Canon Capital Wealth Management | Canon Capital Management Group, LLC

New Trustees Reports Show Continuing Financial Challenges for Social Security and Medicare

Every year, the Trustees of the Social Security and Medicare trust funds release reports to Congress on the current financial condition and projected financial outlook of these programs. The 2015 reports, released on July 22, 2015, show that, despite some encouraging signs, both programs continue to face financial challenges that should be addressed as soon as possible, with the Disability Insurance Trust Fund needing the most urgent attention.

What are the Social Security trust funds?
The Social Security program consists of two parts. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI. Each program has a financial account (a trust fund) that holds the Social Security payroll taxes that are collected to pay Social Security benefits. Other income (reimbursements from the General Fund of the Treasury and income tax revenue from benefit taxation) is also deposited in these accounts. Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest. As a result, the Social Security trust funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits.

(Note that the Trustees provide certain projections based on the combined OASI and DI (OASDI) trust funds. However, these projections are theoretical, because the trusts are separate, and one program’s taxes and reserves cannot be used to fund the other program.)

Trustees report highlights: Social Security

The combined trust fund reserves (OASDI) are still increasing and will continue to do so through 2019 (asset reserves increased by $25 billion in 2014, with year-end reserves totalling $2.8 trillion). Not until 2020, when annual program costs are projected to exceed total income, will the U.S. Treasury need to start withdrawing from the reserves to help pay benefits. Absent congressional action, the combined trust fund reserves will be depleted in 2034, one year later than projected in last year’s report.

Once the combined trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 79% of scheduled benefits in 2034, with the percentage falling gradually to 73% by 2089. This means that 20 years from now, if no changes are made, beneficiaries could receive a benefit that is about 20% less than expected.

The OASI Trust Fund, when considered separately, is projected to be depleted in 2035 (one year later than projected in last year’s report). At that time, payroll tax revenue alone would be sufficient to pay 77% of scheduled OASI benefits.

The DI Trust Fund is in worse shape and will be depleted in late 2016 (the same as projected last year). The Trustees noted that the DI Trust Fund “now faces an urgent threat of reserve depletion, requiring prompt corrective action by lawmakers if suddent reductions or interruptions in benefit payments are to be avoided.” Once the DI Trust Fund is depleted, payroll tax revenue alone would be sufficient to pay just 81% of scheduled benefits.

Based on the “intermediate” assumptions in this year’s Trustee’s report, the Social Security Administration is projecting that there will be no cost-of-living adjustment (COLA) for calendar year 2016.

What are the Medicare trust funds?
There are two Medicare trust funds. The Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care (Medicare Part A costs). The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts, one covering Medicare Part B (which helps pay for physician and outpatient costs) and one covering Medicare Part D (which helps cover the prescription drug benefit).

Trustees report highlights: Medicare

Annual costs for the Medicare program have exceeded tax income annually since 2008, and will continue to do so this year and next, before turning positive for four years (2017-2020) and then turning negative again in 2021.

The HI Trust Fund is projected to be depleted in 2030 (unchanged from last year, but with an improved long-term outlook from last year’s report). Once the HI Trust Fund is depleted, tax and premium income would still cover 86% of program costs under current law. The Centers for Medicare & Medicaid Services (CMS) has noted that, under this year’s projection, the HI Trust Fund will remain solvent 13 years longer than the Trustees predicted in 2009, before passage of the Affordable Care Act.

Due to increasing costs, a Part B premium increase is likely in 2016. However, about 70% of Medicare beneficiaries will escape the increase because of a so-called “hold harmless” provision in the law that prohibits a premium increase for certain beneficiaries if there is no corresponding cost-of-living increase in Social Security benefits. If there is no COLA for 2016, the increased costs may be passed alng only to the remaining 30% not eligible for this hold-harmless provision – generally, new enrollees, wealthier beneficiaries, and those who choose not to have their premiums deducted from their Social Security benefit. If so, these individuals could see the base premium rise to $159.30 in 2016, up sharply from $104.90 in 2015.

Why are Social Security and Medicare facing financial challenges?
Social Security and Medicare accounted for 42% of federal program expenditures in fiscal year 2014. These programs are funded primarily through the collection of payroll taxes. Partly because of demographics and partly because of economic factors, fewer workers are paying into Social Security and Medicare than in the past, resulting in decreasing income from the payroll tax. The strain on ths trust funds is also worsening as large numbers of baby boomers reach retirement age, Americans live longer, and health-care costs rise.

What is being done to address these challenges?
Both reports urge Congress to address the financial challenges facing these programs in the near future, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. As the Social Security Board of Trustees report states, “Social Security’s and Medicare’s projected long-range costs are not sustainable with currently scheduled financing and will require legislative action to avoid disruptive consequences for beneficiaries and taxpayers.”

Some long-term Social Security reform proposals on the table are:

Raising the current Social Security payroll tax rate (according to this year’s report, an immediate and permanent payroll tax increase of 2.62 percentage points would be necessary to address the revenue shortfall)

Raising the ceiling on wages currently subject to Social Security payroll taxes ($118,500 in 2015)

Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later)

Reducing future benefits, especially for wealthier beneficiaries

Changing the benefit formula that is used to calculate benefits

Changing how the annual cost-of-living adjustment for benefits is calculated

Regardless of the long-term solutions, Congress needs to act quickly to address the DI program’s imminent reserve depletion. According to this year’s report, in the short term, lawmakers may reaollocate the payroll tax rate between OASI and DI (as they did in 1994). However, this may only serve to delay DI and OASI reforms.

You can view a combined summary of the 2015 Social Security and Medicare Trustees reports here, where you can also access a full copy of the Social Security report. You can find the full Medicare report here.

Our Wealth Management team is glad to answer any questions you may have about these reports. Call 215-723-4881 or contact us here.

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable – we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Save with a Cash Balance Plan

Are you a business owner paying too much in taxes?

With year-end approaching, here’s a great way to save.

You’re in one of the highest tax brackets and already maxing out 401(k) and HSA contributions. You may even be making non-deductible IRA contributions to squeeze out a little more tax-deferred benefit. What if you’ve run out of options to shelter taxes, but you can afford to sock away more than your 401(k) plan allows every year?

Cash Balance Plan to the Rescue

A cash balance plan may be the perfect fit for you. It is ideal for business owners who: are 35 years of age or older, have 0-25 employees, already have a 401(k) profit sharing plan with the new comparability feature, and can afford to contribute more than $50,000 annually. A cash balance plan has a flexible benefit design and allows owners to potentially contribute substantial amounts of earned income with lower and more controlled costs to employees. Contributions reduce ordinary income taxes dollar for dollar, which means the effects of compound interest in a cash balance plan are nothing to walk away from.

For example, if a 45-year-old business owner contributed $150,000 in 2015 and it grows 5% per year for 20 years, it would be worth $397,995 when he/she is ready to retire at age 65. Not to mention the fact that a business owner in the 33% tax bracket would have saved approximately $50,000 in federal income taxes. The future value would be significantly less if the original amount was invested with after-tax dollars and taxes were paid on earnings every year.

Why Now?

Many business owners pay themselves a lower salary during the year and are looking for ways to shelter taxes on large bonus payouts before year-end. The fall season typically brings these planning questions to light since owners are getting the general feel for their year-end projections.

Why Canon Capital?

We act as your fiduciary, which means that we have a legal obligation to act in your best interests. We have the ability to work with the most reputable plan administrators in the industry. The implementation costs and recurring annual costs are typically far less than the amount of federal taxes saved every year, which makes the cash balance plan very attractive as a wealth accumulation tool. We will customize a model targeting up to 6% per year based on your risk and return objectives. The platforms that we use have access to thousands of investment choices, and our role is to narrow down the choices and invest the monies for you. The account grows annually in two ways: 1) contributions and 2) interest credits, which are guaranteed. It’s an effective way to accelerate retirement savings, and worst case scenario — if the plan terminates prematurely — each participant can roll their balance into an IRA and manage it themselves or have it professionally managed.

It’s easy to get started. Feel free to give us a call today at 215-723-4881 and ask to speak with one of our investment advisors. We look forward to the opportunity to work with you!

Canon Capital Staff News

We’ve had a lot to celebrate this summer. The Canon Capital family is expanding due to these happy occasions.

Amanda (Van Camp) Spengler, CPA, a staff accountant in our Accounting department, celebrated her marriage to Andy Spengler on July 18^th.

Most recently, Brandon Keeler and his wife Cori welcomed Greyson Keeler on August 7^th. Brandon is a PC Network Technician in our Computer Solutions unit.

Congratulations to all!

Team Canon Capital at the Indian Valley Chamber of Commerce 2015 Business Expo

We had a terrific time earlier this week at the Indian Valley Chamber of Commerce 2015 Business Expo.

Matthew Witter, a senior investment advisor & financial planner
with our Wealth Management Group, talks with an Expo attendee.

Vicki Barnes, director of payroll services, and Lori Canfield, office manager, show off our team jerseys. We’re all wearing #87 to represent 1987, the year Canon Capital Management Group was established.

“Team Canon Capital” represented this year’s theme “Sporting Success…Join the Winning Team!” sharing peanuts and popcorn along with all of the services we offer to businesses and individuals in our community.

Ring in the New, Shred Out the Old: Join Our Cyber Security & Shredding Event January 7, 2016

Ring in the “New” by shredding the “Old.” Join us for a Cyber Security presentation and on-site document shredding event Thursday, January 7, 2016 at our Canon Capital Wealth Management and Family Office Center (2936 Funks Road, Hatfield, PA).

Please join us for refreshments and a presentation on Cyber Security by our industry expert, Kent Gerhart, director of Canon Capital Computer Solutions. Richter’s Shredding will also be on site to safely shred those old, unwanted documents and help you clean out for the New Year.

Presentations will take place at 3:45pm and 5:30pm; please attend as your schedule allows.

Richter’s Shredding will be available 4:15-5:15pm.

In addition, we will be accepting unwrapped donations of any size diapers, wipes, and toys for infants and toddlers to benefit local charities.

RSVPs are appreciated – email Jennifer Norman or call her at 215-723-4881.

Canon Capital Wealth Management: Comments on the Federal Reserve Rate Hike

Based on their belief that the U.S. economy had strengthened, the Federal Reserve on December 16, 2015 made the decision to hike their interest rate from zero to .25 percent. This rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight. The Federal funds rate is generally only applicable to the most creditworthy institutions when they borrow and lend overnight funds to each other. In spite of being so restricted a market, it has a great effect through the loans of these lending institutions to the rest of the U.S. and even to the Global economy.

While this is a very small increase, it must be remembered that this is the first increase since 2008. This small increase does indicate that future policy tightening, i.e., increasing interest rates, will likely be very measured and will be governed by the future U.S. and global economic outlook.

An Inevitable Increase

The present situation had to change eventually as zero interest rates have crushed conservative savers and continues to reward risk takers which can easily lend to speculative bubbles in asset values. Retirees especially have seen their returns on savings accounts, certificates of deposit, and high quality bonds decline to almost insignificant values. Speculators have been able to borrow at very low rates, via leveraging their funds, to purchase riskier securities and to force their prices to often unrealistic values. This phenomenon of rewarding speculation at the expense of conservative savers is known as Financial Repression.

However, balanced against a relief for savers are the areas of the U.S. and Global economies which will be negatively impacted and are the reason for caution by the Fed. In the U.S. the stronger dollar, as a result of global funds coming to the U.S. for higher return, will make U.S. products more expensive in foreign countries. This can reduce the amount of and profitability of U.S. exports. Furthermore, higher borrowing costs as a result of Fed tightening together with increasing wages, as quality help is becoming scarce, will further impact business returns.

The Global Impact

Internationally, the emerging market countries have already been hit hard by the slowing growth of China (a major market for them) and by the precipitous decline in commodity prices, i.e., iron ore, copper, oil, etc., which many of these countries have as their only major export. Added to this, much of their debt is denominated in U.S. dollars. As the U.S. dollar strengthens as a result of the Fed rate increase, their currencies decline making it harder for them to pay interest and to pay back their debts.

In contrast to the emerging market nations, the more developed economies, i.e., Europe, Japan, and China, central banks are doing the reverse of the U.S. by lowering their rates and printing more money, i.e., quantitative easing. This may make their exports to the U.S. more competitive which will put pressure on the Fed not to further tighten as U.S. manufacturing is still struggling to revive and to be more cost competitive.

Next Steps

Therefore, in view of the above, it would be prudent to not rely too much upon the stated goal of the Fed to raise interest rates incrementally by 1% per year. Even though the U.S. has reached a further stage in the economic cycle than its major developed country peers, further tightening can only be done if the U.S. economy continues to achieve moderate growth.

For the future, professional active managers may be able to derive some benefit from market volatility. However, most investors should primarily stay in high quality companies that can better withstand higher interest rates and expected market volatility. Consumer related sectors, i.e., restaurants, retail, and home improvement should benefit from the stronger dollar and low energy prices. The financial sector will benefit from the increasing interest rates. In view of the present low threat of inflation, quality intermediate term bonds can also be considered.

Roger Small is a Senior Investment Advisor with Canon Capital Wealth Management. A U.S. Navy veteran, Roger earned his MBA from Harvard and is an accredited investment fiduciary.

Canon Capital Management Group Kicks Off 2016 with Cyber Security Seminar and Document Shredding Event

With the arrival of the new year, thoughts turn toward clearing out clutter and developing good habits. We were happy to lead the way with our Cyber Security Seminar and Document Shredding event, held Wednesday, January 7 at our Wealth Management & Family Office Services location in Hatfield.

Dr. Peter Roland, Canon Capital Management Group founder and managing director, delivers one of the first containers of documents to be shred.

While Richter’s Mobile Shredding provided the document shredding services, our Computer Solutions owner and director, Kent Gerhart, presented two seminars on the latest news and best practices in cyber security safeguards.

This event was free of charge, with attendees encouraged to bring donations to be distributed to local charities, including diapers, baby wipes and new, unwrapped toys for infants and toddlers. Many thanks to everyone who participated.

Canon Capital Wealth Management Announces Financial Literacy Seminar

Canon Capital Wealth Management is pleased to announce the first in a series of free educational seminars to be held throughout the 2016 calendar year. The seminars will cover personal finance and business related topics to help you become more financially literate.

The first Financial Literacy Seminar will be held at our Hatfield office Wednesday, March 23, 2016. For your convenience, we are offering this seminar at 3:00-4:00pm or 5:00-6:00pm.

This Financial Literacy Seminar is for adults of all ages with any level of financial knowledge. It’s ideal for individuals desiring to improve their ability to manage their financial resources effectively to meet their goals and gain a lifetime of financial security.

During this seminar, you’ll learn:

– The significance of financial literacy in your daily life.
– Tools and techniques to better understand and apply financial literacy concepts.
– How you can help yourself and others to become more financially literate.

The seminar will be presented by Dr. Peter Roland, Managing Director of Canon Capital. Dr. Roland brings over 25 years of experience teaching finance and accounting in the graduate MBA program at DeSales University.

We hope you’ll join us for this educational and fun event so please feel free to bring a friend. RSVP by Thursday, March 17, 2016 to Jen Norman. You may RSVP via email (jnorman@canoncapital.com) or call 215-723-4881, ext. 207. Please include whether you would like to attend the 3:00pm or 5:00pm session.

Canon Capital Management Group provides a single source of financial and business services to help you make the right decisions. For more information, visit www.canoncapital.com or call 215-723-4881.

Canon Capital Staff News – Congratulations to Matthew Witter

Congratulations to Matthew Witter, a Senior Investment Advisor and Financial Planner in our Wealth Management division, for achieving the designation of Certified Financial Planner (CFP®). The CFP® designation is earned by meeting the education, examination, experience and ethics as required by the CFP® Board. This includes adhering to “the principles of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence” in carrying out his advising duties.

Prior to this CFP® designation, Matt had passed his Series 65 exam, earned the AIF® Accredited Investment Fiduciary, the C(k)P® Certified 401(k) Professional designations, and completed extensive coursework through ASPPA.

“The CFP® certification serves as a recognized standard of excellence for competent and ethical personal financial planning and Matt’s professional achievement will enhance the financial planning services which Canon Capital provides our clients,” said Dr. Peter Roland, Managing Director and Founder of Canon Capital Management Group.

Congratulations, Matt!

Canon Capital Wealth Management Kicks Off Financial Literacy Initiative

Results from a recent Global Literacy Test show that only 57% of adults in the United States are financially literate. What does this mean? It means that nearly half of the U.S. population does not have the complete understanding of the tools and abilities needed to best manage their personal finances.

It is with this literacy ratio in mind that our Wealth Management division kicked off a new Financial Literacy Initiative. The first seminar was presented by Dr. Peter Roland, Managing Director of Canon Capital, on Wednesday, March 23 at our Hatfield location. This personal financial literacy seminar is the first of several educational seminars that will be offered free of charge to both Canon Capital clients and the public throughout the 2016 calendar year.

“For many people, personal finance management can be overwhelming. It’s not that people aren’t smart enough, it’s that many people feel they don’t have the time to devote to it so they put it off. We believe that with the knowledge and tools presented in these seminars, people will be able to use their time more efficiently and therefore be more eager and better prepared to take a good look at their personal finances. When we all are able to make good decisions everyone benefits,” said Dr. Roland.

This Financial Literacy Initiative is for adults of all ages with any level of financial knowledge who are eager to improve their ability to manage their financial resources effectively to meet their goals and gain a lifetime of financial security.

We want to hear from you. What topics would you like to see covered in our Financial Literacy Initiative? Please let us know in the comments.

You can listen to the March 23rd seminar via this webinar replay.

Canon Capital Management Group provides a single source of financial and business services to help you make the right decisions. For more information, call 215-723-4881 or browse our website.