9%
higher than a year ago. The CPI-W—a subset of the CPI-U—was up 5.4%.

Here’s what you can look forward to in 2009.

Retirement plan contribution limits

Clients who are still saving for retirement will be able to sock away a bit
more in 2009, as most qualified plan limits have been raised. For example, the
maximum that can go into a defined-contribution plan rises to $49,000, up from
$46,000 in 2008. The limit for contributions to 401(k) plans will be $16,500, up
from $15,500 (assuming the plan formula allows it), with catch-up contributions
for participants over 50 rising to $5,500 from $5,000.

Of course, convincing clients to set more of their hard-earned salary aside
for retirement when (a) their budgets are pinched already and (b) their previous
contributions have lost value, is one of advisors’ biggest challenges in this
environment. But it must be done. Retirement security is more uncertain than
ever now, and dollar-cost averaging was made for times like this, when stocks
are cheap and human emotions threaten to undermine sensible, long-term plans.
Automatic contributions are the way to go. Don’t think about it; just do it.

No word yet on IRAs, whose statutory limit of $5,000 (plus $1,000 catch-up
for people over 50) ends in 2008. Of course, clients who have not contributed
for 2008 may make their $5,000 (or $6,000) contribution as late as April 15,
2009.

Beginning in 2009, IRA contribution limits will be indexed for inflation, but
these numbers have not been announced yet. However, the income limitations for
IRA deductibility by individuals covered by a retirement plan in 2009 have been
announced: $89,000 (up from $85,000) for married couples filing jointly; $55,000
(up from $53,000) for single taxpayers; and $166,000 (up from $159,000) for a
taxpayer who is not a participant but whose spouse is.

The adjusted gross income limitations for maximum Roth contributions rises in
2009: $166,000 (up from $159,000) for married taxpayers filing a joint return or
qualifying widow(er)s, and $105,000 (up from $101,000) for single taxpayers. The
income limitation for Roth conversions is not adjusted for inflation and remains
at $100,000 for 2009. However, it is scheduled to be lifted in 2010, with
special provisions for paying the tax over the following two years.

Table 1: Pension Plan Limits
	2009	2008
Maximum annual benefit under a defined-benefit plan	$195,000	$185,000
Maximum annual contribution for defined-contribution plans	$49,000	$46,000
Annual compensation limit used for determining retirement plan contributions	$245,000	$230,000
Maximum annual contribution to 401(k), 403(b), and 457 plans	$16,500	$15,500
Catch-up contribution for individual age 50 or older	$5,500	$5,000
Maximum annual SIMPLE employee deferral	$11,500	$10,500
SEP minimum compensation	$550	$500
Income of key employee in top-heavy plan	$160,000	$150,000
Definition of highly compensated employee	$110,000	$105,000
Maximum annual IRA contribution	N/A	$5,000
Catch-up IRA contribution	N/A	$1,000

Social Security

Social Security recipients will receive their biggest raise since 1982.
Checks are scheduled to increase by 5.8%
starting in January 2009. Before clients break out the champagne, though, they
might want to take a look at their energy and food bills, as these were the
areas with the biggest price increases over the past year. Of course, champagne
is hardly the drink of the hour, considering all that’s going on in the
financial markets these days. Most clients have probably already moved into a
belt-tightening mode and view the generous COLA as small consolation for the
challenges they face going forward.

The annual Social Security COLA announcement is always a good time to review
retirees’ spending needs and make sure all the other components of their
retirement income plan are properly positioned. When it comes to their personal
assets, it may be hard for clients to stick with the classic 4% rule, which
calls for annual increases in withdrawals to match the inflation rate. Most
plans are based on a 3% projection of inflation, so increasing the withdrawal by
5% or more at a time when portfolios are down in value might seem imprudent.

Even though history may be on their side, clients may prefer to cut back on
scheduled withdrawals and work on the spending side so they can conserve assets
for the future. Social Security may represent only a fraction of their
retirement income, but this year’s COLA raise can help take some of the sting
out of the dismal news reflected on their account statements.

Keep in mind that inflation affects the Social Security benefits of people
who haven’t retired yet. Their eventual benefits are rising even though they
haven’t started collecting yet. Here’s how it works. Each year the “bend points”
used to calculate the primary insurance amount
(PIA) are increased based on the rise in the average wage index.
(Historically, wages have increased faster than prices, averaging about 4% a
year.) In the year a worker turns 62, his PIA is calculated based on the bend
points in effect for that year (which in turn are based on the wage index two
years prior, when the worker was 60).

For example, let’s say Bob the Boomer turned 62 in 2008 and had maximum
Social Security earnings throughout his career. Based on the bend points in
effect in 2008, Bob’s PIA would be $2,230. This is the amount he will receive if
he applies for Social Security when he reaches his full retirement age of 66 in
four years. But not really, because the PIA will be adjusted for COLAs. Already,
Bob is on track to receive at least 5.8% more than the $2,230, thanks to the
2009 COLA. (Note: If Bob applies for Social Security prior to full retirement
age, his benefit will be some fraction of the PIA to account for the actuarial
reduction. If he applies after FRA, the benefit will be higher due to delayed
credits.) The bottom line: benefits are affected by COLAs even if they haven’t
begun yet. Waiting until age 70 to begin collecting benefits results in the
highest possible benefit, because of the compounding of COLAs and delayed
credits.

Here are some key changes arising from the COLA:

Table 2: Social Security Benefits
	2009	2008
Maximum benefit for worker retiring at full retirement age (FRA)	$2,323	$2,185
Maximum taxable earnings	$106,800	$102,000
Retirement earnings test exempt amounts if under FRA. $1 in benefits withheld for every $2 in earnings over the limit.	$14,160/year $1,180/month	$13,560/year $1,130/month
Retirement earnings test exempt amounts in year individual reaches FRA (applies only in months prior to attaining FRA). $1 in benefits withheld for every $3 in earnings above the limit.	$37,680/year $3,140/month	$36,120/year $3,010/month

Medicare

In previous years, the COLA announcement has been tempered somewhat by a
substantial increase in Medicare Part B premiums. A good chunk of what Social
Security gave, Medicare took away, since Part B premiums are deducted from
retirees’ Social Security checks. But this year the Centers for Medicare and
Medicaid Services (CMS) announced
that Medicare premiums stayed flat at $96.40 per month if modified adjusted
gross income is under $85,000 for individuals or $170,000 for married couples.

However, before clients get too complacent about the pause in the relentless
upward trend in Part B premiums, they should know two things:

The reason the Part B premium is holding steady in 2009 is due to accounting
issues, not any kind of relief in health care costs. The Part B trust fund is
working off previously accumulated excess reserves and also received a repayment
of $9.3 billion for hospice care that should have come out of Part A. These
factors will not be in play next year, so clients should expect continued
increases in part B premiums for 2010 and beyond.
The Part B premium for high-income people will go up in 2009. If modified
adjusted gross income is over $85,000 for individuals or $170,000 for married
couples, an “income-related monthly adjustment amount” will be added to the
standard Part B premium.

Here are the Part B premiums for all MAGI levels for 2008 and 2009.

Table 3: 2008 Part B Premiums for High-Income Beneficiaries
MAGI range for beneficiaries who file an individual tax return	MAGI range for beneficiaries who file a joint return	Part B premium
$82,000 or less	$164,000 or less	$96.40
$82,000-$102,000	$164,000-$204,000	$122.20
$102,000-$153,000	$204,000-$306,000	$160.90
$153,000-$205,000	$306,000-$410,000	$199.70
More than $205,000	More than $410,000	$238.40

Source: Centers for Medicare & Medicaid
Services

Table 4: 2009 Part B Premiums for High-Income Beneficiaries
MAGI range for beneficiaries who file an individual tax return	MAGI range for beneficiaries who file a joint return	Part B premium
$85,000 or less	$170,000 or less	$96.40
$85,000-$107,000	$170,000-$214,000	$134.90
$107,000-$160,000	$214,000-$320,000	$192.70
$160,000-$213,000	$320,000-$426,000	$250.50
More than $213,000	More than $426,000	$308.30

Source: Centers for Medicare & Medicaid
Services

Deductibles

The Part B deductible remains unchanged at $135 per year. The Part A
deductible for the first 60 days of hospitalization will increase by $44 to
$1,068. Beneficiaries must pay an additional $267 per day for days 61 through 90
in 2009, and $534 per day for “lifetime reserve days” that can be used for
hospital stays beyond the 90th day in a benefit period. These are up from $256
and $512, respectively, in 2008. Daily co-insurance for the 21st through 100th
day in a skilled nursing facility will be $133.50 in 2009, up from $128 in
2008.

Looking ahead

This year’s 5% inflation rate seems to be a hiccup in an otherwise benign
inflationary environment due to a spike in energy prices earlier this year. The
latest Survey
of Professional Forecasters projects headline inflation (including food and
energy) to be 2.3% to 2.6% in the years ahead. The Social Security trustees project an
inflation rate of 2.8% under their intermediate-cost projections (1.8% for
low-cost and 3.8% for high-cost).

Medicare is another story. Part A (the HI trust fund) is projected to go
broke by 2017, but that’s something the government will have to fix. Part B
costs will hit Medicare beneficiaries directly in the pocketbook, since Part B
premiums are based on the actual cost of health care, which is projected to rise
6.2% annually, according to Medicare
trustees. At the rate things are going, Part B premium increases will
continue to eat into annual Social Security COLAs, leaving clients with less and
less inflation protection.