Bob’s Journal for 6/9/22

Social Security Trust Fund Is a Little More Solvent

The Board of Trustees of Social Security issued its latest annual report last week and estimated the retirement trust fund will last one year longer than was estimated last year.

While the pandemic recession in 2020 was worse than anything the trustees had anticipated in previous annual reports, the recession was very short. Also, the recovery was much stronger than anticipated in the 2021 annual report.

The retirement trust fund, officially known as the Old Age and Survivors Insurance trust fund, now is projected to run out of assets in 2034, one year later than was estimated last year.

When the trust fund is depleted, the Social Security retirement program won’t end. The trustees estimated that the annual tax revenue coming into the program will be enough to pay about 77% of benefits indefinitely.

The total annual cost of Social Security began to exceed its annual income in 2021 and will continue to do so through the 75-year period over which the estimates were made. Social Security’s costs began to exceed its non-interest income in 2010.

If Congress doesn’t act to shore up the program before 2034, there will have to be an across-the-board reduction in benefits of 23% in 2034.

The trustees say that to keep the trust fund fully solvent through the next 75 years, a combination of the following actions would have had to take effect by January 2022: (1) revenue would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 3.24 percentage points to 15.64%; (2) scheduled benefits would have to be reduced by an amount equivalent to an immediate and permanent reduction of 20.3%  applied to all current and future beneficiaries, or a 24.1% cut if the reductions were applied only to those who become initially eligible for benefits in 2022 or later.

Each year that reforms are delayed increases the required changes. For example, if changes don’t occur until 2035, payroll taxes would have to increase 4.07 percentage points to 16.47% or all benefits would have to decline by 24.9%, or some combination of the two would have to occur.

Another alternative is for the work force to increase faster than projected so more people are paying taxes into the program.

Will RMDs Be Suspended in 2022?

Congress took the extraordinary step of suspending required minimum distributions (RMDs) from retirement accounts in 2009 and 2020. Several readers asked if they should avoid taking their RMDs in 2022 in case RMDs are suspended again.

I think there’s a low probability RMDs will be suspended in 2022.

The previous suspensions occurred in extraordinary circumstances.

The financial crisis caused a deep decline in prices of stocks and other investments in 2008, with most of the decline occurring in the last half of the year. Even so, RMDs weren’t suspended for 2008. IRA owners still had to take their 2008 RMDs. Only the 2009 RMDs were suspended.

The pandemic recession caused a sharp stock market decline in March 2020. Congress included a suspension of RMDs in the early pandemic legislation.

So far in 2022, we’ve had a normal correction in stock and bond prices that isn’t accompanied by an extraordinary outside event such as a financial crisis or pandemic.

I haven’t seen or heard any discussions in Congress about suspending RMDs for 2022. Anyone who is subject to RMDs should assume the requirement will remain in effect through the year.

If Congress decides to suspend RMDs later this year, it is likely to include a provision similar to the one in 2020 that allowed people who already took their RMDs a period of time to return the money to retirement accounts to avoid having it taxed for the year.

How Higher Inflation Increases Your Taxes

Inflation does more than erode the purchasing power of your income and assets. Inflation also automatically increases your taxes.

Many sections of the tax code are indexed for inflation. For many years, the exemption amounts, tax tables, retirement plan contribution limits, and a wide range of other tax items have been changed annually to reflect changes in the Consumer Price Index.

But not all parts of the tax code are indexed for inflation, and that causes automatic inflation-induced tax increases for many taxpayers.

Perhaps the most important un-indexed parts of the tax code are the income levels at which Social Security benefits are taxed. One income level hasn’t been changed since the 1980s and the other since the 1990s.

The result is that a tax that initially was targeted at the highest-income retirees now applies to more and more Social Security beneficiaries each year. In a few years, it is estimated that about 80% of Social Security beneficiaries will pay taxes on their benefits.

The Congressional Budget Office estimates that the share of total Social Security benefits taxed will increase by 10% this year and another 10% next year. Total income taxes paid on benefits will increase by 37% in 2022 from 2021.

The maximum loan amount for mortgage interest deductions also isn’t indexed for inflation. That one really should be indexed for housing price inflation, not general consumer inflation.

The $10,000 annual limit on deductions for state and local taxes and the amount of gain from the sale of a principal residence that’s tax free also aren’t indexed for inflation.

Perhaps the biggest oversight is the $3,000 annual limit on deductions for capital losses. That limit hasn’t been changed since 1978, so it’s now a fraction of its initial value after adjusting for inflation.

There are a number of automatic tax increases that take effect whenever there’s inflation. Because of them, taxes are going to increase even if Congress doesn’t enact a tax increase.

The Data

Total consumer credit in April increased at an annual rate of 10.1% from March’s level.

Revolving credit (mostly credit cards) increased at a 19.6% annual rate and non-revolving credit (mostly student and vehicle loans) increased at a 7.1% annual rate.

The economy added 390,000 jobs in May, according to last Friday’s Employment Situation reports. While a historically higher number, it’s the lowest since April 2021 and less than the average monthly increase of the last 12 months.

Average hourly earnings increased by 0.3% in May and are up 5.2% over 12 months.

Retail jobs declined by 61,000 while leisure and hospitality jobs increased by 84,000. Those changes are a result of consumers buying more services and fewer goods than in 2021.

The labor market remained strong in April, according to the JOLTS (Job Openings and Labor Turnover Survey) report.

The number of job openings declined a little to 11.4 million from the record of 11.8 million set in March.

The number of workers quitting their jobs during the month stayed near its historically high level of 4.4 million.

Productivity decreased at an annual rate of 7.3% in the first quarter. That, coupled with wage increases, caused unit labor costs to increase 12.6% in the quarter.

Factory orders increased only 0.3% in April, and March’s orders were revised down to a 1.8% increase from the 2.2% increase initially reported.

Orders for manufactured durable goods, considered a good measure of business investment, increased 0.5% in April, following a 0.7% increase in March.

The manufacturing sector of the economy increased its growth rate in May, according to the ISM Manufacturing Index. The index increased to 56.1 from 55.4 in April.

But the PMI Manufacturing Index declined to 57.0 in May from 57.5 in April. The PMI Services Index declined to 53.40 in May from 55.6 in April. That brought the Composite Index down to 53.6 in May from 56.0 in April.

The ISM Services Index decreased to 55.9 in May from 57.1 in April.

New unemployment claims declined by 11,000 to 200,000 in the latest week. Continuing claims decreased to 1.31 million. Both measures remain near their historic lows.

The ADP Employment Report indicated there were 128,000 new private sector jobs created in May, down from 202,000 in April.

The Markets

The S&P 500 rose 0.68% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.60%. The Russell 2000 increased 3.02%. The All-Country World Index (excluding U.S. stocks) added 0.34%. Emerging market equities are up 0.21%.

Long-term treasuries lost 1.06% for the week. Investment-grade bonds fell 1.03%. Treasury Inflation-Protected Securities (TIPS) added 0.21%. High-yield bonds declined 1.21%.

On the currency front, the U.S. dollar rose 0.44%.

Energy-based commodities increased 4.35%. Broader-based commodities rose 4.41%. Gold added 0.98%.

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.

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