Bob’s Journal for 9/9/21

It’s Past Time for Congress to Fix Social Security

The Trustees of Social Security and Medicare last week finally issued their 2021 annual report.

The news wasn’t good, but not as bad as many expected. Normally, the trustees issue their annual report sometime in the spring, but they took extra time this year for further analysis.

Last year, the annual report was issued April 22. This year, they spent additional time assessing the data and adjusting their assumptions about the effects of the pandemic. As a result, the report wasn’t released until Aug. 31.

The bottom line wasn’t much different from the 2020 report. The trustees and their actuaries estimate that the Social Security retirement trust fund will be unable to pay benefits after 2033.

After that, the annual tax revenue will fund about 76% of promised benefits. Farther into the future, after about 2045, the system will be able to pay only 70% of promised benefits.

Without action by Congress, presumably there will be a 76% across-the-board benefit cut beginning in 2034. But even that’s not clear, because the law doesn’t give the Social Security Administration any direction about how to reduce benefits or take other action when there’s a revenue shortfall.

The report also covers the Medicare Part A trust fund. Medicare Part A, also known as hospital insurance, covers inpatient hospital stays, care in a skilled nursing facility, hospice care and some home health care. That trust fund will run out of money after 2026. But tax revenue will be able to pay 91% of benefits after that.

Many outside analysts expected the condition of the retirement trust fund to be worse than stated in this latest report. But the data in the report indicate that revenues into the trust fund in 2020 increased more than benefit payments increased.

Also, the Social Security actuaries were able to forecast a modest decrease in the trust fund’s life by changing a number of their assumptions.

The main conclusions of the trustees are based on what they call the intermediate scenario assumptions. They also offer low- and high-cost assumptions and forecasts for those who want to see results from different assumptions.

Among the new assumptions, the actuaries forecast that the U.S. fertility rate will increase starting in 2036. They also assume the average unemployment rate will be lower than in their previous reports.

The newest report stated that the steep drop in the economy in the second quarter of 2020 has been followed by a gradual recovery. The trustees assume full recovery won’t occur until 2023 and that gross domestic product (GDP) is permanently lowered by 1% because of the pandemic.

Other effects of the pandemic are increased mortality rates (which helps the trust fund by reducing benefit payments) and delays in birth and immigration (which hurt the trust fund by reducing the size of the work force paying taxes into the system).

The net result is the labor force is assumed to increase by 0.8% annually for the next 10 years under the intermediate assumptions.

Inflation is assumed to be 2.40% annually in the intermediate scenario assumptions, though the 2022 cost of living adjustment is likely to be 6%.

People can disagree about the assumptions used in the report. What’s important is the end of the trust fund is a little over 10 years away under their intermediate assumptions. The longer Congress takes to act, the more severe the adjustments eventually will be.

Congress has known for more than a couple of decades that the current funding and benefit system isn’t sustainable. Adjustments back then would have been minor compared to the adjustments that will be needed now or in a few years.

It could be that a majority in Congress and the administration believe that federal budget deficits of any level aren’t important. The current spending proposals indicate that might be the case.

If so, the solution is clear. Congress can declare that any shortfall in Social Security will be covered by a contribution of general funds from the Treasury Department.

Otherwise, Congress will have to enact a menu of tax increases and benefit decreases and decide who should bear those burdens.

I continue to believe that those already retired or within five to 10 years of retirement will be protected from benefit reductions.

There likely will be exceptions for those with very high incomes or net worths. For them, there could be benefit reduction but more likely are some indirect benefit decreases, such as increasing the amount of Social Security benefits taxed at higher income levels or enacting a surtax on high-income Social Security recipients.

A long shot way to shore up the trust fund is to increase the labor force, perhaps by increasing immigration. But that doesn’t seem likely in the near future.

The most likely scenario seems to be that younger workers (those ages 50 and under) will face higher taxes during their working years and lower benefits after their careers. The longer Congress waits to act, the more severe these changes will be.

Whatever the state of the system, it’s not a reason to change your Social Security claiming strategy. Most people should wait to claim their benefits as long as possible to maximize lifetime benefits, as I explain in my book “Where’s My Money?: Secrets to Getting the Most out of Your Social Security.”

A Pandemic Necessity: Check Your Homeowner’s Insurance

There are a lot of collateral effects of the COVID-19 pandemic. The effectiveness of your homeowner’s insurance is one of them.

You’re no doubt aware that two results of the pandemic are increased demand for homes and shortages of many building components and supplies. Skilled labor to build homes also is in short supply.

The result is that the cost of building a home increased. The increase has been dramatic in some areas.

You need to review the coverage limits in your insurance policy. Most policies say they will pay for the cost of rebuilding the home if it is destroyed. But there’s usually a maximum amount the insurance company will pay.

Many insurers automatically adjust the maximum each year when a policy is up for renewal. Others don’t.

You need to learn how much rebuilding costs have increased in your area. Determine how much it would cost to build your home in today’s market.

You’ll probably find that the maximum coverage limit in your policy is 20% or more less than what it would cost to build the home if it’s destroyed by a fire or other catastrophe. Adjusting the policy limit will increase your premiums a bit. But that will be less expensive than having to reach deep into your pocket and your savings to pay part of the cost of rebuilding the home.

SECURE Act 2.0 Will Increase Taxes

The Securing a Strong Retirement Act of 2021 (SECURE Act 2.0) is steamrolling its way through Congress and probably will be enacted this fall.

I’ve covered the bill in some detail in past editions of Bob’s Journal.

The bill’s main goal is to increase the retirement savings of individuals. It would do that by requiring employers to automatically enroll eligible employees in retirement plans, make it less expensive for small employers to establish retirement plans, authorize automatic annual increases in employee contribution rates and take other actions.

But the bill also has some sneaky tax increases to offset the lost tax revenue from the retirement savings.

A recent estimate from the Congressional Budget Office (CBO) confirms that the net effect of the bill would be a net increase in tax revenues and a net reduction in the federal budget deficit in the first year after passage and in the first 10 years.

The law is estimated to lead to long-term deficit increases after 2032, though the CBO says there’s a lot of uncertainty in how the law would affect long-term tax revenue.

The main tax increase in the bill would come from the requirement that catch-up contributions to 401(k) plans be treated as Roth contributions. An employee would have to include the value of catch-up contributions in gross income and pay income taxes on them.

The law also would allow employees to designate employer matching contributions as Roth contributions, though it’s unknown how many employees would elect that treatment.

The bill further would delay required minimum distributions (RMDs) to age 75 over time. Though this might reduce taxes for a few years if retirement account owners delay their RMDs, it is likely to increase income taxes in the long run.

The value in retirement accounts would increase during the years the RMDs are delayed. The eventual RMDs would be higher, and that would result in higher lifetime income taxes.

As I’ve said before, Congress is coming after your retirement money. After encouraging people to sock away trillions of dollars in tax-deferred retirement accounts, it’s looking for ways to increase taxes when money is taken out of those accounts.

Review the Archives on the members’ section of the Retirement Watch website for strategies to increase the after-tax wealth of your IRAs and other retirement accounts.

The Data

The economy continues to grow at a rapid rate, according to recent business surveys.

The PMI Manufacturing Index declined a little to 61.1 in August compared to 61.2 in July.

The ISM Manufacturing Index increased to 59.9 in August from 59.5 in July.

The PMI Composite final index for August was unchanged from July at 55.4. The Services Index declined slightly in August to 55.1 from 55.2

The ISM Services Index for August was down to 61.7 from 64.1 in July.

In all those indexes, a reading above 50.0 indicates growth and a reading above 60.0 indicates strong growth.

Factory Orders increased by 0.4% in July, which compares to a 1.5% increase in June.

New unemployment claims reached a new pandemic low of 340,000 in the latest week. That’s down 14,000 from the previous week.

Continuing claims also declined to another new pandemic low of 2.748 million.

The number of people receiving some form of unemployment compensation increased by about 179,000 to 12.2 million.

Last week’s Employment Situation reports were a bit below expectations.

The number of new jobs increased only 235,000. Economists were expecting around 740,000 new jobs.

Hiring slowed substantially for in-person services sectors, such as leisure and hospitality. The number of those jobs held steady after rising by 350,000 jobs monthly for six months. Also, jobs were reduced at retailers.

But July’s new jobs estimate was revised higher to 1,053,000 from 943,000.

Perhaps the bigger news in the Employer Situation reports was wage inflation. Average hourly earnings were up 0.6% for month and 4.3% over 12 months.

The number of job openings in July was a record high of 10.9 million, according to the JOLTS (Job Openings and Labor Turnover Survey) report. The JOLTS report is more detailed than the Employment Situation reports but is a month behind.

The number of hires was 6.7 million and didn’t change much from June, but industries with declines in hiring were retail, durable goods manufacturing and education.

There wasn’t much change in the number of people being separated from or quitting their jobs.

The Markets

The S&P 500 lost 0.02% for the week ended with Tuesday’s close. The Dow Jones Industrial Average declined 0.70%. The Russell 2000 increased 0.21%. The All-Country World Index (excluding U.S. stocks) added 1.85%. Emerging market equities are 1.95% higher.

Long-term treasuries lost 1.15% for the week. Investment-grade bonds declined 0.53%. Treasury Inflation-Protected Securities (TIPS) fell 0.31%. High-yield bonds decreased 0.04%.

In the currency arena, the U.S. dollar declined 0.16%.

Energy-based commodities fell 0.44%. Broader-based commodities lost 0.14%, while gold declined 1.16%.

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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