Is a New Social Security Fix at Hand?

Is a New Social Security Fix at Hand?

 

March 21, 2019

 

We’ve been hearing for years that the Social Security trust fund will run out of money in 2034, and a close reading of the Social Security Administration’s Trustee Report projections (https://www.ssa.gov/oact/TRSUM/) show what this would mean.  By that time, based on estimates of the number of people earning an income in the workforce, the numbers of Social Security benefits recipients still alive, and the amount of income, overall, that the workers will be earning, payroll taxes will account for about 77% of the existing benefits—indexed for projected inflation.  In other words, if we don’t fix the system between now and then, by 2034 the government will be taking payroll taxes and turning around and paying this money back to the Social Security beneficiaries, and that money is projected to equal about 77% of today’s benefits.  As more people retire and live longer, the ratio of workers to beneficiaries is expected to gradually decrease, meaning that 77% will become 76%, then 75% and gradually shift downward barring an influx of new workers or unexpected mortality among the elderly.

 

Chances are, there will be a fix of some sort between now and 2034.  But what will it look like?  200 Democratic co-sponsors in the U.S. House of Representatives have recently signed on to an expansion of Social Security that would keep the trust fund solvent—and the payments coming—for at least the next 75 years.  

 

What are they proposing?  The new bill, which is unlikely to pass Congress until/unless the Democrats take control of the Senate, would address one of the anomalies of the payroll tax, that it stops at $132,900 of annual income (currently).  That means a person earning $132,900 pays 6.2% of her income, while a person earning $266,000 pays 3.1%, and a person earning over $1 million pays just .77% of total income in payroll taxes.  The legislation would, just like today, stop collecting payroll taxes temporarily at $132,900 (adjusted each year for inflation), but resume those taxes on all income over $400,000.  It would also gradually raise the 6.2% tax rate to 7.4% by 2042.

 

In return, all Social Security beneficiaries would receive a 2% increase in benefits, and the benefits would go up a bit faster each year, using the CPI-E index for inflation, rather than chained CPI.  (Much of the difference is that the CPI-E calculation is more sensitive to medical inflation and other costs that disproportionately affect seniors.)  Higher-income seniors would also get a bit of a tax cut; that is, less of their Social Security benefits would be taxed, using a complex change in an already-complex formula.

 

Not in this proposal, but worth considering, is allowing the Social Security trust fund to invest at least some of its assets in equities, which normally appreciate much faster in value than the current “assets:” promissory notes backed by Treasury bills.  Look for a healthy debate on the solvency of Social Security in the next election cycle.

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Source:

https://www.morningstar.com/articles/918591/will-the-big-social-security-fix-include-expansion.html

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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The Perfect Pundit Interview

January 2019

 

Chances are, you’ve already heard or read endless predictions about… everything.  The direction of interest rates.  Market returns and whether the markets will go down or up.  When the next recession will hit.  The movements of the cryptocurrency markets.

 

If the market gurus were being honest, they wouldn’t give us definitive answers to any of the questions that are posed to them.  Does anybody really have a working crystal ball?  If they did, would they share what they’ve seen in it?

 

A recent article in the financial services press offered up some realistic answers to the questions that financial journalists and cable tv hosts typically ask.  Here are some examples:

 

Are stocks overvalued?

 

We don’t know.  All we know is markets go up over time.

 

What are the signs I should look for that predict a market correction?

 

There are none.

 

What’s your view of [this headline] on Bloomberg or CNBC?

 

It justified my view that not watching Bloomberg or CNBC should have been one of my resolutions this year.

 

What do you think of what the technical analysts are saying about the near future?

 

The only thing I know for certain about technical analysis is that it’s possible to make a living publishing a newsletter on the topic.

 

What do you think of Jim Cramer’s opinions about the market?

About the same (actually slightly worse) than the flip of a coin, without the attitude.

 

Wells Fargo is now positive on gold.  Should I buy gold?

 

Gold might take off or tank.  The opinion of Wells Fargo about some event in the future is no better than yours.  Personally, I would like to see Wells Fargo “turn positive” on ethical behavior toward its employees and clients.

 

Are stocks vulnerable to another pullback?

Yes.  They always are.  The problem is that no one has the expertise to tell you when market corrections will occur, although many love to imply that they do.

 

Do you have an investing goal for 2019?

 

Make your investing about as exciting as watching paint dry.  Leave the excitement to others.

 

 

Source:

https://danielsolin.com/investing-answers-you-wont-see-in-the-financial-media/

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

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Shutdown Economics

January 24, 2019

 

A full month into a historic government shutdown, after 800,000 government workers have missed their second paycheck, two things are clear: 1) Economists and political pundits had no expectation that the impasse would past this long; and 2) the impact on the U.S. economy cannot be calculated with precision.

 

Many of the reports you may have read probably failed to note that the shutdown only impacts 7 out of 12 yearly appropriations.  Still receiving funding, under an earlier resolution, are Energy & Water, the Legislative Branch, Military Construction and VA, the Department of Defense, and Labor, Health & Human Services.  Together, they represent 75% of discretionary government spending, and are fully funded through September 30, 2019.

 

That famously leaves 800,000 federal workers on furlough, although roughly half of them are still at work because they were deemed to be “essential.”  Ironically, the budget impasse instantly terminated a pay freeze for certain government workers, so, for example, Vice President Pence has received a $10,000 annual pay increase, as did a number of the Trump Administration’s political appointees.  The cost of the raises is estimated to be more than $300 million over ten years.

 

At the other end of the spectrum, workers with the Transportation Security Administration are still on post at airports, as are air traffic controllers—working without pay.  But others were deemed inessential.  Many food inspections performed by the Food and Drug Administration have ceased, and the SNAP program—aka food stamps—is about to expire because February’s benefits have not been funded and 2,500 retailers cannot renew their EBT debit card licenses.  School lunch and breakfast programs will stop operating in February as well.

 

Zillow, the real estate database firm, has estimated that federal workers not receiving paychecks owe $249 million in mortgage payments and $189 million in rent payments—all due this month.  But even people who are simply trying to buy a home are shut out because new applicants for FHA loans are not able to communicate with the agency.  In addition, the U.S. Department of Agriculture, which provides loans for people buying homes in rural areas, is not processing those requests that land on unoccupied desks. 

 

Some 1,150 landlords who provide subsidized (affordable) housing for low-income Americans are not receiving their subsidy payments, and another 500 contracts will expire at the end of January.  As a result, as many as 100,000 low-income tenants could face eviction.

 

Economists have been trying to model the impact of so many workers not spending money as they normally would, plus a shutdown-caused slowdown in the housing market, and an interruption in the flow of actual government statistics due to furloughed economists.  Most Wall Street analysts initially thought that 0.05 percentage points would be shaved off the American Gross Domestic Product (GDP) for every week the shutdown goes on.  But by adding in the loss of revenue to federal contractors and third party companies that are paid by one of the shut-down agencies, government economists now believe the GDP reduction is closer to 0.13 percentage points every week.  That means the 30-day (and counting) shutdown has already knocked 0.25 points from first quarter GDP, with no clear end in sight.

 

If you can ignore the human costs of not receiving a paycheck, not receiving food stamp assistance, a subsidized school lunch or not being able to get a home loan, then this is not a great catastrophe for the U.S. economy.  But there is a nontrivial chance that economic growth will turn out to be negative in the first quarter, in small part due to the shutdown, and that could spook the markets into believing that the economy is heading into recession. 

 

 

Sources:

http://fortune.com/2019/01/03/the-government-shutdown-us-gdp/

https://www.businessinsider.com/government-shutdown-senior-trump-administration-officials-get-raises-2019-1

https://www.businessinsider.com/government-shutdown-how-the-partial-closure-affects-average-americans-2019-1#the-approximately-40-million-people-who-receive-snap-benefits-also-known-as-food-stamps-will-only-be-able-to-get-the-benefit-through-february-if-the-shutdown-continues-7

https://www.businessinsider.com/government-shutdown-2018-social-security-checks-still-paid-2018-1

https://www.businessinsider.com/government-shutdown-federal-workers-mortgage-rent-payments-housing-2019-1

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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TURBULENCE AND VOLATILITY AND WHAT’S NEXT!

December 21, 2018

 

Volatility will always be around on Wall Street, and as you invest for the long term, you hopefully learn to tolerate it.  Rocky moments, fortunately, are NOT the norm.

Since the end of World War II, there have been dozens of Wall Street shocks.  Wall Street has seen more than 50 pullbacks (retreats of 5 – 9.99%) in the past 73 years.  On average, the benchmark fully rebounded from these pullbacks within two months.  The S&P has also seen 22 corrections (declines of 10 – 19.99%) and 12 bear markets (drops of 20% or more) in the post WWII era.

Even will all those setbacks the S&P has grown exponentially larger.  During the month WWII ended (September 1945), its closing price hovered around 16, YES 16.  At this writing it is above 2500.  Those two numbers communicate the value of staying invested for the long term.  This current bull market has witnessed five corrections.  It has risen more than 300% since its beginning even with those stumbles.  Investors who stayed in equities through those downturns watched the major indices soar to all-time highs.

Bad market days shock us because they are uncommon.  If pullbacks or corrections occurred regularly, they would discourage many of us from investing.  A decade ago in the middle of the terrible 2007-09 bear market, some investors convinced themselves that bad days were becoming the new normal.  History proved them wrong.

As you ride out this current outbreak of volatility, keep two things in mind. One, your time horizon: you are investing for goals that may be 5,10,20 or more years into the future.   One bad market week, month, or year is but a blip on that timeline and in unlikely to have a severe impact on your long run asset accumulation strategy. Remember that there have been more good days on Wall Street than bad ones.

LET’S ASSESS LATE CYCLE RISKS AND OPPORTUNITIES.   AND WHAT DO WE SEE AHEAD IN 2019:

  • The U.S. economy will slow, but not stall.   We expect GDP growth to slow to 2 to 2.5% next year.
  • Central banks (The Federal Reserve, the Bank of Japan, and the European Central Bank) will continue to tighten monetary policy and raise interest rates.  Just this past week the Fed raised rates 0.25% and indicated they will likely raise rates twice, but NOT three times in 2019
  • U.S. Equities:  earnings growth will slow although it will remain positive.  Earnings will still be the main driver of returns.
  • The unemployment rate will likely continue to decline from 3.7%, its lowest level since the early 50s.
  • Inflation should remain at a level close to 2%.
  • Consumer sentiment is negative.
  • Trade tariffs still present a hurdle and need resolution.
  • The international markets have promise, but look murkier than the U.S.  We are continuing to watch BREXIT.
  • It is important to stay invested even though it appears we are in the late innings of the bull market.
  • A possible government shutdown (see our previous newsletter on this topic). 

Even with all of this volatility, the major indices (Dow and S&P) are down only 6 to 8% at this writing.  This is NOT another 2007-8-9, although more volatility could still be ahead.

THE MOST IMPORTANT ISSUES TO REMEMBER ARE THE FOLLOWING:

  1. You are invested in a diversified portfolio, not all equities.
  2. Your portfolio is not the market.
  3. We have planned your portfolio carefully to weather markets like this.
  4. Sudden volatility should not lead you or us to exit the market. If you react anxiously and move out of equities in response to short term downturns, you may impede your progress toward your long term goals.

If you have any questions about the markets, or your portfolio, please call. 

We wish you and your family a very Merry Christmas and a Happy New Year!

 Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

These are the opinions of Edward Kohlhepp and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal

 

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Shutdown Metrics

December, 2018

 

We are told that one reason stocks have been going down lately is the threat of a government shutdown, which seems almost probable if the President’s recent statements are to be taken at face value.  The U.S. President is on record as embracing a government shutdown on Friday, December 21 unless he receives full funding for his border wall with Mexico.  This seems unlikely, so it might be time to ask: If the government shuts down, what is actually likely to happen?

 

An article on the ZeroHedge website offers some news that might surprise most of us.  First: government shutdowns have been more common than we might realize.  In all, there have been 20 government shutdowns since October 1, 1976:

 

October 1-10, 1976

October 1-12, 1977

November 1-8, 1977

December 1-8, 1977

October 1-17, 1978

October 1-11, 1979

November 21-22, 1981

October 1, 1982

December 18-20, 1982

November 11-13, 1983

October 1-2, 1984

October 4, 1984

October 17, 1986

December 19, 1987

October 6-8, 1990

November 14-18, 1995

December 6, 1995 - January 5, 1996

October 1-16, 2013

January 20-22, 2018

February 9, 2018

 

The article notes a few things to remember.  First, Congress can avoid a partial shutdown by passing another continuing resolution—following the continuing resolution in September that temporarily funded 7 out of 12 total appropriations into December.  If the President were to veto that resolution, then a two-thirds majority in both the House and Senate could override the veto.

 

What about the other 5 of the 12 appropriations?  Those—Energy & Water; the Legislative Branch; Military Construction and VA; the Department of Defense; and Labor, Health & Human Services—represent 75% of discretionary government spending—basically 75% of the money spent that is not related to Social Security, Medicare or other entitlement programs.  Those programs are fully funded through September 30, 2019. 

 

So what appropriations would the shutdown actually impact?  The seven that still have to be authorized are Agriculture; Commerce, Justice and Science; Financial Services and General Government; Homeland Security; Interior and Environment; State and Foreign Operations; and Transportation and HUD. 

 

What would be the economic impact of this potential partial shutdown?  The report estimates that for every day of a full shutdown, American GDP is reduced by 2.4 basis points, or 0.024%.  But since only 25% of the government would be inoperable, the impact in this case would be about 0.008% per day. 

 

Put another way, each month would reduce American economic growth by about half a percent.  That, of course, is unlikely to happen.

 

What have the markets done during past government shutdowns?  The data show that the average market move for the S&P 500 index, in the week of a government shutdown, is down 0.06%—which I think most of us would regard as virtually unchanged.  The two weeks during and after a shutdown, the markets averaged down 0.13%.  More interesting is the fact that the one-week data shows that only 47% of the time did the market go down.  More interesting still, in the month after the shutdown, the average price move was UP 0.25%.

 

Nobody is saying that a government shutdown is good for stocks, or that shutting the government down is a great way to shake the market out of its current tailspin.  But it probably isn’t a good idea to panic about the market impact of a shutdown either.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Source:

 

https://www.zerohedge.com/sites/default/files/inline-images/19%20govt%20shutdowns.png?itok=UIGSm3fB

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Phone: 215-340-5777
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