Bob’s Journal for 12/3/20

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The Future of Social Security Raises Questions, and I Have Answers

The future of Social Security raises questions, and I have the answers for you this week.

Those who provided their questions about the future of Social Security from my Nov. 19 teleforum will be rewarded for their patience as I first will address the program’s solvency. The program’s funding naturally is of utmost concern to retirees who depend on it and future retirees who expect to need it.

What is the future of Social Security and what actions should we take now?

I want to thank you for the many questions sent to me about the solvency and future of Social Security. The last official estimate from the trustees of Social Security is that the retirement trust fund would run out of money in 2034 but that estimate was made before the current COVID-19 recession.

The recession was deeper than previous recessions and no doubt was damaging to Social Security’s financial condition. The next official estimate of the system’s financial condition won’t come until April or May of 2021.

But some private researchers and the Congressional Budget Office have estimated that the current recession will cause the trust fund to run out of money in 2032 or earlier. The extent of the damage will depend on how long the recession lasts.

Even when the trust fund runs out of money, however, Social Security itself won’t be out of money. The system each year collects payroll taxes from employers and employees. Those taxes are estimated to be enough to pay 75% or more of promised benefits for at least 75 years.

Congress will have to act within the next 10 years, preferably sooner, to avoid an across-the-board reduction in benefits. I expect that Congress will protect those who already are receiving benefits and those within five or 10 years of applying for benefits.

There might be an exception for very high income or net worth individuals. In addition, income taxes on Social Security benefits might increase for higher-income recipients.

There is likely to be a combination of taxes (including higher taxes on Social Security benefits) and benefit reductions. I don’t recommend applying for benefits early as a way to protect yourself from cuts.

That is partly because I believe Congress will protect those receiving or within a few years of applying for benefits. It also is because if benefits are cut, I’d rather have my benefits reduced from the higher level scheduled for those who claim benefits later than the lower level of someone who claimed benefits early.

My recommendation is that those near retirement should determine the best time for them to claim benefits without regard to potential benefit reductions. Those more than 10 years from claiming Social Security benefits need to include some flexibility in their retirement plans. Be prepared to make adjustments reflecting a reduction in, but not an elimination of, Social Security benefits.

What is the best way now to pass an IRA on to a non-spouse beneficiary?

There also were many questions about IRAs, especially questions related to estate planning. Longtime readers know that the SECURE Act, enacted at the end of 2019, ended the Stretch IRA for IRAs that are inherited after 2019.

Most IRA beneficiaries now must distribute the IRA in full within 10 years after inheriting. The 10-year rule applies to both traditional and Roth IRAs.

There are a number of ways you can give loved ones the equivalent of a Stretch IRA, and some of the strategies deliver better results than a Stretch IRA. You can simply take money out of the IRA early and invest the after-tax amount. You also can convert the traditional IRA to a Roth IRA.

Or you can have the after-tax IRA balance transferred to a charitable remainder trust. The trust will make annual distributions to its beneficiaries for the rest of their lives, or over whatever period you name.

More powerful strategies involve using the leverage of permanent life insurance policies. There are several strategies available.

Details of these and other strategies are in the March and April 2020 issues of Retirement Watch.

Should we wait until age 75 to take required minimum distributions (RMDs) from a traditional IRA?

RMDs were another topic with wide interest, and there is much confusion about RMDs because of some recent changes in the law.

All RMDs were suspended for 2020, which we covered in detail in Retirement Watch during the year. But that was only a one-year suspension. You have to resume taking RMDs in 2021, unless Congress suspends RMDs again. That isn’t likely to happen unless there is another significant market decline.

The SECURE Act also changed when RMDs must begin. Anyone who turned age 70½ before 2020 has no change. They had to begin taking RMDs for the year they turned 70½ and should continue taking RMDs, except for the year 2020.

But anyone who turns 72 after 2020 doesn’t have to begin RMDs until the year he or she turns 72. That gives them a little delay in when RMDs begin. It also makes it easier to determine when RMDs begin, since you don’t have to figure out the half year.

The IRS recently issued regulations with new life expectancy tables to be used in computing RMDs. Those take effect in 2022. I’ll have details in the January 2021 issue of Retirement Watch, which should be posted on the website next week.

There’s a new proposal in Congress that has strong bipartisan backing. Among other things, this bill would change the beginning age of RMDs to 75. But that law hasn’t been enacted. It likely won’t be seriously considered by Congress until sometime in 2021.

The Data

New unemployment claims have been volatile the last few weeks. They increased for two consecutive weeks. But in the latest week, they declined by 75,000 to 712,000.

That is the lowest level since the pandemic began but higher than any on record before 2020. Continuing claims declined by 569,000 to 5.52 million.

Claims for special pandemic unemployment compensation programs increased.

But a total of 20.16 million Americans received some kind of unemployment compensation benefits for the week. That is 349,633 lower than the previous week.

The Government Accountability Office (GAO) last week released a report that concluded the weekly unemployment claims data issued during the pandemic were inaccurate. Case backlogs, fraud and other problems at the state level make it difficult for the Department of Labor to compile accurate data.

New unemployment claims rise by 30,000, and last week’s claims were revised higher by 6,000 to total 778,000.

Continuing claims declined by 299,000 to 6.07 million.

Pandemic Unemployment Assistance (PUA) declined by 8,019 to 311,675. But the PUA emergency program increased by 466,106 to 9.15 million.

The total number of people receiving all benefits increased by 135,297 to 20.45 million. That compares to 12 months ago when just 1.5 million people were receiving all benefits.

New home sales declined by 0.3% in October from September’s level. But sales for the three previous months were revised higher. New home sales were up 20.6% for the year to date and 41.5% over 12 months.

October 2020 new home sales were the third highest since 2006, lagging only August and September of 2020.

The S&P Corelogic Case-Shiller House Price Index increased 1.3% in September and rose 6.6% over 12 months.

The FHFA House Price Index increased 1.7% in September and was up 9.1% over 12 months.

The Pending Home Sales Index declined by 1.1% in October, according to NAR. That’s the second straight monthly decline. But the index was up 20.2% over 12 months.

The Dallas Fed Manufacturing Index recorded a sixth consecutive month of expansion for Texas manufacturing in November, but the rate of growth declined. The general business activity index was 12.0 in November, compared to 19.8 in October. The production index declined to 7.2 from 25.5.

Consumer Confidence from The Conference Board declined to 96.1 in November from 100.9.

Consumer Sentiment from the University of Michigan at the end of November declined a little to 76.9 from 77.0 at mid-month.

Personal Income in October declined by 0.7% compared to a 0.7% increase in September. That reflects the decline in fiscal stimulus and a slowdown in people returning to work.

Despite the decline in income, Personal Consumption Expenditures increased 0.5% compared to 1.2% rise in September.

The PCE Price index was unchanged for October and up 1.2% over 12 months. The core index, excluding food and energy, also was unchanged in October but up 1.4% over 12 months.

Durable Goods Orders gained 1.3% in October. The September number was revised higher to a 2.1% increase. Excluding transportation, orders were up 1.3% in October, and September’s number was revised higher to 1.5%.

Core capital goods orders — regarded as a good measure of business investment — was up 0.7% October. September’s increase was revised higher to 1.9%.

The ISM Manufacturing Index for November was 57.5, down from 59.3 in October. But it is the seventh consecutive month the index was above 50.0, which indicates the sector is growing.

But the ISM Services Index for November declined a bit to 55.9, compared to 56.6 in October.

The PMI Manufacturing Index for November increased to 56.7 from 53.4 in October. The PMI Services Index increased to 58.4 from 56.3. The PMI Composite Index for the economy increased to 58.6 from 56.9.

The Richmond Fed Manufacturing Index for November was down to 15 from 29. That indicates continued growth but at a lower rate than in October.

The Kansas City Fed Manufacturing Index was 11 in November, compared to 13 in October. The November level was the same as in September. According to the index, manufacturing activity still is lower than a year ago and immediately before the pandemic.

Private sector jobs increased by 307,000 in November, according to the ADP National Employment Report. The number of new jobs was well below economists’ expectations and below the October level.

The second estimate for third-quarter gross domestic product (GDP) was unchanged, indicating GDP increased at an annualized rate of 33.1% during the quarter. The estimate of personal consumption expenditures showed a decrease in the rate of growth by 0.1 to 40.6%.

The Markets

The S&P 500 rose 1.14% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 0.15%. The Russell 2000 lost 0.38%. The All-Country World Index (excluding U.S. stocks) added 0.62%. Emerging market equities increased 0.38%.

Long-term treasuries lost 1.43% for the week. Investment-grade bonds decreased 0.01%. Treasury Inflation-Protected Securities (TIPS) added 0.20%. High-yield bonds gained 0.59%.

In the currency arena, the U.S. dollar declined 0.97%.

Energy-based commodities lost 0.43%. Broader-based commodities fell 0.53%. Gold rose 1.10%.

Bob’s News & Updates

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.