Tag Archives: social security benefits

Do Social Security Payroll Taxes Need to Increase?

My Comments: If you have not already signed up for Social Security, chances are good you will draw the short straw. If you are now getting monthly benefits, chances are you have a longer straw. Me, I have no idea.

What we do know is that sooner or later the crisis will become immediate and it will get fixed. The problem is if it gets fixed now, the pain will be far less. But that’s not how Congress works, so don’t hold your breath.

Sean Williams \ Jul 30, 2017

The longer Congress waits to act, the bigger the actuarial deficit grows.

Social Security is an absolute monolith of a program. Last year, the program generated $957 billion in revenue and wound up spending $922 billion, a vast majority of which went to the more than 25 million retired workers who currently receive a monthly check from the program.

However, this vital program, which is currently cash-flow positive, is also facing some major issues. And, according to the latest report from the Social Security Board of Trustees, major changes could be just around the corner.

Social Security’s foundation is crumbling
The heart of the problem for Social Security is this: By 2022, it’ll begin paying more in benefits than it’s generating in revenue from payroll taxes, interest income earned on its asset reserves, and taxes on Social Security benefits. The Trustees have estimated that after reaching approximately $3 trillion in 2022, Social Security’s cash reserves will be completely exhausted 12 years later. By 2034, should Congress fail to enact any new laws to generate additional revenue for Social Security, benefits will need to be cut by as much as 23%. Enacting a steep 23% benefits cut across the board would keep the program solvent for another 75 years (through 2091), but it would also be a devastating blow to the more than 60% of retired workers who currently rely on Social Security for at least half of their monthly income.

Understanding that Social Security is coming to a crossroads, the public has rightly looked to Congress to fix things. Ironically, a lack of solutions isn’t the problem. Both Democrats and Republicans have put forth Social Security fixes that would resolve the estimated $12.5 trillion budgetary shortfall and provide financial certainty into the early 2090s. Unfortunately, since Washington politics is so partisan, neither party has been willing to work with the other. Thus we have multiple solutions that work, and no lawmakers willing to vote those plans into law.

A payroll tax hike of this much would fix Social Security
Arguably the simplest fix of all would be to increase the payroll tax, which is a 12.4% tax on all earned income between $0.01 and $127,200, as of 2017. Increasing the payroll tax on all American workers would generate additional income and possibly make benefit cuts unnecessary, at least through 2091. Keep in mind that if you’re employed by someone else, your employer pays half of your Social Security tax (6.2%), leaving Americans who aren’t self-employed to pay just 6.2% of their earned income up to $127,200 into Social Security. Any earned income above $127,200 is free and clear of the payroll tax.

Just how big of an increase is needed to fix Social Security? According to the Trustees report, the actuarial deficit grew by 17 basis points from the previous year to 2.83%. In plainer terms, this means that the Trustees estimate that a 2.83% increase to the payroll tax right now would eliminate the $12.5 trillion cash shortfall between 2017 and 2091. It would also likely mean no benefit cuts for anyone. It’s worth noting that the longer Congress waits to act, the bigger the deficit gets.

What would this tax hike actually look like? Self-employed folks would see their share of Social Security payroll taxes rise from 12.4% to 15.23% on earned income up to $127,200, while the average American who’s employed by someone else would see their responsibility increase by 1.415% (half of the 2.83%) to 7.615%. Assuming the average American makes around $30,000 a year, we could be talking about handing over an extra $425 a year for Social Security payroll taxes under such a scenario.

The public has previously shown their support for gradual increases to the payroll tax to help fix Social Security, but support for tax hikes usually fizzles out beyond a 0.4% increase in average worker payroll taxes (0.8% overall), which isn’t anywhere near the projected 1.415% (2.83% overall) needed to offset demographic changes to Social Security.

A potentially easier path to more revenue
There is, however, a potentially easier way to generate more revenue that wouldn’t require a 2.83% payroll tax hike on all workers — and it’s a pathway that a majority of Americans support. Raising the maximum earnings tax cap would substantially reduce Social Security’s cash shortfall, while eliminating it would wipe out the deficit entirely.

The aforementioned $127,200 figure, which often increases annually with the Wage Index, represents the peak dollar amount that is assessed the 12.4% payroll tax. Approximately one out of every 10 workers earns more than this peak figure annually, meaning they get an exemption on a portion of their earned income, while 90% of working Americans pay into Social Security with every dollar they earn. Raising the maximum earnings cap so that it’s reinstituted on earned income above, say, $250,000 or $400,000, would require the wealthy to contribute more, and it would resolve a good chunk of the program’s cash shortfall. Eliminating the cap entirely and allowing all earned income to be taxed would be a popular and easy fix.

So, why not simply make the wealthy pay more? After all, the well-to-do are unlikely to be as reliant on Social Security income during retirement as lower-income folks. The answer is that Social Security’s monthly payouts at full retirement age are capped at $2,687, as of 2017. Like the maximum taxable earnings cap, the maximum monthly payout at full retirement age adjusts annually, often moving similarly to the rate of inflation. Because there’s a cap on what seniors can receive each month in retirement, there’s also a cap on how much income can be taxed. In other words, it doesn’t make a lot of sense to have a self-employed individual pay 12.4% on $5 million in income if all he or she can net once retired is $2,687 a month at full retirement age. The cap does serve a purpose, after all.

The simple question is: Can lawmakers on Capitol Hill find an amicable solution to boost revenue? If history is any indicator, seniors and pre-retirees should be concerned.

Investment Returns Will Shrink

My Comments: Putting money to work for the future is something we all try to do. Our expectations vary all over the map. If you use the past to predict the future, you’re probably going to be disappointed.

This is very relevant if we have money sitting somewhere that we plan to use tomorrow to support our standard of living.

If we’ve stopped working for a living, our only recurring income comes from Social Security, pensions, and whatever money we’ve saved. All of which makes it imperative we find a way to manage financial risk going forward.

by Dr. Bill Conerly, August 5, 2017

What will an investment portfolio earn over the long term? That issue is important to individual investors, state pension agencies and corporations offering defined benefit pensions. State pension agencies have been lowering their assumed returns. A decade ago, 8.0 percent was the dominant assumption, with some states higher and some lower. Now the most common assumption is between 7.0 and 7.5 percent. The sub-seven assumption was never used as recently as 2011 but is now embraced by several pension authorities.

What assumption should a family, a government agency or a corporate pension fund use? For a long time, it’s been best to go back to the long-term averages, but the current outlook is less rosy. I personally have revised down the estimate I use in planning the Conerly family’s spending and saving, and I concur with public bodies who do the same. I’m not fully convinced that I’m right; I just think the pain from erring on the low side will be less than the pain of erring on the high side.

The traditional approach is to look at long-run returns, and the book of numbers for that analysis is the SBBI Yearbook covering stocks, bonds, bills and inflation (hence the SBBI name). This research is based on pioneering work done by Roger Ibbotson and Rex Sinquefield.

Since 1926, when their dataset begins, U.S. common stocks have rewarded investors by 10 percent per year, counting capital gains and dividends, before taxes. Corporate bond returns averaged 5.6 percent returns. An investment portfolio split 50 percent in stocks (the Standard and Poor’s 500) and 50 percent in corporate bonds would have earned 8.3 percent per year over 1926-2016. That justifies a long-run expected return around 8.0 percent as was common.

But don’t stop reading yet! Remember two important points. First, past returns are not guaranteed in the future. Second, even if the past points the way to the future, the past includes whole decades with negative returns to stocks, albeit just slightly negative.

On the first point, the structure of the economy has changed substantially since 1925 when the good data begin. Jeremy Siegel in his book, Stocks for the Long Run, shows stock market data back to 1802. He finds a seven percent annual return from 1802 through 1925. This suggests that we cannot take investment returns fixed in stone; they can be higher or lower over long periods. (Siegel’s book is one of my top two picks for the average person making investment decisions. The other is Burton Malkiel’s A Random Walk Down Wall Street.)

Stock market returns have been pretty good recently. Look at the S&P 500 since 2012 (counting capital gains and dividends, before taxes):
2012 +16%
2013 +32%
2014 +14%
2015 +1%
2016 +12%

But high returns can be due to overly optimistic speculators rather than economic fundamentals. We know that economic growth has been below normal in recent years. We also know that interest rates have been well below long-run averages. That suggests – but does not prove – that returns on capital are lower now than in the historic average.

Low returns on capital might trigger a stock market gain in the short run, as lower interest expense makes corporate profitability look better. But in the long run, stock market returns must reflect the returns of investing capital in a business. So if low corporate bond interest rates today reflect low returns on capital, then stock market returns should be low in the future.

The story for low returns on capital now is simple: much of our new production requires very little capital. A steel mill or car factory requires lots of capital. A Google or Facebook requires far less. With less need for capital, the owners of capital will earn lower returns. And the global supply of savings is rising, partly due to aging baby boomers around the world and partly because a larger share of world income is in countries with weak social safety nets. I provided more detail in “Returns on Capital – And Interest Rates – Will Be Low In The Future.”

The second caution mentioned above is the tremendous variability of returns. The long-run average for stocks may be ten percent, but the entire decades of the 1930s and the 2010s had negative returns. An investor ended a ten-year period with fewer dollars than at the beginning. And don’t forget the spectacularly bad years: 1931, -43 percent, and 2008, -37 percent.

The long-run average tells you little about next year’s return. If the next bad decade starts just as you retire, you may feel pretty uncomfortable waiting for the long-run average to return. And if you can’t stomach the occasional bad year, then you’re likely to shift into a low-return investment when the stock market rebounds.

If I have to make a best guess as to how the next 100 years will look, I roll with the long-term average and say that stocks will return about ten percent. But I have arranged my personal affairs so that long-run returns can be much lower and I’ll still be able to eat.

Retirement Expenses You May Not Expect

My Comments: Aaahh, bliss! Nothing to do but relax and watch the years roll by.

You and I both know that’s not likely to happen. For one thing, it’s too easy to get bored and stressed out with not enough to do. Okay, some of us love retirement, but I’m not one of them.

Being properly prepared for it involves understanding the financial dynamics that come with the territory. Here’s a few thoughts to consider. Comment if you don’t agree or need some help.

Wendy Connick \ Jun 25, 2017

Planning for retirement can be quite a challenge. It’s an event that may not come for many years and that will last for decades (you hope), and yet you have to figure out how much this event will cost so you can save up for it now. And if you forget to account for one of the expenses below, you could end up shorting yourself on retirement income no matter how carefully you save and plan.

1. Inflation

Inflation can be a retirement-killer. It’s the reason why prices for everything go up over time. But consider what that means for your retirement: If you save enough to cover today’s expenses, but prices go up by 10%, 20%, or more by the time you retire, then then your income will fall seriously short of your needs.

Let’s say you’re aiming to save up $1 million by the time you retire 20 years from now. That’s a pretty worthy goal, and it may be enough to see you through retirement when combined with Social Security benefits. However, inflation in the U.S. has averaged 3% per year over the long term, so let’s assume prices will rise by 3% for the next 20 years. By the time you retire, that $1 million will be roughly equivalent to $540,000 in today’s dollars. In other words, the buying power of your nest egg will be cut nearly in half.

If retirement is still a long way off, you can use that 3%-per-year figure to estimate how much your expenses will change. If retirement is less than 10 years away, then you can safely assume a slightly lower rate of inflation, given that inflation hasn’t crested 3% in 10 years.

2. Taxes
Income taxes don’t go away when you stop working. But once you no longer have an employer, there’s no one helpfully taking the tax money out of your paycheck and passing on to the government for you. Whatever income you expect to receive from Social Security, retirement savings accounts, and other sources, you need to budget for the taxes you’ll be paying on it. Distributions from tax-deferred retirement accounts such as IRAs and 401(k)s are taxed as income, so a large distribution can trigger an enormous tax bill. For example, in 2017, if you draw $50,000 from a traditional IRA, you’ll have to pay $8,239 on that income — plus taxes on your Social Security benefits.

Don’t forget that many states charge income taxes as well. If you own a house, property taxes can be a significant expense that you’ll need to budget for. And although selling assets within a retirement account such as a 401(k) or IRA won’t generate capital-gains taxes, selling them outside of a tax-advantaged account will.

3. Long-term care

As we age, certain day-to-day activities become more of a challenge. When your health deteriorates to the point that basic activities such as bathing, dressing, and feeding yourself are too difficult to manage, you need long-term care to help you with such activities. About 70% of the population will need some form of long-term care, yet few retirees budget for this service. And unfortunately, Medicare doesn’t cover most long-term care services, considering them to be nonmedical expenses. The easiest way to cope with such expenses is to buy long-term care insurance, though you can also self-insure by saving enough to cover such expenses yourself. However, be aware that long-term care isn’t cheap: One year in a private room at a nursing home costs on average nearly $100,000.

4. Medical
Many people are under the impression that Medicare will cover all medical-related expenses once they hit age 65. Unfortunately, the truth is a lot more complicated than that. Original Medicare (meaning Medicare Part A and Part B) will cover a lot of services, but definitely not all of them. For example, Medicare is no help with medical devices such as hearing aids or wheelchairs, and it won’t cover any dental, vision or prescription expenses.

A Medigap or Medicare Advantage plan can help, but even the best insurance policy won’t cover every possible expense — and the more coverage a health insurance plan offers, the more expensive it’s likely to be. All in all, it’s important to budget for increasing medical expenses as you age. And if you have pets, don’t forget to budget for them, too. Just like humans, pets tend to run up higher and higher medical bills as they age.

5. The unexpected
You can research and plan and try to save up for every imaginable expense, but inevitably, something will come up that you never thought of, and it will probably be an expensive something. That’s why it’s just as important for retirees to have an emergency savings account as it is for workers. In fact, it may be even more critical for retirees, as most of them are on a fixed income that leaves them with little room for error. An emergency savings account with a few months’ worth of expenses in it can turn that unexpected expense from a financial catastrophe into a minor headache. And once it’s resolved, you can go back to your happy retirement.

2017 Social Security Trustees Report

My Comments: A critical question on the minds of everyone is “Will Social Security be there for me or my spouse?” It doesn’t matter where you are in life, short of being on life support.

Unfortunately, there is not yet the political will to impose a solution. That’s because the crisis is not yet within the last election cycle for any elected official. Few politicians have the necessary ability to think and act for anything beyond the next election.

The easiest fix is to increase the upper limit of earned income to which FICA taxes apply. But it won’t happen from either a Republican or Democrat controlled house and senate until the crisis is next door. But it will get fixed if we still have a Constitutional democracy.

Dan Caplinger \ Jul 17, 2017

Americans rely on Social Security, but its financial future has been unclear for a long time. Every year, it’s the responsibility of the Social Security Trustees to report on the health of the Social Security Trust Funds, which hold the assets that will help fund future retirement benefits for Social Security recipients. Once again, the trustees missed their statutory deadline and were three and a half months late getting the 2017 Social Security Trustees Report done. The report, which you can access by PDF here, is 269 pages long, but the most important aspects confirm most of what those who’ve followed Social Security in the past have seen for years.

1. The disability trust fund again improved, but Social Security’s trust funds overall will still run out of money in 2034.

Most of the headline numbers regarding Social Security stayed the same as they’ve been for a couple of years now. The 2017 report repeated its previous projections that the combined overall trust fund reserves will be depleted in 2034. When you look solely at the Old Age and Survivors Trust Fund, which covers the Social Security benefits that older Americans and their families receive, 2035 is still the date at which that portion of the overall program will run out of money.

The Disability Insurance Trust Fund, however, has gotten more financially healthy. The depletion date for that fund is now 2028, five years later than it was last year. The report noted that favorable experience for applications and benefit awards for disability benefits has been helpful, continuing a trend of falling applications for disability since 2010. The number of disabled workers actually getting benefits has also fallen each year since 2014, and despite expectations that this trend would reverse itself, the numbers at the end of 2016 confirmed its continued improvement. Disability is a small portion of the overall Social Security program, so even if favorable trends continue, optimism about that trust fund won’t be enough to provide a meaningful extension of time for Social Security as a whole.

2. Americans will face a benefit cut after the trust funds are depleted.

Many people mistakenly believe that once the Social Security trust funds are out of money, the program will be completely bankrupt. That’s not the case, because the program gets income from Social Security payroll taxes and other sources. What will happen, though, is that recipients will only get a fraction of their scheduled benefits.

The 2017 trustees report said that following the spending of all trust fund balances, Social Security on the whole will only get enough revenue to cover 77% of scheduled benefits. When you break that down by the type of benefit, the Old Age and Survivors Fund will receive enough income to cover 75% of payments, while the Disability Fund will be able to cover 93% of what it owes beneficiaries.

3. Here’s what it would take to fix Social Security’s financial problems.

Trustees reports typically offer some thoughts about how to close the shortfall between Social Security’s long-term financial obligations and its current financial resources. The 2017 report made a couple of suggestions about how lawmakers could immediately solve the problem, although the measures are so draconian that they would never happen in reality.

One solution would be for the government to increase the current payroll tax that goes toward Social Security. For 2017, employees pay 6.2% on the first $127,200 in wages that they earn. Employers have to match that amount with a 6.2% tax of their own. In order to cover 100% of future benefits over the next 75 years, the government would have to increase that total tax by 2.76 percentage points, bringing the overall total to 15.16%. That’s considerably larger than the 2.58 percentage point increase that the 2016 report said would be necessary.

Alternatively, lawmakers could cut benefits. But even if they acted right now to cut all benefits — including those that current Social Security recipients get — then it would take a 17% cut to get the job done. That’s up from 16% last year. If you spare current recipients but apply a reduction to future beneficiaries, the reduction would have to be even greater at 20%. That too is one percentage point higher than the corresponding figure in the 2016 report.

4. It only gets tougher to fix Social Security later.

The solutions above assume immediate action. If lawmakers wait, the actions required to fix Social Security get even harder.

The 2017 report looks at what would be necessary if nothing changes until 2034. It would take a payroll tax increase of almost 4 percentage points to close the funding gap at that point. Immediate benefit reductions of 23% would also get the job done. Those cuts won’t be any more palatable in the future than they are today.

5. Social Security’s date of reckoning is getting more certain.

The Social Security Trustees Report has to make assumptions about the future, and that introduces uncertainty in their projections. However, the likely range of trust fund depletion dates is getting narrower, reflecting greater visibility as the dates get closer.

Last year, the 2016 report said that it was likely that the trust funds would run out of money between 2029 and 2045, with a 95% confidence level for that range of dates. This year, the range in the 2017 report narrowed to between 2030 and 2043.

The trustees did acknowledge that under low-cost assumptions, there is a theoretical possibility that the Social Security trust funds won’t run out of money. It would take higher fertility rates, slower rises in life expectancy, lower unemployment, and favorable macroeconomic factors to get to that low-cost scenario, however, and the trustees see that scenario as extremely unlikely.

Most of those who follow Social Security will dismiss the 2017 Social Security Trustees Report as having few big changes from previous years. Yet as the impending depletion of trust fund balances approaches, lawmakers have to tackle the issue with more resolve if they want to avoid huge problems within the next 15 to 20 years.

When Should You Apply for Social Security

My Comments: Brian Stoffel has identified 3 critical elements for everyone not yet retired and receiving Social Security benefits. And they are not just about money and the role it plays in people’s lives. I could point out some flaws in his arguments, but the message is real.

Brian Stoffel | Apr 17, 2017

You can choose to take Social Security as early as age 62, and as late as age 70. When to claim your benefits is a question many retirees take a long time to consider. To make the best decision, it’s important to look at how your monthly benefits change based on when you begin receiving them.

Currently, the average retirement benefit check from the program is $1,360, and the average retirement age is the earliest option, 62. But if recipients waited, these checks could get much bigger. Here’s what it would look like for those born in 1954 and earlier:

As you can see, those aren’t small differences. On the one hand, if you wait until age 70, your monthly benefit will be a whopping 76% higher than if you claim right away. On the other hand, if you do decide to delay your benefits that long, you’ll go almost a decade with no Social Security income coming in even though it was an option.

While there are tons of different variables that affect when you should apply for Social Security benefits, the following three questions often play an outsize role.

1. How do you feel when you get up and go to work in the morning?
This may seem like an odd place to start, but hear me out. Most people worry about having enough money to retire — that is an important concern, and we’ll get to it in a bit. But there’s one big blind spot to tackle first: hedonic adaptation.

You’ve likely heard hedonic adaptation being used in the context of getting used to lifestyle improvements, as in, “Even after buying the new car to keep up with the Joneses, Mark was still miserable — that’s hedonic adaptation for you.”

But in truth, it works both ways: We can have much less materially, and not be nearly as depressed about it as we’d expect.

If you want proof, I point you toward a Merrill Lynch/Age Wave survey that came out in 2015. When respondents of different ages were asked how often they felt happy, content, relaxed, and/or anxious, here’s how they responded:

And lest you think that this was just a survey of wealthy respondents, it was “nationally representative of age, gender, ethnicity, income, and geography.”

The bottom line is that if you hate your work and you can make ends meet on Social Security plus other sources of income, you shouldn’t wait to apply for benefits.

2. Can you make ends meet?
Of course, we can’t forget entirely about money. In the survey mentioned above, 7% of retirees said retirement was less fun and more stressful than pre-retirement years. The main culprit: financial concerns.

Almost all retirees report spending less in retirement than while they were working, and these expenses continue to fall as people age. Of course, everyone has heard about rising healthcare costs — and it’s true that healthcare expenses do jump. But there’s a host of other realities that keep costs down: less money spent on transportation costs commuting to and from work, a drop in food costs as you can make your own food more often, and a house finally being paid off in full, to name a few.

In general, you’ll need to calculate how much income you’ll get from three streams:
• Social Security and/or pensions
• Withdrawals from your own retirement accounts, using the 4% rule
• Other forms of income

The “other” forms of income could come from rental properties you own or even part-time work.

The bottom line is that you should try living for six months on this income to ensure that it’s suitable.

3. Have you coordinated with your spouse?
Finally, we have to deal with the sobering reality that one partner often lives longer than another. In that situation, Social Security has a simple rule: The surviving spouse gets to either keep his or her current benefit, or assume the benefit of the deceased — whichever is larger.

It’s important to remember that, statistically speaking, wives will live longer than their husbands. And if husbands were the higher earners, they may want to consider waiting as long as possible to claim their benefit, as it maximizes what their wives will receive after they pass away.

In this respect, there are a dizzying number of variables to consider, and I suggest doing further reading to figure out which will be best for you and your partner.

In the end, if you can answer these three questions accurately, you’ve got a good grasp on the factors affecting when to claim Social Security benefits.

Everything Looks Like A Bubble

My Comments: The article below comes courtesy of a writer by the name of General Expert.

He/she/they write extensively and appear on an investment news feed I follow called Seeking Alpha. You’ll have to draw your own conclusions about the message but I, for one, find it interesting and informative.

Here’s a link to the news feed: https://seekingalpha.com/author/general-expert.xml

Jun. 5, 2017


Calling the top is in fashion as the market makes new highs.

I see nothing in the market that is indicating a bubble.

Consumers are taking on more debt, but debt is essential for growth.

Consumers and corporations have no problems servicing their debts.

I see no reason why the Fed can’t keep interest rates low if there is a need.

Everything looks like a bubble… if you are a hedge fund manager that wants to protect your reputation or if you are a fearmonger that is just relishes schadenfreude on the off chance that everyone suffers.

I am never a mindless optimist, but I believe that we are currently experiencing one of the best economic environments since the financial crisis. Major indices such as the S&P 500 (NYSEARCA:SPY) and the Dow (NYSEARCA:DIA) are making new highs every week, but so what?

I believe that this is a testament to the economic strength of the U.S. rather than a reflection of the irrational exuberance of market participants. Today I would like to address two of the major arguments that I see being repeated again and again by bears, and why they are of no concern.

Too Much Debt

Consumers have been taking on more debt as the economy grew:
But debt isn’t bad. In fact, I would go on to argue that debt is great. Debt is what fuels economic growth. Part of the reason why recovering from a financial crisis is so difficult is because credit market freezes up and no one can take on debt to spend or to invest. But are we taking on too much debt? I believe that the answer is a firm “no.” As I mentioned in my previous article, consumers’ ability to service their debts is nowhere near pre-crisis levels.

Of course, a bear would say that this is all a ponzi scheme perpetuated by the Fed, which is keeping interest rates artificially low.

The Fed

The Fed’s dual mandate is simple enough: lower unemployment and stabilize prices. If these two objectives are achieved, it is likely that the economy will do well. The Fed took drastic measures (i.e. near zero interest rates) to stimulate spending during the financial crisis, and because interest rates are still low right now, bears are saying that the Fed is prolonging the inevitable collapse of the economy as the Fed can’t print money forever (both through QE and low interest rates to encourage lending). But why? I see absolutely no reason why the Fed cannot simply keep interest rates low for the foreseeable future if the economy is truly dependent on low interest rates.

What is a bubble? A bubble is something that is unsustainable. I would really like to be educated as to why the current regime could collapse at any time. Low interest rates have not caused rampant inflation contrary to the opinion of many experts, nor has debt spiraled out of control, neither at the consumer level (see previous graph) nor at the corporate level (below).

As we can see, interest coverage has risen far above pre-crisis levels, meaning our corporations have become less susceptible to shocks than before.

If the Fed can keep rates low forever then why bother with rate hikes and why should it unwind its balance sheet? While the Fed could keep interest rates low forever, it needs to proactively prevent the formation of bubbles. Because consumer confidence has risen since the election, the logical thing to do would be to offset this increase by enforcing a tighter monetary policy. The expectation of higher interest rates should allow corporations and consumers to make more level headed decisions. In my opinion this does slow down growth, but higher interest rates should reduce the volatility of the business cycle. Note that there is no reason to believe that the current level of spending is excessive, as evidenced by the low debt servicing ratio graph shown earlier.


I believe that the economy is in very good shape right now and any talk of a bubble is ludicrous. Neither corporations nor consumers are having any trouble servicing their debts. The Fed’s act of “printing money” is not harmful and I fail to see why low interest rates have to go away. While the Fed is raising rates, this is being done with the intention of offsetting rising consumer confidence. Even though higher rates may hamper growth, the Fed must make the safe choice in order to prevent the formation of an actual bubble, as opposed to the fictitious one that is often discussed in the media today.

Rates Won’t Skyrocket, So Ignore the Cassandra Chorus

My Comments: The last time interest rates started moving upward in a long term up trend was 1946. This lasted until 1981. Then they started moving down again.

Now, 36 years later, they have once again started upward. The central bank, known as the FED, started moving them back up about a year ago. Granted, the increases are tiny, but I believe it’s the start of an long, upward trend.

If you expect to live another 20 – 30 years, the financial landscape you’re used to is going to be very different. Rising interest rates are going to influence the value of your retirement accounts and other funds, the money you will use to sustain your standard of living going forward.

Just thinking about it could give you a headache…

By Scott Minerd, Chairman of Investments and Global CIO, Guggenheim Partners – July 17, 2017

When markets suddenly change short-term trends or direction, prognostication abounds to explain the most recent gyrations. Often, those who missed the move leading up to the sudden change by sticking to an earlier erroneous call will suddenly issue statements to vindicate the veracity of their earlier predictions. Others, looking to justify the conventional wisdom, will seize an opportunity as proof that the masses were right and the conventional wisdom, whether empirically true or not, still holds.

Such has been the events of recent days.

With the sudden rise of rates around the world, the pundits present the recent selloff as proof that long rates are bound to skyrocket as a result of any number of factors including reduction of the Federal Reserve’s (Fed) balance sheet, tapering of quantitative easing by foreign central banks, lurking inflation and growth, fiscal stimulus from Washington, D.C., and so on.

In moments like these, I think it is wise to step back and grasp the big picture. The Fed is on course to continue raising rates. If it does not, it is only due to weakening growth or inflation. Either way, case history tells us that the yield curve will continue to flatten.

As for ‎skyrocketing long rates, that seems unlikely during the current economic cycle. Virtually every business cycle ends with an inverted yield curve. If the yield on the 10-year Treasury note were to ‎rise to 3 percent, that would imply an overnight rate at 3 percent or higher. Using a number of metrics, an overnight rate of 3 percent would be so restrictive as to induce a recession.

Even the Fed, which has notoriously forecast rates higher than the market delivers, sees the longer term “terminal” rate (the apex of the policy interest rate during the business cycle) at 3 percent. Given the structural debt load on corporate balance sheets, a 3 percent short-term rate would ultimately prove unsustainable. With a cap on short-term rates around 3 percent, the likelihood that long-term rates could be sustained above 3 percent for any period of time is low.

Then again, there is a fairly good argument that the terminal short-term rate may be lower than 3 percent. Deflationary headwinds continue to restrain price increases. With declining energy and commodity prices, supply gluts in automobiles, competitive restraints on retail merchandise such as groceries and apparel, and a growing inventory of new apartments weighing on owner-equivalent rents, these headwinds are unlikely to dissipate anytime soon. Since inflation is tamed when real rates rise enough to choke off economic expansion, the lower the level of inflation, the lower is the nominal rate necessary to restrain it.

If that is the case, then the terminal rate is likely to be closer to 2 percent.

Only time will tell but that scenario argues for less policy tightening by the Fed as further rate increases are likely to slow the economy and inflation more than expected.

There is also the issue of valuation. Many routinely argue that bonds and stocks are overvalued yet the empirical evidence is sketchy.

As for interest rates, the last era of financial repression between the 1930s and 1950s resulted in long-term rates remaining below 3 percent for more than 20 years. The argument that 10-year yields need to be close to nominal gross domestic product (GDP) growth rates is equally unsound as, aside from the era of opportunistic disinflation from 1980 into early in the new millennium, 10-year yields on balance were below nominal growth rates for most of the past century.

Finally, the downtrend in long-term rates that began in the early 1980s is firmly intact. ‎To break that 35-year trend, the 10-year note would need to yield more than 3 percent for some period of time. Even if we did break that downtrend, history shows that rates will tend to move in a sideways consolidation for a number of years, often retesting the lows more than once.

The simple truth is that, while rates may trend higher in the near term, the risk is that we have not reached the point where the macro economy can sustain persistently higher rates. If anything, political, military, and market uncertainties would more likely lead to another sudden decline in rates rather than a massive spike upward.

Investors would be wise to ignore the growing chorus of Cassandra cries and look through the noise to the fundamentals. There are many things to be concerned about in the world but skyrocketing rates is not likely among them.