Outside Economics

When smaller, less developed countries from around the world need to exchange their currencies into a more utilized and liquid currency, they utilize SDRs (Special Drawing Rights), essentially a basket of currencies. Created by the IMF in 1969 to supplement a shortfall of preferred foreign exchange reserve assets, namely gold and the U.S. dollar, SDRs have evolved to over $200 billion in value.

The SDRs are currently made up of four currencies, the U.S. dollar, the euro, the yen, and the pound. Over the past few years, China has been aggressively bargaining to have its currency, the yuan, included in the SDRs. Such an inclusion is considered a validation by the IMF that a country’s currency is internationally recognized and accepted.

In an effort to strengthen the world’s recognition of its currency, China has entered into currency swap agreements with other countries, bypassing the U.S. dollar as the reserve currency. Currently there are fourteen nations that have signed currency swap agreements with China allowing them to clear their trades using the yuan as the main currency. Those countries include: Argentina, Belarus, Brazil, Canada, ECB, Hong Kong, Iceland, Indonesia, Malaysia, Singapore, South Korea, Thailand, the United Kingdom, and Uzbekistan.

Monday, November 30^th

The IMF announced that the Chinese yuan will be included in the SDRs basket of currencies. It is expected that the demand for the yuan will not increase much considering the currency controls of the Chinese government. Central banks have begun acquiring the yuan but they don’t expect to have a major increase in demand.

Central banks don’t use the SDR as a yardstick for determining the composition of their foreign-currency reserves. These are much more heavily influenced by cross-border trade, said Karthik Sankaran, a director of global strategy at Eurasia Group.

Before the currency swap agreements all trading with these countries and China were conducted with U.S. dollars as the reserve currency. While many policy makers don’t believe that the yuan will supplant the U.S. dollar anytime soon, no one thought the Chinese economy would grow to become as big as the U.S. economy anytime soon either.

The inclusion of the yuan in the SDRs Basket is a big deal to China, they view it as placing their currency value equal to that of the other currencies in the Basket. It’s a bit like letting the camel poke its head in the tent! Soon enough the entire camel is in the tent.

In our competitive world economy, China will continue to work at becoming the world’s largest economy and they will compete to become the world’s reserve currency. As the country with the largest population, they want to be a super-power on the world stage and set world economic standards. (Remember they are still a communist nation with limited human rights.)

With the fall of Bretton Woods system and increasing availability of credit through international banking institutions, SDR’s are not used as much as they were when they were first developed. After all we have left the gold standard back in the early 1970’s, which in essence changed precious metals (gold and silver) from a common median of exchange (controlled currency) to a commodity, greatly increasing their value and volatility, particularly as the currencies have been devalued over time.

What are your thoughts of this new development in the world’s economy?

Sources: IMF

Remember

"Peace and contentment come into our hearts when we save a portion of our earnings and avoid unnecessary debt."  - Ezra Taft Benson

November as we know is the month in which we celebrate Thanksgiving, perhaps the most celebrated and gratefully under-commercialized holiday of the year, for which I am truly thankful. I love Thanksgiving – it is my favorite holiday. November is also Long-Term Care awareness month.

Long-Term Care is so very important to plan for. Throughout our lives we are bombarded with taking care of risks we are exposed to, auto accidents, home owners’ problems, life and disability, etc., but often we do not plan much for the end of our lives (actually few people die with a valid will in place). And what is left for our loved ones is literally a financial mess on top of the emotional challenges of losing a family member.

Below is some information from two studies I would like to use, they lay out some statistics about Long-Term Care. The people who are prepared or ill-prepared for such a catastrophic problem might find the motivation to look for more information to help their unique situation.

According to researchers at Georgetown University and Pennsylvania State University, about 70% of individuals 65 and older will need some kind of long-term care—whether at home, in an assisted-living facility or nursing home.

But how many of them should purchase a long-term-care insurance policy? That number, it turns out, is far lower—at 19% of men and 31% of women, according to a new study published by Boston College’s Center for Retirement Research. (Women live longer on average, and so they’re statistically more likely to incur long-term-care costs; my own mother lived 27 years past my father.)

Surprise - most “individuals should not buy insurance,” wrote the authors of the paper, which was published in November 2014. However, this study only looks at strictly “nursing home care” and ignores assisted living facilities or home health care. Neither of these two levels of care are provided for by any government programs.

Most people do not need the coverage because they do not have a sufficient level of assets to protect. People work their whole lives to provide for themselves and their families, what is left over at the end they want to pass on to their heirs, Long-term Care insurance can help protect that final nest egg, so there is something left.  The value of owning a Long-term Care policy is related to the amount of assets one has and the estimated amount needed to cover the catastrophic cost of long-term care. Additionally the authors found, that for many people of modest means the coverage provided by of Medicare and Medicaid are adequate to cover most of their needs. 

To assess the odds of needing long-term-care, the researchers used government data to “calculate monthly probabilities of transitioning among various health states” from age 65 on. The “health states” are: “healthy, requiring home health care, living in an assisted living facility, living in a nursing home and deceased.” The data show that 44% of men and 58% of women will spend at least some time receiving nursing-home care.

However, many people spend only short spells in nursing homes. Government data show that, on average, men who require nursing-home care spend an average of less than a year in such care over their lifetimes. For women, the figure is about one year and four months.

As the study notes, “many short-duration stays in nursing homes are covered by Medicare,” which covers stays of 100 days or less following a hospital stay of more than 3 consecutive days, Half of all men and 40% of women who use nursing-home care fall within this coverage window, and Medicare picks up their tabs.

At the other end of the spectrum, Medicaid picks up the tab for extended stays in nursing homes for those who run out of money. There are also those people of modest means who try to game the system by spending their assets and thus causing self-inflicted poverty to qualify for Medicaid.

So who should consider buying coverage? According to Anthony Webb, a senior research economist at the Center for Retirement Research and a co-author of the paper, those with significant assets—of a couple hundred thousand dollars or more ($200,000)—should look into a policy. The target market, he adds, is “people who have a sizable amount of household financial assets and would be unlikely to qualify for Medicaid.”

Two things to remember: 1) The study primarily focused on nursing home care, and that type of care is far more comprehensive care than assisted living care and Home Health Care, both of which is covered with Long-Term Care, but not covered by Medicaid or Medicare. People tend to spend more time in assisted living facilities and using home health care then nursing home care. Nursing home care is truly an end of life type of care.

2) What triggers the receiving of long-term care benefits is the loss of two of six activities of daily living, which often allows a person to remain at home, but simply need help on a daily basis to tend to certain activities.

It is likely that in your adult stage of life, most people have experienced a friend or relative that has needed and or used, home health care, assisted living care, and/or nursing home care. There are many different types of policies to choose from. You will want a policy which is simple to understand and yet is flexible enough to cover your needs, while at the same time not being subject to massive rate increases. Or worse, a reduction of the benefits you have paid for, because you can’t afford the new rate increase.

My family has several times expressed gratitude for the policy my mother had, which kept her estate intact and left more to her heirs. It was a wonderful blessing for which I am truly grateful. But more than that it made it possible for my sisters, who were responsible for her, to be care managers rather than care givers – a significant difference between the two roles – and a major difference in the quality of life for both the care manager and the one receiving the care.

With that - I wish y'all a very happy Thanksgiving!

Remember

“When you walk with gratitude, you do not walk with arrogance and conceit and egotism, you walk with a spirit of thanksgiving that is becoming to you and will bless your lives.” - Gordon B. Hinckley

Named after the IRS Code it falls under, Section 529 plans (529 Plans) have amassed over $244 billion in assets since their inception in 1997. Their popularity soared over the years as parents and grandparents realized their favorable tax benefits while also saving for college expenses. These 529 Plans are limited to only “higher education” or post high school education, where as a Coverdell Educational Savings Account can also be used for certain K-12 expenses.

529 Plans were initially intended to provide parents of young children the ability to save and invest money for future anticipated college related expenses, such as, tuition, books, room and board, lab fees, etc.

These plans offer two primary benefits: assets grow tax deferred and come out tax free for qualified expenses; and, contributions made by parents and grandparents are considered a gift, thus proving a tax benefit for some contributors.

Over the years, both wealthy and lower-income parents and grandparents have been the main contributors to these plans. The maximum contribution in to any one plan in Texas is $370,000, this can be made in one payment or through monthly or annual contributions.

Any parent or grandparent can make gifts of up to $14,000 per year per individual person (child) and to as many individuals as they wish. 529 Plans allow gifts to be made five years ahead all at once. Thus, a grandparent can gift $70,000 per grandchild at once for the next five years. If the grandparent has five grandchildren, then they have the ability to contribute $350,000 at once to the 529 Plans, which are considered gifts. There would be no gift tax, assuming no other gifts were made to that child over those years.

Another benefit of 529 Plan is the ability to change beneficiary to another member of the beneficiary’s family. This flexibility allows the family to set up one account for several children as the balance can roll down to the youngest child without any penalties.

Such generous contributions allow a reduction in the contributor’s taxable estate. This is an ideal strategy for parents and grandparents that may have estates valued at over $5.43 million, the current federal estate tax exemption level. The federal estate tax exemption, that’s the amount an individual can leave to heirs without having to pay federal estate tax, is $5.43 million for 2015.

While many people are not in the above situation of needing to reduce their estate size to avoid paying estate taxes; using such a gifting strategy may be advantageous for other family reasons. With the high cost of a college education any help from family should be appreciated by the student.

Selecting the right strategy for college savings or combination of strategies is worth the time and effort. A discussion with your financial advisor of the different strategies and what would make the most sense for your family should be part of the plan, after all next to you no one should know your finances better and how best to integrate the strategies.

Source: IRS, Saving For College

Remember

Remember the only real control is self control. - Jefrey R. Holland

International growth concerns and uncertainty surrounding the Fed’s decision as to when to finally start raising rates continued to roil markets in the 3^rd quarter.

The Fed held interest rates steady during a critical meeting in September, signaling that it intended to raise rates towards the end of the year. The economy’s apparent return to normalcy will be tested when a rate hike does eventually take effect.

The Department of Labor released data for the 3^rd quarter showing that there were improvements for low-income workers across the country, which tends to accelerate when the economy is close to full output. Historically, the Fed has considered full output to be a catalyst for rising rates in order to stem inflationary pressures driven by increasing wages. Consequently, employment data continues to weigh on the Fed’s decision to raise rates.

Markets reacted to mixed signals from the Fed regarding the timing of its anticipated interest rate hike while economic conditions were still questionable. The Bureau of Labor Statistics may have been contributing to the Fed’s uncertainty as it revised 2^nd quarter GDP estimates to a growth rate of 3.9%, up from 3.7%. Such revisions signal a strengthening economy, thus swaying the Fed to a rate rise sooner rather than later. Many economists view a decisive rate increase, a confident attainment of some economic progress.

Many analysts believe that Federal Reserve members have become extremely sensitive to the occurrences in China and the emerging markets, which have been adversely affected by the dollar’s strength. Some propose that the Fed is trying to indirectly minimize the dollar’s strength by keeping interest rates from rising too soon.

Since a stronger dollar has historically been a negative factor for the emerging markets, developing countries such as Brazil and Mexico are taking restrictive actions in order to slow the decline in emerging market currencies.  Brazil implemented sharp interest rate hikes in September while Mexico intervened to sell dollars in order to boost a record low peso. Traditionally, emerging market countries are inclined to raise interest rates in order to stem the decline of their currencies against the U.S. dollar.

It was 7 years ago this September that the financial crisis reached its most critical point when industry behemoths, including Lehman Brothers and Merrill Lynch, were acquired by other institutions.

Commerce Department data released identified construction as the strongest evolving sector of economic growth in September, with construction spending up over 13% for the past 12 months. Construction expenditures have been led by private sector nonresidential building, which includes manufacturing spending that is up considerably over the past year.

Reis, reported in its research that, office space throughout the country became scarcer as the vacancy rate fell to 16.5% in the 3^rd quarter. Department of Labor data showing an increase in higher paying professional positions coincides with the increase in demand for office space.

Sources: Fed, Bloomberg, Dept. of Labor, Commerce Dept.

To Remember:

When things go wrong, don't go with them!  - sign on a church

Anticipation is building as the Fed nears a decisive move to raise interest rates before year end. Some believe that the Fed may have missed its chance to raise rates, which would have conveyed a sense of confidence about the nation’s economy.

As rates have settled at 50-year lows for sometime now, pension plans are a distinctive few that have not benefited from the low, single-digit rates. This is so because pension funding and growth projections are primarily based on the interest earned. So when rates are low for an extended period of time, growth estimates decline and shortfalls evolve. The concern is that most fiscally strapped municipalities are struggling to meet shortfalls in pensions, thus increasing liabilities and hindering cash reserves.

Credit spreads continued to widen between U.S. government bonds and corporate high-yield bonds, somewhat of an indicator of the credit market’s health.  Questionable corporate earnings tend to pull corporate bonds down, feeding into higher stock volatility and price uncertainty.

Various fixed income analysts are closely following the $1.5 trillion of corporate bonds maturing in 2016 & 2017, representing nearly 20% of the entire $7.8 trillion corporate bond market. Questions arise as to how capable companies will be to pay that debt off, and where will rates be should additional debt be needed to fund maturing bonds.

If the Fed raises rates before year end, the riskier bonds (junk bonds), which have had the highest yields in the past few years, their yields will push higher and prices will fall. Investors should monitor how much they have in riskier paper; they may want to reduce their exposure some in the coming months.

Another area of bond risk is the global high-yield bonds from emerging markets. These have become popular as their yields have been much better than the treasuries. However if rates begin to rise, it is likely they will rise too, as they are in constant competition for investment money. This is one reason why a well-diversified portfolio is helpful. It will limit exposure in any one area and should provide proper cross correlation of investments.

Alternative investments can be a terrific option to add to an income based portfolio, some providing yields of as much as 7.5% or more, with relatively low risk. Because they are hard/real asset backed, the price should not change when rates move. Alternative investments can be a part of well diversified portfolio and provide a base that is typically not subject to market volatility.

Sources: Bloomberg, Moody’s, Reuters, Market Watch

To Remember 

"God gets to judge; I get to serve." - personal motto of Dell Loy Hansen  

International trade in the world market is conducted around the world using the U.S. dollar as the reserve currency. Trade is critical to nearly all countries the world over. Here in the U.S. there are some products that we produce far more than we can consume and we have to sell our goods overseas. It is the same for other countries; China as a manufacturing center, produces anything they want to in any amount. The main ingredient in manufacturing is labor and they have a lot of very cheap labor; therefore, they need to export their goods and U.S. is their biggest customer.

As countries produce and market their goods, the natural tendency is for their currency to appreciate, making the products they produce more expensive for other countries to buy. Small increases can produce stable growth, large increases can setup a financial bubble.

Since the financial crash in 2007 the yuan appreciated, in real trade-weighted terms a whopping 40% through May 2015. This partly reflected nominal appreciation against the U.S. dollar, with effective appreciation against the euro, yen, Korean won, and other currencies.[i] During this time period the U.S. dollar gained strength mostly because we were the best option compared to the other world currencies.

China’s biggest drop in its currency valuation in over 20 years occurred last month due to export concerns and China’s economic growth. The decline of foreign reserves illustrates the cost to China as it tries to prop its economy and alleviate the outflow of capital from the country, which has now threatened the nation’s economic position. The shrinkage in foreign reserves means less money flowing into China’s financial system. Many economists believe that it is inevitable China will see continuous capital outflows and continued depreciation of its currency in the ensuing months.

Federal Reserve data released in September showed that China started to liquidate U.S. government Treasuries as early as July. During the same period, several nations maintained their holdings in U.S. Treasuries. China actively reduced its position in Treasuries by over 2.5 percent in less than one month, amounting to a $30 billion reduction. China has been and continues to be the single largest foreign holder of U.S. government Treasuries worldwide, amounting to nearly $1.25 trillion in value. U.S. Treasuries are the single most liquid securities held by foreign entities worldwide.

One cause of volatility in our markets in part due to the actions of governments. Allowing their currency to rise and then suddenly devaluing it that can cause such volatility in our markets. Changes in currency valuation cause uncertainty in the markets and investors react by converting their investments to cash. In time, investors regain the previous confidence and put their money back in the market. Bidding it back up. China’s devaluation of their currency caused our markets to head south. This reflects two questions: 1. With China now as an economic powerhouse, how does the U.S. make room for two at the top? and 2. Think of what the rest of the world goes through when the U.S. market has a cold or our government does something unpredictable; how do we, as the U.S. population, now cope with a more unstable government? Our government stability is so very important in the world. Perhaps you may have other questions to ask? please ask in the comments below.

[i] Is China in danger of falling into the trap that killed Japan? 10/16/2015 By Jeffrey D. Sachs

Source: Federal Reserve

To Remember:

"Bull markets are born in pessimism, grow in skkepticism, mature in optimism and die in euphoria, I don't see any signs of euphoria." Sir John Templeton

As year end approaches, another income tax season is just over the horizon. The importance of gathering necessary tax items is essential. Starting in early autumn gives you time to act; you can implement any additional tax planning strategies to help lower your bill. Some strategies may take a few weeks to properly implement. Even though not much may have changed since 2014, it is always clever to have accurate estimates and tax items prepared for 2015.

Federal Tax Rates

For the most part, federal tax rates for 2015 remain the same as they did last year. Federal tax rates start at 10% and increase to a top rate of 39.6%. Keep in mind that the beginning and end points are increased slightly to account for inflation. Higher income individuals may also be susceptible to an additional Medicare tax on wages and self-employment income, as well as the 3.8% net investment income tax which can result in a higher marginal federal tax rate for 2015.

Employer Qualified Retirement Plans

Whether you are a self-employed individual or a W-2 employee, it is important to tally up any contributions that may have been made to your retirement accounts over the year. Most employer retirement accounts allow for year end contributions until December 31^st. So any additional contributions that you can make to a company qualified plan such as a 401(k) or a 403(b) should be made before the end of the year. It’s a good idea to estimate how much more you can contribute then spread out the additional contributions between now and year end.

Charitable Contributions

Now is a good time to line out your charitable contributions for the year. If you are not pleased with the way the federal government spends your tax dollars, then the best method to combat that is to donate money to charities that do support causes you are interested in. The tax deduction may produce a significant reduction in your income tax bill; sometimes providing just enough of an additional tax deduction to lower your tax marginal rate. These contributions need to be made by year end in order to qualify.

Investment Portfolios

For investors that hold securities as various types of positions, it is important to identify any investments that may have either significant losses or significant gains, which should be realized before the end of the year. With the market being as volatile as it has been, it is also important to identify any investment positions that may yield some type of tax benefit before year end.

Alternative Minimum Tax (AMT)

Affecting more and more people every year, Alternative Minimum Tax (AMT) should be carefully considered when implementing tax planning strategies going into the New Year. Originally enacted in 1969, AMT was never indexed for inflation, thus it continues to affect more and more taxpayers each and every year. AMT is essentially an additional tax on top of the standard tax tables. There’s a good chance that taxpayers taking significant deductions at the state and local levels (such as state tax free municipal bond income), claiming multiple dependents, exercising stock options, or recognizing a large capital gain for the year, may eventually be affected by AMT.

Income tax planning throughout the year pays off, those who pay attention to it often pay fewer taxes for the year. Those who do no planning and just report the numbers on the form pay the most. There is no law that says that you have to pay the maximum. Year end planning save you money, the challenge is will you make the time to do it. After all it’s your money; you are the one who earned it! Tell us about your favorite tax planning strategy; what strategy(ies) do you use to save income taxes?  If you would like to learn more, click on the link below:

To Remember:

Success is getting what you want; Happiness is wanting what you get!  Warren Buffet

The Economy 

There was a series of bad news in the past couple weeks, which have driven markets lower over the past seven days. The pounding may not be over. Some of the economic news that challenges the markets are as follows:

Internationally the dollar has remained strong and the best option of all the poor options. So the US debt is a problem, but it is perceived to be less of a problem than the debt of other countries, making the US the best option.

Sales of new homes in June came in below expectations, and the median new home price fell from a year ago. That news was a U-turn from recent data indicating strength in the housing market.

Two major economic indicators are air freight and shipping, both have been down this year. Air freight has dropped to levels not seen since 2009 and the number of idle ships (ships sitting in harbors with no shipping containers to move) has increased 31% from 82 to 108 ships. The transportation sector is a very key indicator, as it is responsible for moving raw material and goods to market. If no one is ordering commodities/materials or finished products then shipping slows, on sea, land, and air.
 
China’s wild ride continues as the country deals with its own economic problems. This week it was announced that the Chinese economy has grown to become the largest economy in the world making it larger than the US economy. The Purchasing Managers’ Index, a private measure of Chinese manufacturing, came in below expectations at 48.2, according to BloombergBusiness. Results below 50 indicate the sector is contracting. That doesn’t bode well for growth in China, which is the biggest global consumer of metals, grains, and energy, or the rest of the world.
   
With this week’s jobs report and employment holding steady, it is more likely that the Fed will raise interest rates next month. When interest rates are 0%-.25% basis points any movement is likely to result in as much as a 100% increase over the current the rates, a .35% rate would be 100% or more of any rates below .175% and a 40% rise over the top end of .25%. That is still a big move, which will be costly to businesses who need to borrow. But hey, we all knew the day would come when rates would start heading back up, Right?

Experts cited by Barron’s cautioned, “…it’s not the first rate hike that’s important. It is what comes after that.” Stay tuned.

A Few Good Tips:

1. Make sure you update your estate plan regularly – if you don’t have one, GET ONE NOW! The problems you leave behind can be as devastating as your passing.

2. Successful investing is found by focusing on sound investment strategies and goals, not focusing on the markets.

3. Review risk management and levels of insurance, have adequate life, disability and property & casualty coverage; someday you may end up being the “other guy” that something happens to.

4. Stay out of debt – get your debts paid off ASAP. This is the ball and chain to your financial success.

To Remember:

Back to School sales are already upon us – the kids are heading back to classrooms all across the country. Next, coming up fast, will be Halloween, and the holidays with the Christmas season and the wonderful spirit that brings to families and children. While RED is the typical Christmas color, it is not the favorite financial color! Certainly not the color of choice on how you want to end the year financially! For many people Christmas is a budget buster, they spend through their savings, only to end up putting the balance on credit cards; thinking “this will be easy to pay off during the next few months.”

Here is a suggestion: Begin now creating your gift list, pricing each item, then shop around for the extremes – highest and lowest prices for each item (the MSRP: Manufacturer’s Suggested Retail Price vs. sale price). Save/budget for the highest price and make the purchase at the lowest price, then actually put the difference into savings. You will discover two things, as you exercise the discipline of putting the difference into savings: 1. You will enjoy shopping for deals more, instead of paying the regular retail price. 2. You can make this a game with your children – teaching the value of saving and how to shop. They will become more savvy consumers and they will enjoy growing their new saving plan.

When you make the transfer to savings you can set up some simple rules to keep working right: make a daily transfer or a weekly transfer and simply keep track of purchases and the savings on a pad of paper. I like using something like PayPal where they simply draft the money from my checking account and forget about it. You can also make a limit that you don’t make transfers of less than $25.00 so at least weekly you are moving something to savings.

Successful savings is found strictly on the principle of self-discipline. Nobody makes you save money, you have to do it all on your own. Its 100% you! So make a weekly transfer of something to the account, develop the discipline and commitment to follow through, even if the amount is small. Frequent small deposits add up! This simple tip will help your finances stay in the black!

Little did we know that this week is “National My Social Security Week”! WeeHa! It’s a week where the Social Security Administration (SSA) is encouraging people to sign up for an online account. Much like many other financial institutions we have the ability to manage our account, the SSA wants people to do the same. There are a few other interesting thoughts and statistics I thought might be interesting to the average American who at some point will be drawing income from this massive bureaucratic government agency. For example average benefits paid out by the SSA to recipients; and the age old question, will there be any money left when I am ready to receive my benefits?

As a Personal CFO, this is one thing I think folks should do – go online and create/open your own account on the SSA website. This provides quick easy access to info which will help in your planning your future finances. While Social Security Income (SSI) may not be a large portion of your overall retirement plan or your income, it is still important to review it periodically, if nothing else to make sure they are recording contributions properly.

From the Social Security website at www.ssa.gov:

Get your free personal online my Social Security account today!

You probably plan to receive Social Security benefits someday. Maybe you already do. Either way, you’ll want a my Social Security account to:

•    Keep track of your earnings and verify them every year;
•    Get an estimate of your future benefits if you are still working;
•    Get a letter with proof of your benefits if you currently receive them; and
•    Manage your benefits:
o    Change your address;
o    Start or change your direct deposit;
o    Get a replacement Medicare card; and
o    Get a replacement SSA-1099 or SSA-1042S for tax season.

Setting up an account is quick, secure, and easy. Join the millions and create an account now!

*With instant access to your Social Security Statement at any time, you will no longer receive one periodically in the mail, saving money and the environment.  Thank you for Going Green!

If you would like to receive your Social Security Statement by mail, please follow these instructions.

Current Paid benefits from SSA

It is interesting to see what the current benefits are that the SSA pays and to whom, see Table 1 below. As with many government agencies, over the years they have felt the need to grow and expand – and grow they did! It started out in 1935 as an Old-Age and Survivors Insurance fund to help pay some benefits to folks in their old age and the widows of workers. It was supposed to be a safety net, it is just that that safety net continued to grow to include many different conditions, without collecting specific premiums for those new conditions. This expansion has welded the SSA into the foundational grid-work of our country.

Additionally, the premiums are not voluntary, so for example many people have their own private disability insurance, and yet part of the tax collected covers disability benefits that they would never need because of their own insurance.

 
How Social Security Is Financed

Social Security is largely a pay-as-you-go program. Most of the payroll taxes collected from today's workers are used to pay benefits to today's recipients. In 2013, the Old-Age and Survivors Insurance and Disability Insurance Trust Funds collected $855.0 billion in revenues. Of that amount, 85.5% was from payroll tax contributions and reimbursements from the General Fund of the Treasury and 2.5% was from income taxes on Social Security benefits. Interest earned on the government bonds held by the trust funds provided the remaining 12.0% of income. Assets increased in 2013 because total income exceeded expenditures for benefit payments and administrative expenses.

Sources and uses of Social Security revenues in 2013

 
SOURCE: 2014 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Table II.B1.


Will Social Security ever go away?

I am often asked; “Will Social Security every go away?” We can’t keep funding this social program… Well let’s take a look at the program from a different perspective and see if it will go way or not.  According to the SSA there are 161,673,000 (2012) people in the United State who earn income taxable by the SSA.

Of those employed people there are 2,711,000 employed by the Federal Government (Nov. 2014). Of the 2.7 million Federal employees 60,771 are employed by the SSA (2013). In my lifetime I don’t know of a time when the Federal Government has closed an agency and told the employees to go find a job someplace else.

Now to dig a little deeper on this according to the SSA, 0.7% of the annual tax revenue is used to fund the SSA administrative expenses.  The SSA takes in $855.0 billion in revenue (including: payroll taxes, interest, and taxation of benefits) and the administrative expenses are $5.985 billion, for an average cost per employee of $98,484.

Again, I do not think the Federal Government will shutter this program. The government will continue to tweak it in one form or another, so it will be for a long time to come. Which means I would expect three things to happen: 1) taxes will go up. 2) Amount of SSA benefits to be taxed will increase, and 3) future benefits will be reduced.

Another challenge is that we have so many people receiving benefits; the worker to beneficiary ration keeps dropping. As mentioned above that the system is based on a pay as you go model, we have fewer worker paying into the system than people who are taking income. Post WWII in the mid 1950’s there were just over eight employees paying into the fund for every person receiving benefits. That has dropped over the years to a mere 2.8 employees in 2013 paying into the system for each person receiving benefits.

The problems of this agency are difficult and challenging, clearly it will not be going away, and this year, being its 80th anniversary year, while its future does not look bright, it will be around another 20 years to celebrate its 100th anniversary!