Tag Archives: social security recipients

10 Social Security Terms To Know And Understand

My Comments: Happy Thanksgiving everyone!

For those of you still not signed up and receiving monthly benefits, here’s some useful things to know.

For those of you who attended my Social Security workshops, you’ll recall the acronyms that appear on every page. There’s even a couple more here for you to learn.

Maurie Backman – The Motley Fool – Nov. 10, 2017

Social Security serves as a key source of income for countless retirees and disabled individuals.

It’s also an extremely complex program loaded with rules and terminology. If you’re attempting to learn about Social Security (which is something you should do, regardless of how old you happen to be), here are a few key terms you’ll need to understand.

1. OASDI

OASDI stands for old age, survivors, and disability insurance, and in the context of your paycheck, it’s the tax used to fund the Social Security program. The current OASDI tax rate is 12.4%. If you work for an outside company, you’ll lose half that amount of your earnings up to a certain income limit, while your employer will pay the remaining 6.2%. If you’re self-employed, however, you’ll pay the full 12.4% up front.

2. SSI

SSI stands for supplemental security income, and it’s different from OASDI in that it’s a program funded by general tax revenues, not Social Security taxes. SSI is designed to help those who are over 65, blind, or disabled with limited financial resources keep up with their basic needs.

3. FICA Tax

FICA stands for the Federal Insurance Contributions Act. It’s the tax that’s withheld from your salary or self-employment income that funds both Social Security and Medicare. For the current year, FICA tax equals 15.3% of earned income up to $127,200 (12.4% for Social Security and 2.9% for Medicare), but those making above $127,200 will continue to pay 2.9% FICA tax on income exceeding that threshold. In 2018, the earnings cap will rise to $128,700.

4. Social Security credits

In order to collect Social Security benefits, you must earn enough credits during your working years. In 2017, you’ll receive one credit for every $1,300 in earnings, up to a maximum of four credits per year. For 2018, the value of a single credit will rise to $1,320 of earnings. Those born in 1929 or later need 40 credits to qualify for benefits in retirement.

5. AIME

AIME stands for average indexed monthly earnings, and it’s used to calculate your personal Social Security benefit. The amount you receive from Social Security is based on your highest 35 years of earnings. To arrive at your AIME, your past earnings are adjusted for inflation so that they don’t lose value.

6. Full retirement age

Your full retirement age, or FRA, is the age at which you’re eligible to collect your Social Security benefits in full. FRA is based on your year of birth, and for today’s older workers, it’s 66, 67, or 66 and a number of months. Though you’re allowed to claim benefits prior to reaching FRA (the earliest age is 62), doing so will cause you to collect a reduced benefit amount — permanently.

7. Delayed retirement credits

Though waiting until full retirement age will ensure that you collect your benefits in full, if you hold off on filing for Social Security past FRA, you’ll rack up delayed retirement credits that will boost your benefits. Specifically, for each year you wait, you’ll get an 8% increase in your payments. Delayed retirement credits stop accruing at age 70, so that’s typically considered the latest age to file for Social Security (even though you can technically wait even longer than that).

8. Trust Fund

The Social Security Trust Fund was established in the early 1980s to cover any future shortfalls the program might face. If Social Security has a year in which it collects more taxes than it needs to use, that money is placed in the Trust Fund and invested in special Treasury bonds. Once Social Security’s incoming tax revenue fails to cover its scheduled benefits, the Trust Fund will be tapped to make up the difference. Come 2034, however, the Trust Fund is expected to run out of money, at which time future recipients might face a reduction in benefits.

9. COLA

No, we’re not talking about a soft drink. In the context of Social Security, it stands for cost-of-living adjustment, and it’s designed to help beneficiaries retain their purchasing power in the face of inflation. Back in the day, those who collected Social Security received the same benefit amount year after year. But beginning in 1975, beneficiaries have been eligible for automatic COLAs based heavily on fluctuations in the Consumer Price Index. COLAs are not guaranteed, however. If consumer prices don’t climb in a given year, benefits can remain stagnant. Such was the case as recently as 2016.

10. Survivors benefits

Survivors benefits are designed to provide income for your beneficiaries once you pass. Those benefits are based on your earnings records and the age at which you first file for Social Security. Surviving spouses, children, and even parents of deceased workers are eligible for survivors benefits.
Clearly, there’s a lot to learn about Social Security, but familiarizing yourself with these key terms will help you better understand how the program works. It also pays to read up on ways to maximize your benefits so that you end up getting the best possible payout you’re entitled to.

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A Majority of Working Americans Are Completely Wrong About Social Security

My Comments: The first monthly Social Security income benefit ever paid was to Ida May Fuller on January 30, 1940. Today, some 77 years later, it is a critical income source for millions of Americans.

This article by Sean Williams confirms the role Social Security plays in the lives of millions of Americans, and I’m one of them. If not already, you too will become a recipient of benefits from this 82 year old program.

I’m creating an internet course called Successful Retirement Secrets. It will have three major topic areas, one of them about Social Security.

The course will be a comprehensive and sophisticated outline for someone to follow as they slowly move through life toward retirement. I expect to have it ready to go before year end.

Sean Williams | Dec 10, 2016

In terms of retirement income, no program is more vital to seniors’ financial well-being than Social Security. For more than 75 years, Social Security income has been providing a financial floor for countless seniors, with the Center on Budget and Policy Priorities estimating that elderly poverty rates in America are just 8.5% because of Social Security income, as opposed to 40.5% without it.

Data from the Social Security Administration backs up this reliance on benefits. According to the SSA, 61% of all beneficiaries are counting on their Social Security benefits to supply at least half of their monthly income. This figure was particularly high (71%) for unmarried elderly individuals. Even pre-retirees, which believe they’ll be less reliant on Social Security than the current generation of beneficiaries, would likely struggle to make ends meet without Social Security income.

While on one end Social Security has been a financial blessing for many retired workers, their spouses, and their families, it’s also a major cause for concern. Projections from the Social Security Board of Trustees suggest that the program could begin paying out more in benefits than it’s bringing in via payroll taxes, interest, and through the taxation of benefits by 2020, ultimately culminating in the program exhausting its more than $2.8 trillion in spare cash by the year 2034.

A majority of working Americans have this all wrong

If you’re among the many retirees reliant on Social Security, the idea of the program “exhausting its spare cash” probably sounds terrifying. The TransAmerica Center for Retirement Studies, which regularly surveys Americans to get a feel for their retirement preparedness and knowledge, found earlier this year that 77% of workers are concerned that Social Security will not be there for them when they retire. Yet the truly terrifying fact here isn’t that Social Security’s spare cash is expected to be depleted in less than two decades; it’s that a majority of working Americans are just plain wrong about Social Security.

One of the near-surefire guarantees of Social Security is that it will be there when baby boomers, Generation X, millennials, and Generation Z retire. In other words, Social Security won’t be going bankrupt anytime soon, if ever.

The reason Social Security will be able to provide benefits to America’s retired workforce, the disabled, and survivors of deceased workers lies with the payroll tax. Even if the more than $2.8 trillion current in spare cash is depleted as the Trustees report has predicted, payroll tax revenue — a 12.4% tax that’s often split down the middle between you and your employer, or which is paid in full by the self-employed — will continue to be levied and collected on America’s workforce. As long as Americans keep working, the program will continue to generate revenue.

Social Security can, in theory, continue forever as a budget-neutral program that pays out benefits based on what is collected via payroll tax revenue and the taxation of benefits. Interest income earned from its spare cash is the only component of the program set to essentially disappear once that excess cash has been exhausted.

Two steps for working Americans to take now

The true worry for working Americans should be that their future Social Security benefit may be reduced from its current trajectory. The Board of Trustees estimates that when the spare cash is depleted, across-the-board benefit cuts of 21% may be needed to sustain the program through 2090. This would put three in five retirees who count on Social Security for a majority of their monthly income in a very precarious position.

This estimate serves as a wake-up call for working Americans to both (1) have a working budget and retirement budget ready, and (2) have alternative channels of income for retirement.

1. Have a working and retirement budget

Budgeting is critical for a variety of reasons but none more important than that it helps you understand your cash flow. If you don’t have a firm grasp of where your money is being spent once it’s deposited into your account by your employer, then your chances of maximizing your saving habits or minimizing your discretionary spending is low.

Creating a budget can be done entirely online these days with the use of free software, and the biggest challenge is no more involved than adding and subtracting and sticking to your plan. Some of the most helpful hints for budgeting with the goal of saving as much as you reasonably can for retirement include:

• Getting everyone in your household involved, since it’ll encourage you and those around you to stick to the household budget.
• Meeting up with like-minded individuals once or twice monthly to share your ideas and progress.
• Using separate accounts for different spending categories, such as food and entertainment.
• Most importantly, analyzing your data monthly to assess your progress.

Having a retirement budget is just as critical as the budget working Americans use to save money. Retirement probably means giving up a consistent working wage for good, and for many Americans that can mean a sudden drop in monthly income. If you’re nearing retirement and haven’t thought about a retirement budget, you could be in for a shocking surprise when your income drops 10%, 20%, or even more once you retire, especially if you’re still working with your old budget from when you were working.

Furthermore, not having a retirement budget in place could lead to you depleting your nest egg faster than expected or pulling out more than you need from your retirement accounts each year and paying more in taxes as a result.

2. Have alternative channels of income

Working Americans also need to ensure that they have alternative channels of income beyond just Social Security when they retire. If you have other forms of income, then a 21% cut to Social Security benefits may not be crippling to your financial well-being.

Arguably the most popular retirement income channel is the employer-sponsored 401(k). According to StatisticBrain.com, 52.5 million Americans have a 401(k), with the value of assets held by 401(k)s totaling about $4.5 trillion. A 401(k) is a tax-deferred retirement plan, meaning the money is taken out pre-tax and can lower your current-year tax liability. However, you’ll owe federal tax once you begin making withdrawals during retirement. A 401(k) can be particularly attractive if your employer offers to match a percentage of your contribution, which is essentially free money.

For those of you who work for an employer that doesn’t offer a 401(k), either a traditional IRA or Roth IRA is always available. The popularity of the Roth IRA has grown particularly quickly in recent years since eligible distributions are completely tax-free. Unlike a traditional IRA or 401(k), which provide that aforementioned up-front tax benefit and deferred taxation until retirement, a Roth IRA is funded with after-tax dollars — and since you’ve already paid your taxes on those dollars, any subsequent gains on that money is free and clear of taxation as long as you make a qualified withdrawal.

Long story short, there are ample ways for working Americans to save money and diversify their income stream during retirement. Social Security will be there for you when you retire, but that doesn’t mean you should rely on it to be your primary or sole source of income.

Is Social Security Going Broke?

My Comments: In 1983, when Social Security was on the verge of going broke, Congress made some changes to keep it alive and well. It’s again on the verge of going broke and there are ways to fix it.

But were not yet close enough to the edge of the cliff for there to be the necessary political will to fix it.

You have to remember, things only get done within the context of ONE ELECTION CYCLE. Absent that pressure, the can gets kicked down the road. The remedy won’t likely appear until 2030. If then.

Social Security is expected to run out of money by 2034. Here’s the problem. by Matthew Frankel \ Mar 26, 2017

You may have heard certain things about Social Security’s financial condition — maybe that the system is “broke” or that it won’t be able to pay benefits for much longer. Fortunately, statements like these are a bit of an exaggeration. Social Security’s trust fund has plenty of money in it for the time being, but this isn’t expected to last beyond 2034. Here’s the truth about the current state of Social Security’s finances and why it is projected to run out of money in about 17 years.

The current and projected financial state of Social Security

According to the 2016 Social Security Trustees Report, the most recent available, the Social Security trust fund had roughly $2.8 trillion in reserves at the end of 2015. What’s more, Social Security has run at a surplus since 1982 and is projected to do so through 2019. In other words, for the next three years, Social Security’s income from taxes and investment revenue will exceed the cost of the benefits it pays out.

Unfortunately, that’s where the good news ends. In the year 2020, Social Security is projected to start running annual deficits, which are expected to grow quickly and continue for the foreseeable future. In order to pay benefits, reserve assets from the trust fund will need to be redeemed. As a result, the Social Security trust fund is expected to be completely depleted by 2034. After this point, the incoming tax revenue will only be enough to cover about three-fourths of promised benefits.

To be perfectly clear, the reason Social Security is expected to start running annual deficits and eventually run out of money isn’t because of fiscal mismanagement or anything of that nature. Rather, it’s a simple cash flow problem.

Reason 1: Baby boomers are retiring

It all starts with the post-World War 2 “baby boom.” During the time period from the end of the war until about 1964, babies were being born at some of the highest rates in modern history. To illustrate this, here are the total fertility rates, defined as the number of babies born per woman throughout her lifetime, based on the birth rate of that year, throughout our recent history.

As you can see, there was a huge uptick in the number of babies being born in the post-war decades. Since then, the total fertility rate has held steady at around two children per woman.
The baby boomer generation is generally defined to be Americans born between 1946 and 1964. Therefore, this group represents Americans ages 53 to 71 today. In other words, this is the group that is starting to retire now, and will continue to reach retirement age over the next decade and a half.

Reason 2: Modern medicine has resulted in longer life expectancies

The other contributing factor to Social Security’s expected financial woes is that modern medicine has resulted in Americans living longer lives and therefore collecting Social Security benefits for a greater number of years.

According to the Social Security Administration’s (SSA) life tables, a man who was born in 1900 lived for about 13 years after reaching the age of 65. However, a man born in 1960 (a member of the baby boomers I discussed earlier) is expected to live roughly 18 years after reaching 65 years of age. And the life expectancy improvement is nearly as dramatic for females as well. In other words, the current group of retirees is expected to collect Social Security benefits for almost five years longer than the group of retirees 60 years prior.

And this trend is expected to continue going forward. As you can see in the chart below, the average person born in 2000 will live over two decades after reaching the age of 65.


More money flowing out than coming in

As a result of this combination of baby boomers retiring and senior citizens living longer lives, there will be far fewer workers paying Social Security tax for each beneficiary receiving retirement benefits. Image source: 2016 Social Security Trustees Report.

As you can see, from 1980 until almost 2010, the ratio stayed steady at 3.2-3.4 workers paying into Social Security per beneficiary. As of 2016, this ratio has already dropped well below 3-to-1, and is expected to decline rapidly over the next few decades, reaching a level of just 2.2 workers per beneficiary by 2035.

What can be done?

The good news is that there is still time to fix the problem, and there are two main ways it can be done.

• Decrease benefits, which could come in the form of an across-the-board cut, or increase the full retirement age, cut benefits to wealthy retirees, or several other ways.
• Raise Social Security taxes. The current tax rate is 6.2% for employers and employees, assessed on up to $127,200 of earned income. So, a tax increase could either be a higher tax rate or a raising or elimination of the taxable wage cap.

There’s no way to predict the eventual reform package that will be passed, but history tells us that something will be done. It’s just a matter of how long it will take Congress to act and what the eventual solution will look like.

Image sources: Social Security Administration.

This Is Not How A Bear Market Starts

My Comments: Today is Memorial Day, and the markets are closed in this country. It’s a day for us to instead remember those of us who gave their lives that we might continue with ours. Pray that fewer lives will be given in the years to come.

The following comes from someone whose name I do not know. But if you can wade through the math and graphics, you may find that the world is not about to end. At least financially.

Here’s how the author describes himself: “I have a degree in Math and Science from the University of Toronto, as well as a degree in education, also from U of T. I have traded private equity for 38 years and have developed a proprietary Price Modelling System which has provided me with consistent profitable trading success. In partnership with my computer scientist son, Aidan Gomez, we have automated this model using neural networks, and offer a Trade Alert service that lets subscribers replicate the trades we are involved in.”.

To see the charts, you’ll want to visit the source article HERE.

May 22, 2017 | ANG Traders

Summary
There has been much digital ink spilled trying to convince us that the bull market is on its last legs.

We present fundamental and technical reasons to support the idea of an ongoing bull market.

Black swans aside, this is not how bear markets start.

There has been, and continues to be, an inordinate amount of digital ink spilled promulgating the imminent demise of the bull market. Most of the arguments for this, center around the near-historic levels of certain metrics, such as PE ratios and S&P averages, but they ignore the factors that truly coincide with the launch of bear markets. In this piece, we will attempt to elucidate several of the metrics that we have correlated with bear or bull markets, and hopefully, show that the bull market is alive and well.

Rate Differential
When the 10-y minus the 2-y Treasury rate inverts, it has a way of marking the end of bull markets. When this differential turns negative, in conjunction with low unemployment, investors should look for an exit. Today, the unemployment rate is low, but not as low as in 2000 or 2007, and the 10-y minus 2-y rate is still a healthy +1%. It will take several sizable Fed rate hikes before the rate differential inverts (chart below). This does not look like the start of a bear market.

Fed Funds Rate

It is obvious that when the Fed raises rates, the bull market dies, but often when it comes to the market, what is obvious, is obviously wrong. In fact, three of the last four bull markets occurred while the Fed raised rates – the latest bull market being the exception (chart below). The Fed has lots of room to raise into a growing business cycle. Bear markets do not start when low rates are being raised.

Industrial Production
Except for a five-month period in 2002, a rising industrial production has coincided with a rising SPX. The chart below demonstrates this strong positive correlation. Bear markets do not start with rising industrial production.

GAAP Earnings

The Generally Accepted Accounting Principles (GAAP) earnings enjoy a positive correlation with the S&P 500. The GAAP earnings started rising two quarters ago, and the current quarter is shaping up to be positive also. Bear markets do not start with rising GAAP earnings.

Technical Indicators
The 8-month moving average remains above the 12-month moving average, the MACD is rising, the ADX is displaying a bullish pattern, and the RSI and stochastic are elevated, but they can remain elevated for long periods of time (chart below). This is not how bear markets start.

Investor Sentiment
Bull markets climb the proverbial “wall of worry.” There is a lot of geopolitical and intramural politics to worry about, and which are feeding the bull market. Bear markets do not start when there is fear around. They start when investors are confident and throw caution to the wind. The AAII investor sentiment indicator stands at a fearful 24% bullish sentiment, and 34% bearish sentiment (red and blue arrows respectively on the chart below). Bear markets start when bullish sentiment is over 50%, and bearish sentiment is under 30% (red and blue oval on the chart below). This is not how bear markets start.

In conclusion, the evidence presented paints a picture of a bull market that is still fearful and healthy. That is not to say that a black-swan won’t fall out of the sky and ruin the picnic, but judging from what we can and do know, a bear market is not imminent.

Medicare Statistics

My Comments: Medicare is a critical element for retired Americans. These statistics are not jaw-dropping but re-affirm our need to be very careful about making changes to Medicare.

I’m not convinced the folks in Congress have my best interests in mind when they talk about making changes.

Consider yourself enlightened.

Maurie Backman | Apr 20, 2017

You’re probably aware that Medicare provides health coverage for seniors 65 and older. But did you know that Medicare has several distinct parts, each of which provides its own set of services?

Here’s a quick breakdown:
• Medicare Part A covers hospital visits and skilled nursing facilities.
• Medicare Part B covers preventative services like doctor visits and diagnostic testing.
• Medicare Part D covers prescription drugs.

There’s also Part C, Medicare Advantage, that offers a host of additional services. Whether you’re approaching retirement or are many years away, here are a few key Medicare statistics you should be aware of.

1. There are 57 million Medicare enrollees in the U.S. 
A good 16% of the U.S. population is covered by Medicare, but it’s not just seniors who get to enroll. Younger Americans with disabilities are also eligible for coverage.

2. About 11 million people on Medicare are also covered by Medicaid.
Though Medicare offers a wide array of health benefits for seniors, it doesn’t pay for everything. In fact, about 20% of Medicare enrollees rely on Medicaid to pay for services Medicare won’t cover, such as nursing home care.

3. Net Medicare spending totaled $588 billion in 2016.
That’s about 15% of the federal budget. And that number is expected to rise to nearly 18% of the budget in about a decade’s time.

4. The standard Medicare Part B premium amount in 2017 is $134.
Many people assume that Medicare enrollees don’t pay a premium to get coverage, but it isn’t true at all. While Part A is generally free for most seniors, Part B comes at an estimated cost of $134 per month. That number may also be higher depending on your income, or lower if you were collecting Social Security as of earlier this year and had your Part B premiums deducted directly from your benefits.

5. Poor health can be 2.5 times as expensive for Medicare enrollees.
A 2014 report by the Kaiser Family Foundation (KFF) revealed that the typical Medicare enrollee who identified as being in poor health had out-of-pocket costs that totaled 2.5 times the amount healthier beneficiaries faced. This is just one reason it’s crucial for Medicare enrollees to capitalize on the program’s free preventative-care services. Catching medical issues early can often result in a world of savings.

6. A single hospital stay under Medicare can cost almost $4,500 out of pocket. 
Here’s some more discouraging news out of KFF. Back in 2010, Medicare enrollees who had a single hospital stay incurred $4,475, on average, in out-of-pocket costs.

7. Medicare enrollees 85 and older spend three times more on healthcare than those aged 65 to 7.  It’s probably not shocking news that older seniors spend more money on medical care than those a decade or more their junior. But what may be surprising is just how much those 85 and over wind up spending. According to KFF, in 2010, Medicare enrollees 85 and older spent close to $6,000 to cover their healthcare needs.

8. In 2015, 243 medical professionals were charged with Medicare fraud. It’s not uncommon for members of the medical establishment to engage in Medicare fraud, whether it’s in the form of inflating bills, performing (and charging for) unnecessary procedures, or billing for services that were never rendered. The good news, however, is that officials are getting better at identifying and prosecuting Medicare fraud. In fact, in 2007, the Medicare Fraud Strike Force was created to put a stop to fraudulent activity that eats away at the program’s limited financial resources.

9. More than 17 million Americans are enrolled in a Medicare Advantage plan. Medicare Advantage is an alternative to traditional Medicare that offers a number of key benefits, such as coverage for additional services (including dental and vision care) and limits on out-of-pocket spending. Between 1999 and 2016, 10 million Americans signed up for a Medicare Advantage plan, and enrollment now represents roughly 30% of the Medicare market on a whole.

10. A good 38% of Medicare funding comes from payroll taxes.
Nobody likes paying taxes, but without them, Medicare simply wouldn’t have enough money to stay afloat. Currently, the Medicare tax rate is 2.9% for most workers (which, for salaried employees, is split down the middle between worker and employer), but higher earners making more than $200,000 a year pay an additional 0.9%.

Getting educated about Medicare can help you make the most of this crucial health program. It pays to learn more about how Medicare works so that you can take full advantage when it’s your turn to start using those benefits.

A Message for My Children and Grandchildren

Slow Economic Growth Will Be Around For A Long Time

My Comments: I have my doubts that Hillary Clinton could have fixed this, but with 45 in the WH, there is virtually NO chance this problem will be fixed.

And the longer it takes to fix it, assuming it can be fixed, the very people who voted for 45 are going to be the ones first affected by our governments inability and unwillingness to find a remedy.

The headwinds faced by the next two generations are staggering. There is very little I can do to help those following in my footsteps to increase their chances of success. All I can do is write blog posts like this and hope there are a few people paying attention.

Steven Hansen on March 26, 2017

The Trump Administration has targeted 4% economic growth.

The consumer is tapped out, and trends show they cannot increase their contribution to GDP growth.

Does this mean the slack will be taken up by government and business spending?

The White House website reads:
To get the economy back on track, President Trump has outlined a bold plan to create 25 million new American jobs in the next decade and return to 4 percent annual economic growth

Elected officials have very shallow and misguided views of economic gearing. I have no problem with people setting goals pushing the limits of what MAY be possible. However, USA economic growth of 4% year-over-year is likely impossible without massive deficit spending. Economic dynamics are simply not there for the consumer segment of the economy to expand spending.

Life Cycle Spending

The life-cycle hypothesis says consumers save during earning years and dis-save when they retire. The logic of this hypothesis implies that retirees spend at the same rate as they did when they were working. This ain’t true. Good posts on this subject were published by the Richmond Fed.

One assertion:
Consumption may be lower for young people than the model predicts if they are credit constrained. They may wish to borrow against expected higher future earnings but can do so only if lenders extend the credit to them. Uncertainty may play a role as well. Since young individuals don’t know exactly what their future earnings potential will be, they may hesitate to accumulate a lot of debt for fear that they won’t be able to pay it off.

Uncertainty plays a role at the end of life as well. Since individuals do not know exactly how long they will live, it is hard for them to smoothly draw down their wealth throughout retirement. Retirees may also save more than predicted because they wish to leave some of their wealth to their descendants. Finally, the drop in consumption at the end of the life cycle could be due to “hyperbolic discounting.” Behavioral economists have advanced the idea that individuals have trouble planning for the future, which leads them to save too little to maintain their level of consumption after retirement.

No question millennials are saddled with significantly more education debt not faced by previous generations. There are now more than 75 million millennials, making it a larger demographic group than the boomers. Because our politicians have shifted the bulk of costs of university education to the students, millennials are now carrying $1.4T of student loans. Roughly this pulls $100 billion of spending from this group annually which is now used for student loan repayment. Just the effect of student loans are a 0.5% headwind on GDP.

Being a boomer, I get a front row seat to retirement issues. I have friends who thought they were going to get a pension after retirement. Most are getting less than expected due to cutbacks. The corporation I worked for never had pensions but actually a really good 401(k). I got to ride the markets where investing was brainless as it was real hard to lose. But just in time for many boomers retirement, there was the great market crash of 2008. Many thought their 401(k) or IRA was the engine for retirement income – the reality is that the retirement accounts themselves became part of retirement income. From my perspective, the majority of boomers are tapped out, with little or no ability to increase spending [and most likely are figuring out ways to shrink spending].

Saving or Lack Thereof

An even larger drag on the potential of ever seeing 4% growth comes from a historically low savings rate. Consider that consumers can only spend more if they make more money, borrow money, or save less. Median incomes have been stagnant for the last 17 years, and the saving rate is at the lowest level seen in the last 70 years. As far as borrowing money, where does the money come from to pay back the loan (if there is no additional income or little savings)?
• Before 2000, it was not uncommon to see 5% GDP growth. Since 2010, the USA was lucky to see 2.5% growth.
• Before 1980, consumers were saving over 10% of their income. Since 2000, savings have been averaging 5%.

Yet, the consumer portion of the economy has been growing (also meaning the business portion of the economy is contracting). The graph below plots disposable personal income portion of GDP. [note that consumer income and expenditures have historically grown at the same rate].

Note in the above graphic that there is significant variation from period to period. Most of this variation comes from changes in the savings rate from period to period. The graph below removes savings from disposable income.

 

 

 

 

 

 

Note since 2000 that the consumer segment of the economy stopped growing – but between 1967 and 2000, the consumer was the growth engine for the economy. To get to 4% economic growth, one would need to get more money into the hands of the consumer.

How Can the USA More Than Double the Rate of Growth?

“___________________________ [fill in the blank]. The real question is NOT whether the USA needs to see 4% growth, but how to improve the quality of life for the median American.”

Attention, Seniors: A New Social Security COLA Bill Was Just Introduced in Congress

My Comments: This might be good news if it wasn’t so unlikely to happen.

Sean Williams | Mar 18, 2017

According to the January snapshot provided by the Social Security Administration, nearly 41.4 million retired workers are receiving a monthly benefits check from Social Security totaling an average of $1,363. While that may not sound like a lot, Social Security benefits comprise more than half of all monthly income for 61% of retired workers, based on SSA data. Without Social Security, it’s very likely that the poverty rate for seniors would soar, and many would struggle to make ends meet.

But as many of you also probably know, Social Security is beginning to run into some roadblocks. Two major demographic shifts — the ongoing retirement of baby boomers which is lowering the worker-to-beneficiary ratio, and the lengthening of life expectancies over the past five decades — are weighing on this vital program. According to the 2016 report from the Social Security Board of Trustees, the program will have exhausted its more than $2.8 trillion in spare cash by the year 2034, at which point a benefits cut of up to 21% may be needed on an across-the-board basis.

Congress can’t forget about current retirees

It’s pretty clear from this data that Congress needs to act with some degree of expediency to ensure that Social Security offers a financial foundation during retirement for the many generations of workers to come. However, Congress also has to be careful not to forget about the tens of millions of seniors already receiving Social Security.

One of the more contentious battles in Washington is in regards to what should be done (if anything) about Social Security’s cost-of-living adjustments, or COLA.

Right now, Social Security’s COLA is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). As with any of the CPI variants, it takes into account the price movements of a pre-determined basket of goods and services and compares that year-over-year data.

For Social Security, the average CPI-W reading from the third quarter of the previous year serves as the baseline figure, while the average reading from the third quarter of the current year serves as the comparison. Any decrease in year-over-year prices means a 0% COLA for the following year. Thankfully, Social Security benefits cannot be decreased due to deflation, albeit beneficiaries have had three years of no COLA, and a minuscule 0.3% COLA over the past eight years. Any increase in the year-over-year CPI-W is passed along and rounded to the nearest 0.1% in the following year.

A new Social Security COLA bill was just introduced

The debate in Washington involves whether or not the CPI-W is the best measure to tie Social Security’s COLA to. According to one Congressman, it’s not.

Earlier this month, Rep. John Garamendi (D-Ca.) introduced the CPI-E Act of 2017 into Congress. The sole purpose of the Act introduced by Garamendi would replace the CPI-W with the Consumer Price Index for the Elderly, or CPI-E, in calculating Social Security’s COLA. The CPI-E strictly measures the spending habits of households with people aged 62 and up. Since roughly two-thirds of all Social Security beneficiaries are seniors, switching to the CPI-E would (presumably) be more accurate in representing their spending habits.

For instance, according to data found in Garamendi’s press release that accompanied his bill, which already has 24 co-sponsors, the CPI-E rose at an average rate of 3.1% between 1982 and 2011 compared to just 2.9% for the CPI-W over the same time span. In other words, seniors could receive a larger COLA most years with the CPI-E.

Why, you wonder? The CPI-E places a considerably larger emphasis on medical care expenditures and housing costs, which for seniors are often much higher than that of working-age Americans as measured by the CPI-W. Likewise, the CPI-W tends to overemphasize the impact of educational, apparel, transportation, and food expenditures, which just aren’t as important for seniors when compared to working Americans.

In recent years, weaker fuel prices at the pump and stagnant food prices have been the main cause of seniors’ weak COLAs. Plus, medical care inflation has outpaced Social Security’s CPI-W-based COLA in 33 of the past 35 years. According to estimates from The Senior Citizens League, had the CPI-E been used in place of the CPI-W over the past 25 years, the average retired worker would have netted an extra $29,600 in payments.

Switching to the CPI-E probably isn’t in the cards

However, before you get too excited, realize that the chances of this bill succeeding in a Republican-led Congress are slim-to-none.

For starters, the CPI-E has its shortcomings, too. For example, the CPI-W factors in more households than the CPI-E, meaning that it’s providing more data points and presumably a more accurate picture of what Americans are spending their money on.

Also, the CPI-E fails to take into account the rising costs associated with Medicare Part A. Medicare Part A covers in-patient hospital stays, surgical procedures, and long-term skilled nursing care. Even if the CPI-E Act of 2017 were to pass and be signed into law, seniors would likely still fail to keep pace with the true medical care inflation they’re facing.

There’s also that not-so-tiny problem about Social Security running out of spare cash between now and 2034. Switching to the CPI-E without any additional revenue generation would mean depleting the Trust’s spare cash at an even faster rate.

And, of course, the CPI-E is the complete opposite of what Congressional Republicans are angling for. Rep. Sam Johnson’s (R-Tx.) Social Security Reform Act of 2016, introduced in December, called for a switch to the Chained CPI, which Republicans seem to prefer over the CPI-W. The Chained CPI factors in a consumer behavior known as “substitution,” which the CPI-W does not. The Chained CPI assumes that consumers will trade down to lower-priced goods and services if the goods and services they currently buy become too pricey. Thus, the Chained CPI grows at a slower pace than the CPI-W, which could place seniors in a bigger hole to medical care inflation.

Clearly, this isn’t the last we’re going to hear about the COLA debate on Capitol Hill. But, don’t expect COLA reform to happen anytime soon.