Bob’s Journal for 11/4/21

Retirement, Estate Planning Strategies Safe from Change for Now, But for How Long?

Key retirement and estate planning strategies are safe from being changed by Congress for at least a little while.

Last week, after Congress failed to agree on details of the spending and tax proposals in the “Build Back Better” bill, President Biden issued what he called a framework for coming to an agreement. The Biden framework excluded a number of key proposals to increase taxes on estates, gifts and retirement plans.

Under this framework, there are no attempts to reduce the lifetime estate and gift tax exclusion, to wipe out the step-up in basis for inherited property, to eliminate many estate planning strategies, as well as to end the back-door Roth IRA and other estate and retirement planning provisions in the earlier proposals.

This doesn’t mean the proposals are dead. President Biden only issued a framework to restart and refocus discussions. Members of Congress still are trying to reach an agreement.

Many members have made clear they want certain spending items added to the framework. If they are included, more tax increases will have to be added. Congress could agree to insert one or more of the estate and retirement planning changes into the legislation.

Even if the estate and retirement changes aren’t included in this legislation, they won’t be off the table. Many of the proposals that were dropped from the framework are popular among a majority in Congress. The proposals are likely to return soon after Congress is finished with this legislative package. It might happen later this year or next year.

In addition, the SECURE Act 2.0 still is on the agenda and has strong bipartisan support. There’s a high probability it will be enacted this year or next year.

Rep. Richard Neal (D-Mass.) is the main sponsor of the SECURE Act 2.0 and said this week that its passage remains one of the top priorities.

The good news is we likely have an opportunity to take another close look at retirement and estate plans before the rules are changed.

Decide whether you should take money out of traditional IRAs soon and reposition the after-tax amount as a Roth IRA, permanent life insurance, charitable remainder trust, or something else. Review our March and April 2020 issues of Retirement Watch for details of these strategies.

Also, determine if you should take advantage of the estate tax planning strategies that still are available but are targeted by Congress. These include grantor retained annuity trusts, family limited partnerships, lifetime gifts and more. Those with estates worth $5 million or more should consider moving some money out of their estates while the lifetime exemption still is at its high level.

Social Security Overhaul Introduced in Congress

“Social Security 2100: A Sacred Trust” was introduced in Congress last week by Rep. John Larson (D-Conn.).

The legislation has been introduced annually by Larson with tweaks and modifications since 2014. But Congress is more likely to take a serious look at it now that the depletion of the retirement trust fund is just over 10 years away under the latest estimates from Social Security.

The focus of the proposal is to increase benefits for many beneficiaries, but it also includes some revenue hikes. The net effect would be to extend the life of the trust fund for four years, so the proposal is far from a solution to the Social Security solvency problem.

The proposal includes the following provisions: Increasing benefits for all Social Security beneficiaries 2% across-the-board; basing the annual cost of living adjustment on the Consumer Price Index for the Elderly, not the Consumer Price Index for Urban Consumers; increasing benefits for surviving spouses; boosting benefits for those who have been receiving them for 20 years or longer; and raising the thresholds at which Social Security benefits are taxed.

Some of the benefits would be temporary, expiring after 2026. To help pay for the benefits, the bill would impose Social Security payroll taxes on wages and salaries above $400,000. Currently, the taxes aren’t imposed on wages and salaries above $142,800.

Congress is unlikely to take up this or other Social Security proposals until 2022, but then the issue should move close to the front burner. I’ll be monitoring any actions taken and report them back to you.

How the Pandemic Changed Baby Boomer Retirement Plans

The COVID-19 pandemic accelerated the retirements of many Baby Boomers, and many of the retirements might not have been forced.

More than three million Baby Boomers retired prematurely during the pandemic, according to an analysis from an economist at the Federal Reserve Bank of St. Louis. Another way to look at it is that the number of retirees in 2020 doubled compared to the average of previous years.

Some people left the workforce because they were laid off and couldn’t find new jobs. Others left voluntarily because they wanted to avoid infection or reconsidered their priorities.

It appears that many of these Boomers retired voluntarily. That’s the conclusion of an analysis in The Washington Post that found many of the new retirees put off claiming their Social Security benefits.

In fact, the number of workers applying for Social Security retirement benefits in the 12 months ending September 2021 declined 5% from a year earlier. That’s the biggest decline in new benefit applicants in two decades.

Its likely that the high levels of fiscal and monetary stimulus made it easier for a number of Boomers to retire. Prices for stocks, other investments and houses increased substantially after the stimulus began. The stimulus checks also beefed up bank accounts.

Some analysts attribute the decline in benefit applications to the closure of the Social Security Administration offices during the pandemic. But people still could apply online or over the telephone, so it seems unlikely people who needed money couldn’t find a way to apply for benefits.

It is more likely that people took a look at the surges in their asset values. They decided they didn’t need to work any longer and could delay their claims for Social Security benefits a few years so the benefit payments would be higher.

The Data

Personal income declined 1.0% in September, following a 0.2% increase in August.

But personal consumption expenditures (PCE), which is a measure of household spending, increased another 0.6% in September on top of a 0.8% increase in August.

The Fed’s preferred inflation measure continues to climb. The PCE Price Index rose 0.3% in September and 4.4% over 12 months. The 12-month increase is the highest since January 1991.

The core PCE Price Index (excluding food and energy) rose 0.2% in September and 3.6% over 12 months. The 12-month increase is the highest since May 1991.

Compensation increased 1.3% in the third quarter, according to the Employment Cost Index. Over 12 months, compensation increased 3.7%, the highest level since 2002.

The services sector continues to surge in October, according to the ISM Services Index. The index increased to 66.7 from 61.9 in September. This is the eighth consecutive month above 60, which is considered to reflect very strong growth.

Factory Orders increased 0.2% in September, a decline from August’s 1.2% increase. Orders have increased 16 of the last 17 months.

The manufacturing sector grew at a slower but still strong rate in October, according to the ISM Manufacturing Index. The index was 60.8, down from 61.1 in September.

The PMI Manufacturing Index told a similar story. That index was 58.4 in October, down from 59.2 in September.

Manufacturing activity in the Midwest increased in October according to the Kansas City Fed Manufacturing Index. The index rose to 31 from 22 in September.

But the PMI Services Index rose to 58.7 from 58.2. That lifted the Composite Index for the economy to 57.6 in October from 57.3 in September.

The businesses survey indicated optimism about the future. Almost all manufacturers reported higher input prices, and the index of prices paid for raw materials hit a record high.

The Chicago PMI shot up to 68.4 in October from 64.7 in September. Economists were expecting a decline.

There was a solid increase of 571,000 in private payrolls in October, according to the ADP Employment report. This follows a 523,000 increase in September (which was revised down by 45,000 from the initial estimate).

October’s increase was the largest since June. Leisure and hospitality (bars, restaurants, hotels) led the way with 185,000 new jobs. Businesses with more than 500 employees had 342,000 of the new hires.

New unemployment claims fell to another pandemic low in the latest week. Claims fell by 10,000 to 281,000. This was the fourth consecutive week of declines.

Continuing claims also declined again to another new pandemic low of 2.24 million.

Pending home sales declined 2.3% in September from August’s level, according to the National Association of Realtors (NAR). Over 12 months, sales were down 8%.

Rising home prices, higher mortgage interest rates and a small inventory of homes available for sale were blamed for the decline in pending home sales.

The Consumer Sentiment Index issued by the University of Michigan increased to 71.7 in October from 71.4 in mid-October. The index has been in a narrow range for a few months. Optimism is restrained by higher inflation and falling confidence in government policies.

Gross domestic product (GDP) increased at only a 2% annualized rate, according to the first estimate of third quarter economic growth.

A major factor was a sharp drop in vehicle sales and production due to the supply shortages affecting the industry.

Also reducing growth were decreases in residential fixed investment and government spending.

Consumer spending increased only 1.6% for the quarter, which was well below the 12% jump in the second quarter.

The Markets

The S&P 500 rose 1.30% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.86%. The Russell 2000 increased 2.90%. The All-Country World Index (excluding U.S. stocks) lost 0.17%. Emerging market equities declined 2.27%.

Long-term treasuries rose 1.50% for the week. Investment-grade bonds increased 0.60%. Treasury Inflation-Protected Securities (TIPS) declined 0.65%. High-yield bonds gained 0.04%.

On the currency front, the U.S. dollar gained 0.08%.

Energy-based commodities fell 0.83%. Broader-based commodities lost 1.56% and gold declined 0.29%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.