Bob’s Journal for 8/5/21

What Inflation Means for Medicare and Social Security Beneficiaries

The numbers won’t be final for a few more months, but it looks like this year’s rise in inflation will affect beneficiaries of Medicare and Social Security.

Social Security, as you know, gives beneficiaries an annual cost of living adjustment, or COLA. The COLA is based on the 12-month change in the Consumer Price Index (CPI) through September. The Social Security Administration will calculate the COLA in early October.

Private analysts are estimating that, based on the data so far this year and what they anticipate through September, the Social Security COLA for 2022 could be 5.8% or higher. Some are forecasting a COLA just above 6%.

If the COLA is anywhere in that range, it will be the highest since 1983. Of course, if inflation cools off as rapidly as the Federal Reserve expects, the increase would be lower.

Whatever happens with inflation through September, the COLA is almost certain to be much higher than the sub-2% levels experienced in most recent years.

But a lot of that COLA could be absorbed by higher Medicare Part B premiums.

Many people don’t realize that the 2021 Medicare premium increases were artificially and temporarily restrained by one of the COVID-19 relief bills enacted in 2020.

From 2020 to 2021, the base Medicare Part B premium increased only $3.90 to $148.50 per month. Without the cap imposed by Congress, the base premium would have been $160.20.

In 2022, the temporary cap will be lifted. The normal 2021 increase will be reinstated, plus whatever 2022 increase is calculated on top of that.

A 5% increase for 2022 would cause the base premium to increase to around $168, or about 13% higher than the artificially low 2021 premium. The Medicare surtax, or income-related monthly adjusted amount (IRMAA), imposed at higher incomes would increase as well.

Remember that Medicare Part B premiums are calculated to be 25% of Medicare’s estimated per-capita spending for the year. The other 75% is paid by general tax revenues.

The Social Security COLA will be announced by mid-October. The Part B premiums will be announced in November.

Congress Looks to Eliminate ‘Mega-IRAs’

Following reports of Elon Musk’s $5 billion Roth IRA, Congressional tax leaders asked for data about large IRAs and weren’t happy with what they were given.

An earlier congressional report said that in 2011 almost 8,000 taxpayers had IRA balances of $5 million to $10 million. More than 9,000 taxpayers had IRA balances of $5 million or more.

The latest data, from 2019, is that more than 28,000 taxpayers had IRAs with balances exceeding $5 million. Almost 25,000 taxpayers had IRA balances of $5 million to $10 million. And 497 taxpayers had IRA balances of $25 million or more. In that last group, the average account balance was more than $150 million.

Senate Finance Committee Chairman Ron Wyden (D-Ore.) and House Ways and Means Committee Chairman Richard Neal (D-Mass.) said IRAs were intended to help middle class people save for retirement, not to shield large investment gains from taxation.

The two haven’t worked out the details, but they say they are developing legislation to limit the size of IRAs and the amount that could be saved in IRAs. They say they will try to include the new rules in the SECURE Act 2.0, which is working its way through Congress.

Creativity is a Key to Healthy Aging

We’ve known for a long time that it’s important to stay mentally active as we age. Good brain health improves physical health and contributes to longevity.

The latest research shows that creativity also is a major contributor to healthy aging.

The research found that certain arts activities, especially those that are related to the personality trait of openness, increase well-being. The activities studied included singing, theater performance and visual artistry.

But other activities contribute to creativity and can be beneficial. Additional suggested activities include travel, daydreaming, being playful, applying knowledge, meditating, meeting challenges, playing brain games and exercise.

Past research indicated that learning and doing new things improve brain health and ultimately physical health and longevity. The latest research adds creative activities to the list.

The Data

New unemployment claims were reported at 400,000 for the latest week. That’s down 24,000 from the previous week. But the previous week’s claims were revised higher by 5,000.

There were about 3.3 million continuing claims, which is a small increase from the previous week.

The total number of people receiving some form of unemployment benefit increased by 600,000 to 13.2 million.

Pending home sales declined by 1.9% in June from May’s level, according to the National Association of Realtors (NAR). That compares to an 8.3% increase in May. Over 12 months, sales also were down 1.9%.

Job growth was healthy in July but slowed from June’s rate, according to the ADP Employment Report. The report indicated 330,000 private sector jobs were created in July, compared to 680,000 in June. The June number was revised down from the 692,000 reported last month.

The services sector increased its growth rate in July, according to the ISM Services Index. The index increased to 64.1 from 60.1 in June.

But the PMI reported the opposite. Its Services Index declined to 59.9 in July from 64.6 in June. The PMI Composite Index for the entire economy declined to 59.9 in July from 63.7 in June.

Recent price increases and a shortage of homes available for sale are driving some potential buyers from the market and limiting sales.

Personal Income increased 0.1% in June, following a 2.2% decrease in May. Personal consumption expenditures increased 1.0% in June, compared to a 0.1% decline in May.

Both the income and spending increases were better than economists’ expectations.

The Fed’s preferred measure of inflation, the Personal Consumption Expenditures Price Index (PCE), rose 0.5% in June and 4.0% over 12 months.

Excluding food and energy, the core PCE rose 0.4% in June and 3.5% over 12 months. The 12-month increase in the core PCE is the highest since July 1991.

Factory Orders increased 1.5% in June, while May’s increase was revised higher to 2.3% from the 1.7% that was reported last month.

The growth rate in manufacturing decreased a little in July, according to the ISM Purchasing Managers Index. The index was reported at 59.5, down from 60.6 in June. Any measure above 50 indicates growth in the sector.

But the PMI Manufacturing Index found the growth rate increased in July. That index rose to 63.4 from 62.1 in June. The PMI index uses survey data from about twice as many firms as the ISM index.

The Chicago Purchasing Managers Index increased to 73.4 in July from 66.1 in June.

Consumer Sentiment, as measured by the University of Michigan, increased a little in the last half of July. The Consumer Sentiment Index was reported at 81.2 at the end of July, compared to 80.8 at mid-month.

The Employment Cost Index showed a 0.7% increase in compensation in the second quarter of 2021 and a 2.9% 12-month increase.

Gross domestic product (GDP) growth was a little below expectations, according to the first estimate of second quarter GDP. The economy grew at a 6.5% annualized rate, following a 6.3% growth rate in the first quarter, which was revised down from 6.4%. Economists were estimating growth of 8% or higher in the second quarter.

The Markets

The S&P 500 rose 0.49% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.13%. The Russell 2000 increased 1.49%. The All-Country World Index (excluding U.S. stocks) added 2.31%. Emerging market equities are 3.41% higher.

Long-term treasuries rose 0.86% for the week. Investment-grade bonds increased 0.36%. Treasury Inflation-Protected Securities (TIPS) added 0.44%. High-yield bonds gained 0.03%.

In the currency arena, the U.S. dollar declined 0.44%.

Energy-based commodities declined 0.37%. Broader-based commodities fell 0.65%. Gold rose 0.58%.

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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