Every year about this time, the Trustees of the Social Security and Medicare Trust Funds release their reports to Congress on the current financial condition and projected financial outlook of these programs. And every year at this time, we review the entire report. Scintilating reading!
This year's recently released reports show once again, sadly, that both programs face urgent financial challenges that should be addressed as soon as possible. Regardless of one’s political stripe, the importance of adopting solutions in the very near term cannot be overstated in our view.
Here at J.L. Davis, in we normally include Social Security retirement benefits as we prepare wealth management plans and updates for our clients. However, in recent years, we have projected a reduction of those benefits based upon the Trustees Report. It’s been imminently clear to us for some time change is needed.
We think you’ll enjoy taking a look at the attached in order to stay abreast. We sincerely hope that political leaders soon heed the chorus of voices urging them to act to strengthen these programs.
What’s your view?
Best always,
Lee and Jeremy
This Week’s Quote:
“I care about our young people, and I wish them great success, because they are our Hope for the Future, and some day, when my generation retires, they will have to pay us trillions of dollars in social security.”
~ Dave Barry
JL Davis Thoughts This Week:
The recently released Social Security Board of Trustees report states, “Neither Medicare nor Social Security can sustain projected long-run programs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers.” Wow!
One would think that statement would get noticed, but it barely registered in the national media. Every year, the Trustees of the Social Security and Medicare Trust Funds release reports to Congress on the current financial condition and projected financial outlook of the programs. This year's reports show in detail that both programs face urgent financial challenges.
Social Security and Medicare account for roughly 38% of federal expenditures. Funded almost completely by payroll taxes, demographic and economic factors now result in fewer workers paying into Social Security and Medicare than in the past. Add in the challenge of large numbers of baby boomers reaching retirement age, and the increased longevity of Americans, and therein lies the recipe for the problem.
Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program, while disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. This year's trustees report shows that:
• The annual costs for the OASDI program already exceed income from the payroll tax with a projected deficit for 2013 of $79 billion.
• The combined assets of the OASDI Trust Funds will be depleted in 2033. The DI Trust Fund is in worse shape and becomes depleted in 2016 while the OASI Trust Fund becomes depleted in 2035.
• Once the OASDI Trust Funds are depleted, tax income would be sufficient to pay only about 77% of scheduled benefits.
Medicare may be in equally bad shape. There are two Medicare trust funds. The Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care (Medicare Part A costs). The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts, one covering Medicare Part B (which pays for physician and outpatient costs) and one covering Medicare Part D (which covers the prescription drug benefit). According to this year's trustees report:
• Annual costs for the Medicare program have exceeded tax income annually since 2008, and will continue to do so in the foreseeable future.
• Future program costs are likely to be underestimated, due to changes in law that are likely to occur, and actual future program costs are “highly uncertain.”
• The HI Trust Fund is projected to be depleted in 2026 and once gone, tax and premium income would cover about 87% of program costs.
So, what does the future hold? Both the Social Security and Medicare trustees’ reports make it clear that these challenges are here to stay. Our view at J.L. Davis is simple: it’s just math, and these programs will see some combination of higher taxes, reduced benefits, means testing, larger deductibles and so on.
We therefore encourage clients to establish savings and strategies to care for themselves regardless of whether or not they are able to qualify for these programs in the future. Further, we encourage everyone to demand that government officials and politicians be forthright about the issue and implement needed changes right away.
America has a remarkable way of solving problems and we believe this one will be solved, too. We just may not enjoy the solution!**
*A Summary of the 2013 Annual Reports, Social Security and Medicare Boards of Trustees
You can view the 2013 OASDI Trustees Report at www.socialsecurity.gov
You can view the 2013 Medicare Board of Trustees Report at the actuarial studies page at www.cms.gov
You can also view this report, as well as a combined summary of the Social Security and Medicare trustee’s reports at www.socialsecurity.gov/OACT/TRSUM/index.html
Market Week: July 22, 2013
The Markets
As Federal Reserve Chairman Ben Bernanke continued to reassure investors about the Fed's future course, the Dow industrials and the S&P 500 once again set new closing records. However, weak earnings reports from some bellwether tech companies hurt the Nasdaq, while a strong week for the small caps of the Russell 2000 helped the index maintain its year-to-date lead. Meanwhile, reduced anxiety about the Fed also allowed the benchmark 10-year Treasury yield to slide for the second week as prices rose. Municipal bond markets remained relatively stable despite Detroit's decision to file for bankruptcy.
Last Week's Headlines
•In his semiannual testimony before Congress, Fed Chairman Ben Bernanke continued to make soothing statements, saying that the tapering of economic support is not on any "preset course" and will depend on future economic data. He also made headlines by saying that "nobody really understands gold prices, and I don't pretend to understand them, either."
•Hampered by a dramatically reduced tax base and overwhelming debt, Detroit became the biggest U.S. city in history to declare bankruptcy. Creditors, including city pensioners and holders of general obligation bonds, will now have to argue in federal court to try to claim a percentage of what they're owed. Also, Moody's cut Chicago's bond rating by three notches to A3, citing pension liabilities and worsening budget problems.
•Consumer prices rose 0.5% in June, with a 6.3% increase in gas prices responsible for roughly two-thirds of the increase. The Bureau of Labor Statistics said that put the consumer inflation rate for the last 12 months at 1.8%.
•Retail sales rose slightly less in June than they did a month earlier. According to the Commerce Department, the 0.4% increase was largely the result of car sales that were 2.1% higher for the month.
•Industrial production accelerated in June; the Federal Reserve said the nation's factory output rose 0.3%, which was far better than May's flat reading. That meant that industrial output is up 2% from a year earlier. Also, the Philly Fed manufacturing survey hit 19.8, its highest level since March 2011, while the Fed's equivalent Empire State survey also rose to 9.5.
•Housing starts tapered off in June, according to the Commerce Department. The nearly 10% decline, most of which was in the often volatile multifamily sector, could be linked to wet weather in many parts of the country, since homebuilder sentiment remains robust. Building permits also fell 7.5% for the month. However, both housing starts and building permits remained solidly higher than the previous June.
Eye on the Week Ahead
As earnings reports continue to stream in, home sales both new and used may be of extra interest this week in light of last week's weaker housing starts report and the recent jump in mortgage rates. Durable goods orders could be affected by Boeing's struggles with incidents involving its Dreamliner aircraft. Also, given last week's disappointments by some key tech companies, earnings reports will be watched for signs of a broader tech slump.
Key dates and data releases: home resales (7/22); new home sales (7/24); durable goods orders (7/25).
Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.
Prepared by Lee Davis** andBroadridge Investor Communication Solutions, Inc. Copyright 2013
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