Bob’s Journal for 4/6/23

Social Security Trust Fund Moves Closer to Depletion

After last year’s annual report from the Trustees of Social Security and Medicare projected that the retirement trust fund would run out of money in 2034, I said it was too optimistic.

The assumptions in the report didn’t seem realistic. It looks like I was right, since the trustees issued this year’s report last week, and projected the retirement trust fund would run out of money in 2033, one year earlier than forecast.

After that, annual tax revenue into the system should be able to pay about 77% of promised benefits. This is an important point that’s often overlooked. Even when the trust fund runs out of money, the system still receives enough money to pay 77% of promised benefits.

People who think they won’t receive anything from Social Security after the trust funds are exhausted aren’t looking at the data.

The report makes many of the same assumptions as last year about inflation, fertility rates and more. So, I anticipate the trust fund will be exhausted before 2033 unless there are significant improvements in economic growth and inflation or other factors.

The report estimates that to make the program solvent for at least 75 years, beginning in January 2023 revenue would have to increase by about 3.44% of total payroll (increasing the payroll tax to 15.84%) or benefits would have to be reduced by 21.3% on all current and future beneficiaries.

If benefit reductions were applied only to those who initially become eligible for benefits in 2023 or later, the benefit reduction would have to be 25.4%.

Or a combination of those tax increases and benefit cuts could be enacted.

If changes are delayed until 2034, the tax increase would have to be 4.15% and the benefit reduction for all beneficiaries would have to be 25.2%.

There are a number of Social Security bills that have been introduced in Congress, and a group of senators is working behind the scenes to come up with a reform proposal. But most members of Congress seem to believe that there’s no urgency. Their lack of action gives the sense they believe Congress can wait to respond.

Even those proposing tax increases to help the system would tax only those making more than $400,000. That wouldn’t come close to closing the gap. Those proposals often are accompanied by proposals to increase benefits, which would offset the tax increases.

Over the last year, it has seemed more likely to me that when Congress does act, it’s likely to avoid significant changes to Social Security benefits or taxes. Instead, it will make the program more like Medicare by having deficits made up by general revenue from the federal government.

No matter your age, your retirement plans should assume you’ll receive Social Security benefits. But there should be flexibility in your plans to allow for a reduction in Social Security benefits of up to 25%.

Economic Problems Continue to Spread

Commercial office buildings are the latest sector of the economy to experience pain from the Federal Reserve’s tightened monetary policy.

Many office buildings suffered during the pandemic as remote work became widespread. But the better buildings in central business districts, known generally as Class A buildings, didn’t feel much pain. Many kept their tenants and even increased rents. The pain was focused on older buildings and those that are distant from hubs.

That seems to be changing. For the first time since 2021, in the fourth quarter of 2022 the amount of Class A space leased declined from the previous quarter.

Other data indicate that mortgage defaults on Class A buildings are increasing. The building owners are suffering from higher interest rates, as well as lower occupancy rates. Businesses not only are allowing more remote work, they are laying off workers or not filling job vacancies.

One high-profile default was by Brookfield Asset Management on $750 million in debt backed by a couple of prominent towers in Los Angeles.

Asset management firm PIMCO also defaulted on a mortgage that was backed by office buildings in New York and San Francisco. PIMCO purchased the Columbia Realty office REIT in 2021.

Values of buildings also are declining, making it more difficult for owners to refinance existing debt.

The problems in commercial real estate contribute to the banking crisis. Many commercial real estate mortgages are made and held by small and mid-size banks.

The two problems are likely to become worse slowly over the next year or so. As office leases expire, current tenants are likely to move to newer buildings or lease less space than they have now.

Personality Influences Investments

An investor’s personality traits often influence how the person invests, according to a new research paper.

The study used a 20-question survey to classify each individual’s personality traits among five categories established by psychologists: Extraversion, Agreeableness, Openness, Conscientiousness and Neuroticism.

The researchers then asked the investors about economic expectations, risk preferences, their asset allocation decisions and more.

The five personality traits are good at explaining an investor’s beliefs and decisions, concluded the researchers, with some traits influencing decisions more than others.

Investors who are high in Neuroticism are more pessimistic about future stock returns, consider a crash to be a high probability, are more pessimistic about economic growth and expect higher inflation.

Investors who are high in Openness are more willing to take risks than others.

Those who are high in Neuroticism or low in Openness tend to invest less in equities.

While there was some correlation between the other personality traits and investment decisions, the research concluded that Neuroticism and Openness are the most relevant in influencing financial decisions.

The Data

Personal income increased 0.3% in February, down from a 0.6% rise in January. Most of the increased spending was for services.

Personal spending increased only 0.2% in February compared to a 2.0% jump in January.

Inflation continues to decline slowly. The Fed’s preferred inflation measure, the Personal Consumption Expenditure (PCE) Price Index, increased 0.3% in February after climbing 0.6% in January.

Over 12 months, the PCE Price Index increased 5%, down from 5.3% at the end of January.

Excluding food and energy, the core PCE Price Index rose 0.3% in February and 0.5% in January.

Over 12 months, the core PCE Price Index was up 4.6% at the end of February after leaping 4.7% at the end of January.

The number of job openings in the United States declined by 632,000 in February to 9.9 million, the lowest level since May 2021, according to the JOLTS (Job Openings and Labor Turnover Survey) report.

The largest decreases were in professional and business services and health care and social assistance.

The rate of people quitting jobs increased a little to 2.6% of the work force. That’s below the record 3.0% rate at the end of 2021 but higher than the historic average, indicating the job market still is strong.

The Consumer Sentiment Index from the University of Michigan declined to 62 at the end of March from 67 at the end of February.

It was the first decline in the index since November. But except for January and February, March’s reading is the highest since April 2022. Consumers indicated they expect a recession in 2023.

Factory orders declined 0.7% in February after dropping 2.1% in January. After excluding transportation, orders declined only 0.3% in February after increasing 0.8% in January.

The ISM Non-Manufacturing Index fell to 51.2 in March from 55.1 in February. This marked the slowest growth in the services sector in three months. But a majority of companies reported having a positive outlook about business conditions.

The ISM Manufacturing Index declined to 46.3 in March from 47.7 in February. March’s level is the lowest since May 2020.

The PMI indexes diverged from the ISM indexed in March.

The PMI Services Index increased to 52.6 in March from 50.6 in February.

The PMI Manufacturing Index rose to 49.3 in March from 47.3 in February. That marks the fifth consecutive month the index was less than 50.0, which indicates a contraction in the sector.

The PMI Composite Index for the economy increased to 52.3 in March from 50.6 in February.

The Chicago PMI jumped slightly to 43.8 in March from 43.6 in February.

The third and final estimate of gross domestic product (GDP) for the fourth quarter of 2022 grew at an annualized rate of 2.6%. That’s down from 3.2% in the second estimate. Consumer spending increased less than in the earlier estimate.

For all of 2022, GDP increased 2.1%.

The private sector created 145,000 jobs in March, according to the ADP Employment Report. February’s job increase was revised higher to 261,000.

Leisure and hospitality again created the most jobs in March. The sectors with the most job losses were financial services and professional and business services.

New unemployment claims increased by 7,000 to 198,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.689 million from 1.685 million.

The Markets

The S&P 500 rose 3.30% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 3.13%. The Russell 2000 increased 1.10%. The All-Country World Index (excluding U.S. stocks) added 3.13%. Emerging market equities climbed 1.36%.

Long-term treasuries rose 2.75% for the week. Investment-grade bonds increased 2.25%. Treasury Inflation-Protected Securities (TIPS) added 1.27%. High-yield bonds gained 2.58%.

In the currency arena, the U.S. dollar declined 0.72%.

Energy-based commodities increased 4.03%. Broader-based commodities rose 2.34%. Gold gained 2.46%.

Bob’s News & Updates

My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here, respectively. You can be among the first to write a review.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling 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.

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A recent five-star review of my book, “The New Rules of Retirement” 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.