Last month we learned that there will be a 0.3 percent upward cost-of-living adjustment (COLA) in 2017 to the benefits of Social Security recipients. Annual COLAs are based on inflation data from the Bureau of Labor Statistics (BLS) and as evidenced by next year’s relatively small increase, upward price pressures for consumers have been muted recently, at least according to the specific inflation metrics targeted in Social Security’s statutory requirements. Social Security benefits, though, are not the only thing regularly indexed to price changes. For example, U.S. tax law places annual limits on the dollar amount of contributions that can be made to certain retirement plans.
With 401(k), 403(b), and most 457 accounts, for instance, current law allows individuals to contribute up to $18,000 per year (plus another catch-up contribution of $6,000 for those ages 50 and older). Similarly, Individual Retirement Arrangements (IRAs) have an annual contribution limit of $5,500 along with an additional $1,000 for savers age 50 and older. Internal Revenue Code section 415(d) requires that such limits be adjusted annually for cost-of-living increases but inflation was not strong enough this year to warrant a change in any of the above-mentioned ceilings. However, other limits were affected slightly and more details can be found here.
Since these types of retirement plans can provide various tax advantages, the lack of an increase for 2017 should be disappointing news for savers. Unfortunately, a lot of people will likely not even notice that the contribution ceilings have not been raised because most Americans do not set aside anywhere near enough money to worry about annual maximums. In fact, a study by the Center for Retirement Research at Boston College found that just 9 percent of the U.S. workers examined who participated in a 401(k) plan made annual contributions that came within 10 percent of the yearly limit.
Regardless, every penny that a person contributes to his or her savings vehicles can go a long way toward ensuring old-age financial security. That is why more employers are starting to incorporate automatic enrollment and auto-escalation into their plan design in order to nudge workers into being better prepared for retirement. For example, a Callan Associates study found that automatic enrollment usage has increased for four years in a row, with 61.7 percent of employers having already implemented this feature. Such efforts are critical when roughly four in ten Americans between the ages of 25 and 64 have no retirement savings whatsoever, according to the nonprofit National Institute on Retirement Security.
Sources: U.S. DoL, U.S. IRS, Boston College (CRR), Callan Associates, Wall Street Journal, NIRSPost author: Charles Couch