Of all the massive hacks of recent years, the Equifax hack may be the worst. Some 145 million persons had their personal information stolen. Even though other hacks may involve larger numbers (the Yahoo hack may have victimized 3 billion--yes, billion--accounts), Equifax had the crown jewels: Social Security numbers, birth dates, home addresses and phone numbers, and some credit card account numbers and drivers license numbers. Bad guys can use this information to open phony credit card and other loan accounts in your name, steal your tax refund, grab your Social Security check and get prescription drugs in your name (which could interfere with your ability to get medications and maybe even implicate you in police investigations).
What to do? The best thing is to freeze your credit accounts. These freezes, called security freezes, prevent new creditors and other persons from getting access to your credit information unless you specifically authorize it. It doesn't stop existing creditors and their collection agents, or the government from getting access. But it puts a substantial barrier in the way of fraudsters. It's not perfect--the bad guys might still try to use your stolen personal information to snare your tax refund or your Social Security benefits, or snag some opiods in your name. But a credit freeze is a lot better than the alternatives. Forget about credit monitoring and fraud alerts--they aren't great protection. And a credit lock isn't as good as a credit freeze. Credit freezes give you legal protection under state law, while a credit lock is just a contract with the credit reporting agency that may be difficult to enforce. Credit locks may also cost you more in fees (which is one reason the credit reporting agencies might want to sell you a credit lock).
Credit freezes can be a little inconvenient, because you have to lift them any time you want to apply for credit. But that is a lot less bother than the aggravation of cleaning up your credit after the bad guys have impersonated you (a process that can take months or years).
One more reason to freeze your credit is to make the idiots (the ones that got hacked) change things. The credit reporting agencies and banks and other lenders don't like freezes. They interfere with business and revenue flow. The credit reporting agencies and lenders have a harder time making money if a lot of people freeze their accounts. And that is the point. The current system using Social Security numbers as universal identification numbers has just been blown up by the Equifax hack. For all practical purposes, you have to assume that your Social Security number is publicly available. You have no privacy any more. You're not safe, and your finances are not safe. The SSN system of personal identification is now completely kaput.
Make 'em change. Freeze your credit and take profit opportunities away from the credit reporting agencies, and the banks and other lenders. Faced with a business downturn, these massive institutions will lead the way to change. With the potential loss of who knows how many millions of dollars of profit, they will implement posthaste new and improved systems of personal identification. Either that, or their senior executives' stock options will belly flop. And that they won't allow. So freeze your credit. It might be the best thing you can do right now for your financial privacy.
Showing posts with label Social Security. Show all posts
Showing posts with label Social Security. Show all posts
Monday, October 9, 2017
Tuesday, February 28, 2017
Will Donald Trump Be a Traitor to His Class?
The most important legislative priorities of the Trump administration--tax and health insurance reform--will be enacted within a matter of months. Both of these measures will greatly impact the working class whites who propelled Trump to the White House--either for better or for worse.
Preliminary assessments of the proposed tax reform indicate that taxes for the middle class will drop about a couple hundred dollars. One percenters can look forward to many thousands in tax savings. This isn't exactly what folks in small town America were hoping for. To make up for the loss of income tax revenues from these cuts, the President may endorse a border adjustment tax (basically, a tariff on imports that would likely increase the prices of the inexpensive food and goods that low and moderate income Americans rely on). To many, this might feel like another kick in the teeth.
Health insurance reform is turning out to be a very tough nut to crack. President Trump has said he wants to preserve the protections that many low and moderate income Americans count on--guaranteed acceptance, coverage against pre-existing medical conditions, and subsidies for those unable to pay full freight. But these conditions are very expensive. How will the President cover the costs? There seems to be little consideration of progressive taxation of the wealthy or increasing the federal debt. Yet there's no free lunch. One possible "solution," so to speak, would be to offer low cost policies with skimpy coverage--prior medical conditions would be covered but total coverage might go only up to $25,000 or $50,000 a year. This would be expedient, but would effectively deprive people of coverage when they needed it the most.
On top of this, the President's desire to turn Medicaid into a program of block grants for the states has significant potential to reduce coverage for the low income. Many of these people voted for him. Where will they go for care without health insurance? Medicaid covers around 74 million Americans--almost 1 in 4. Cuts to this program could mean many millions of people mad at the President.
President Trump's problems are exacerbated by his proposal to increase military spending by $54 billion. Where will this money come from? The Republicans in Congress won't agree to more deficit spending. So the President can either raise taxes, or piss off many millions of voters by cutting other federal programs.
Donald Trump is President at a time when stark choices are necessary. He was elected as an insurgent. But he's stacked his cabinet with establishment Republican types, people who have no demonstrated concern or sympathy for his core constituents. The Republicans who control Congress gave him scant and faint-hearted support during his campaign. But today they stack the legislative agenda with bills that would make the rich richer and offer the working class hardly more than a crumb or two--and stale ones at that.
If the President really wants to help his constituents, he'll have to be a traitor to his class. He'll have to offer substantial improvements in life to the working class, and sorry to say, but wealthier people will have to pay for them. America got itself into its current mess by believing that somehow everyone can get more of everything all the time at no cost to anyone else. The last two large nations to subscribe to this notion--the Soviet Union and Communist China--had to abandon their illusions and now struggle with the consequences of the their wishful thinking.
Franklin Delano Roosevelt, the greatest President of the Twentieth Century, was labelled a traitor to his class. And he was. He endorsed legislation like Social Security and a strengthening of protections for workers and labor unions that uplifted many millions of ordinary Americans out of poverty and into the middle class. The cost was born to a large degree by a sharp increase in federal income taxes paid by the well-to-do. The rich grumbled and plotted against him. But he ushered in the prosperity of the 1950's and 1960's, now viewed as a golden age in America. America's perceived decline from those days also correspond with ever increasing inequality of wealth and income. If Donald Trump really wants to make America great again, he'll have to make it great for the working class. That isn't the direction he's been going in since his inauguration. The next few months, when his most consequential legislative initiatives will be enacted, will likely make him both a traitor--either to his core constituents or to his class--and a hero--to the wealthy, many of whom didn't support him but are glad to free-ride on his policies and program, or to the working class that vaulted him into office. The choice is his.
Preliminary assessments of the proposed tax reform indicate that taxes for the middle class will drop about a couple hundred dollars. One percenters can look forward to many thousands in tax savings. This isn't exactly what folks in small town America were hoping for. To make up for the loss of income tax revenues from these cuts, the President may endorse a border adjustment tax (basically, a tariff on imports that would likely increase the prices of the inexpensive food and goods that low and moderate income Americans rely on). To many, this might feel like another kick in the teeth.
Health insurance reform is turning out to be a very tough nut to crack. President Trump has said he wants to preserve the protections that many low and moderate income Americans count on--guaranteed acceptance, coverage against pre-existing medical conditions, and subsidies for those unable to pay full freight. But these conditions are very expensive. How will the President cover the costs? There seems to be little consideration of progressive taxation of the wealthy or increasing the federal debt. Yet there's no free lunch. One possible "solution," so to speak, would be to offer low cost policies with skimpy coverage--prior medical conditions would be covered but total coverage might go only up to $25,000 or $50,000 a year. This would be expedient, but would effectively deprive people of coverage when they needed it the most.
On top of this, the President's desire to turn Medicaid into a program of block grants for the states has significant potential to reduce coverage for the low income. Many of these people voted for him. Where will they go for care without health insurance? Medicaid covers around 74 million Americans--almost 1 in 4. Cuts to this program could mean many millions of people mad at the President.
President Trump's problems are exacerbated by his proposal to increase military spending by $54 billion. Where will this money come from? The Republicans in Congress won't agree to more deficit spending. So the President can either raise taxes, or piss off many millions of voters by cutting other federal programs.
Donald Trump is President at a time when stark choices are necessary. He was elected as an insurgent. But he's stacked his cabinet with establishment Republican types, people who have no demonstrated concern or sympathy for his core constituents. The Republicans who control Congress gave him scant and faint-hearted support during his campaign. But today they stack the legislative agenda with bills that would make the rich richer and offer the working class hardly more than a crumb or two--and stale ones at that.
If the President really wants to help his constituents, he'll have to be a traitor to his class. He'll have to offer substantial improvements in life to the working class, and sorry to say, but wealthier people will have to pay for them. America got itself into its current mess by believing that somehow everyone can get more of everything all the time at no cost to anyone else. The last two large nations to subscribe to this notion--the Soviet Union and Communist China--had to abandon their illusions and now struggle with the consequences of the their wishful thinking.
Franklin Delano Roosevelt, the greatest President of the Twentieth Century, was labelled a traitor to his class. And he was. He endorsed legislation like Social Security and a strengthening of protections for workers and labor unions that uplifted many millions of ordinary Americans out of poverty and into the middle class. The cost was born to a large degree by a sharp increase in federal income taxes paid by the well-to-do. The rich grumbled and plotted against him. But he ushered in the prosperity of the 1950's and 1960's, now viewed as a golden age in America. America's perceived decline from those days also correspond with ever increasing inequality of wealth and income. If Donald Trump really wants to make America great again, he'll have to make it great for the working class. That isn't the direction he's been going in since his inauguration. The next few months, when his most consequential legislative initiatives will be enacted, will likely make him both a traitor--either to his core constituents or to his class--and a hero--to the wealthy, many of whom didn't support him but are glad to free-ride on his policies and program, or to the working class that vaulted him into office. The choice is his.
Monday, May 30, 2016
We're All Temporary Workers
According to data collected by the U.S. Bureau of Labor Statistics, middle aged Americans are, on average, likely to have held 11 or 12 jobs by the age of 48. See http://www.bls.gov/nls/nlsfaqs.htm#anch4. The same group will have, on average, experienced 5 or 6 periods of unemployment by the age of 48. See http://www.bls.gov/nls/nlsfaqs.htm#anch42. Only about 10 percent of these workers will have had between 0 and 4 jobs by age 48. In other words, the long lasting, stable employment that we anticipate for adulthood is mostly a mirage. Few of us enjoy that kind of certainty. Indeed, it's fair to say just about all of us are temporary workers.
Of course, there are differences among workers. Some are considered full time, others part time. Some are permanent--either full time or part time--and others are temporary--either full time or part time. But the average American, with about 12 jobs by the age of 50, is realistically a temporary employee, just with better benefits if he or she is considered "permanent" and is working full time.
The impermanence of employment means fewer employees qualify for defined benefit pensions, even in the few jobs that still offer pensions. It also means that in the real world, workers have trouble building up their 401(k) and IRA accounts, because they're periodically hit with a spell of unemployment or have to rebuild benefits at a new employer. Many workers draw down their retirement accounts during episodes of joblessness. When they resume working, they have less time to build up their balances again. The only ways to counteract the temporariness of employment is to save furiously, or, if you're lucky enough to have a job offering a pension, to somehow stay put long enough to qualify for the pension, no matter how boring the job or overbearing the boss.
The wobbly, and sometimes turbulent, work lives of most people place this year's politics in sharp focus. The debates over Social Security, health insurance, trade policy, jobs programs and wage stagnation become all the more crucial when we consider that, in the end, we're almost all temporary workers. Proprosals that enhance stability for workers, like protecting and strengthening Social Security and Medicare will be popular. Measures like free trade agreements are likely to be losers.
But don't count on the government to bail you out. You're not a major financial institution, so assume that there will be no bailout for you. Save as much as you can--and then save some more.
Of course, there are differences among workers. Some are considered full time, others part time. Some are permanent--either full time or part time--and others are temporary--either full time or part time. But the average American, with about 12 jobs by the age of 50, is realistically a temporary employee, just with better benefits if he or she is considered "permanent" and is working full time.
The impermanence of employment means fewer employees qualify for defined benefit pensions, even in the few jobs that still offer pensions. It also means that in the real world, workers have trouble building up their 401(k) and IRA accounts, because they're periodically hit with a spell of unemployment or have to rebuild benefits at a new employer. Many workers draw down their retirement accounts during episodes of joblessness. When they resume working, they have less time to build up their balances again. The only ways to counteract the temporariness of employment is to save furiously, or, if you're lucky enough to have a job offering a pension, to somehow stay put long enough to qualify for the pension, no matter how boring the job or overbearing the boss.
The wobbly, and sometimes turbulent, work lives of most people place this year's politics in sharp focus. The debates over Social Security, health insurance, trade policy, jobs programs and wage stagnation become all the more crucial when we consider that, in the end, we're almost all temporary workers. Proprosals that enhance stability for workers, like protecting and strengthening Social Security and Medicare will be popular. Measures like free trade agreements are likely to be losers.
But don't count on the government to bail you out. You're not a major financial institution, so assume that there will be no bailout for you. Save as much as you can--and then save some more.
Friday, September 25, 2015
Do the Financial Markets Regulate the Fed?
When the Federal Reserve decided last week to hold short term interest rates at zero, the stock market's reaction was to drop. Even though easy money has been a shot of glucose for stocks since the 2007-08 financial crisis, the market seemed to be saying that there can be too much of a good thing.
Yesterday, Fed Chair Janet Yellen stated her view that rates should rise sometime this year. The market reacted positively, even though rising interest rates logically should push stock prices down (since fixed rate investments that compete with stocks would offer higher yields than before).
The implication is that the market is leading the Fed. The market wanted rates to rise, and when they didn't, the market pouted. That may have prompted Chair Yellen to make more noise about rates rising, and then the market cooed with approval.
Why would the market want rates to rise when conventional wisdom holds that stocks should love easy money? Maybe it's because the stock market absorbs information from a variety of inputs, both short and long term. Easy money is positive in the short run, but can be corrosive in the long run. Accommodative policy by the Fed and other central banks has continued for almost 8 years now, and is distorting asset values and relationships to the point where the social contract may be changing. With interest rates so low, the ability of pension funds, insurance companies and other asset managers to provide pension and annuity income is becoming impaired. (For more, see http://blogger.uncleleosden.com/2015/04/is-federal-reserve-wrecking-retirement.html.) When private parties can no longer provide retirement income, greater responsibility falls on the government. Social Security and similar programs become more essential. If these programs suffer from fiscal imbalance, taxpayers become more burdened. We can't toss retired and disabled people into the gutter, but who besides taxpayers can cover their needs?
Another change in the social contract is that easy money favors the wealthy. Low interest rates have pushed up the value of risk assets--stocks, real estate, commodities and so on. The distribution of income and wealth have become more skewed in favor of those who need the money the least. Such growing inequality makes it more difficult to attain social and political compromises and consensus. A resentful and angry society may lack the optimism and initiative for investment and risk-taking that would foster strong economic growth. (Note that jaded, cynical Europe is hardly a hotbed of innovation.)
The voices that are heard at the Fed tend to be those of elites--Wall Street executives, influential academics, power players like IMF Managing Director Christine Lagarde. A lot of these voices have advocated keeping interest rates at zero. But the accumulated knowledge of many thousands of participants in the real financial world seems to signal that continued distortion of asset values is doing more harm than good. Maybe the market is regulating the Fed. And maybe, at least this time, that's a good thing.
Yesterday, Fed Chair Janet Yellen stated her view that rates should rise sometime this year. The market reacted positively, even though rising interest rates logically should push stock prices down (since fixed rate investments that compete with stocks would offer higher yields than before).
The implication is that the market is leading the Fed. The market wanted rates to rise, and when they didn't, the market pouted. That may have prompted Chair Yellen to make more noise about rates rising, and then the market cooed with approval.
Why would the market want rates to rise when conventional wisdom holds that stocks should love easy money? Maybe it's because the stock market absorbs information from a variety of inputs, both short and long term. Easy money is positive in the short run, but can be corrosive in the long run. Accommodative policy by the Fed and other central banks has continued for almost 8 years now, and is distorting asset values and relationships to the point where the social contract may be changing. With interest rates so low, the ability of pension funds, insurance companies and other asset managers to provide pension and annuity income is becoming impaired. (For more, see http://blogger.uncleleosden.com/2015/04/is-federal-reserve-wrecking-retirement.html.) When private parties can no longer provide retirement income, greater responsibility falls on the government. Social Security and similar programs become more essential. If these programs suffer from fiscal imbalance, taxpayers become more burdened. We can't toss retired and disabled people into the gutter, but who besides taxpayers can cover their needs?
Another change in the social contract is that easy money favors the wealthy. Low interest rates have pushed up the value of risk assets--stocks, real estate, commodities and so on. The distribution of income and wealth have become more skewed in favor of those who need the money the least. Such growing inequality makes it more difficult to attain social and political compromises and consensus. A resentful and angry society may lack the optimism and initiative for investment and risk-taking that would foster strong economic growth. (Note that jaded, cynical Europe is hardly a hotbed of innovation.)
The voices that are heard at the Fed tend to be those of elites--Wall Street executives, influential academics, power players like IMF Managing Director Christine Lagarde. A lot of these voices have advocated keeping interest rates at zero. But the accumulated knowledge of many thousands of participants in the real financial world seems to signal that continued distortion of asset values is doing more harm than good. Maybe the market is regulating the Fed. And maybe, at least this time, that's a good thing.
Wednesday, May 20, 2015
Planning For Your Obsolescence
The ongoing debate over trade policy highlights a major career risk: the possibility that you could become obsolescent because of cheaper labor elsewhere and/or automation. For example, in the auto industry, many car parts and some cars are made in other countries and shipped to America because labor and other costs are cheaper elsewhere. In America's auto assembly plants, robots have replaced large numbers of people because robots are more reliable and cheaper. This trend will continue as many other tasks become mechanized and/or cost-effective in lower wage nations. Computer programming, radiology, legal research and legal document review have joined data entry and call center jobs as routinized work that can be done by smart people living in many countries. What can you do about your potential obsolescence?
Keep up your skills. Maintain and upgrade your professional skills. People capable of cutting edge work will often have an advantage over foreign competition and robots.
Be flexible. Keep an open mind about working in new and different jobs. Many people have succeeded in fields they didn't plan on entering. But they were open minded about learning new things and taking on new challenges. The economy will keep changing, and success can follow if you change with it. If you're unemployed, be open to taking temporary and part-time work in order to prevent your personal finances from eroding faster than necessary.
Computers and computer science. Much of the reason for personal obsolescence is computerization. Computers and related technologies (most importantly, the Internet) make it possible for workers overseas and robots to compete against American workers. Don't get angry about this because computerization will continue--and most likely at an accelerating pace. If you can't beat them, join them. Acquire and maintain computer skills. Go into a computer-related field. Become a programmer, technician, data management engineer or something else computer-related that fits your skills. Computers won't become obsolete, and people who can work with them have a better chance of staying employable.
Build your benefits. Work as long as possible to build Social Security credits. If you have the potential to earn a pension, stay in that job long enough to qualify. Having a stream of payments that doesn't depend on your employability is a major victory over obsolescence.
Save. Here's an ugly truth: just as the wages and salaries of the middle class have fallen due to globalization and other reasons, the returns on capital have improved. People who hold capital are becoming comparatively better off, while people who work are on average becoming comparatively worse off. Save. Acquire capital and improve your chances for a comfortable life. Then save some more. Whatever your views on social issues like the distribution of income and wealth, you are individually better off with a pool of savings to protect you from the riptides of a free enterprise economy.
Keep up your skills. Maintain and upgrade your professional skills. People capable of cutting edge work will often have an advantage over foreign competition and robots.
Be flexible. Keep an open mind about working in new and different jobs. Many people have succeeded in fields they didn't plan on entering. But they were open minded about learning new things and taking on new challenges. The economy will keep changing, and success can follow if you change with it. If you're unemployed, be open to taking temporary and part-time work in order to prevent your personal finances from eroding faster than necessary.
Computers and computer science. Much of the reason for personal obsolescence is computerization. Computers and related technologies (most importantly, the Internet) make it possible for workers overseas and robots to compete against American workers. Don't get angry about this because computerization will continue--and most likely at an accelerating pace. If you can't beat them, join them. Acquire and maintain computer skills. Go into a computer-related field. Become a programmer, technician, data management engineer or something else computer-related that fits your skills. Computers won't become obsolete, and people who can work with them have a better chance of staying employable.
Build your benefits. Work as long as possible to build Social Security credits. If you have the potential to earn a pension, stay in that job long enough to qualify. Having a stream of payments that doesn't depend on your employability is a major victory over obsolescence.
Save. Here's an ugly truth: just as the wages and salaries of the middle class have fallen due to globalization and other reasons, the returns on capital have improved. People who hold capital are becoming comparatively better off, while people who work are on average becoming comparatively worse off. Save. Acquire capital and improve your chances for a comfortable life. Then save some more. Whatever your views on social issues like the distribution of income and wealth, you are individually better off with a pool of savings to protect you from the riptides of a free enterprise economy.
Tuesday, December 10, 2013
Barack Obama's Curious Redistribution Ideas
President Obama recently spoke critically of the gap between the rich and the poor. He has endorsed an increase in the federal minimum wage, from $7.25 up to $10.10. He has argued for stronger enforcement of the labor laws. He seeks universal pre-school.
Predictably, Republicans stood in opposition. More government spending isn't the answer, they contend. Economic growth is the tide that will lift all boats, they say.
Republicans, whether they are right or wrong, have nothing to worry about. Barack Obama, whatever he may say, isn't really serious about changing the distribution of income or wealth. He favors reducing the cost of living adjustment for the Social Security, military and federal retirement benefits that tens of millions of Americans depend on. Cutting back on retirement benefits worsens the distribution of income and wealth.
There were some federal tax increases that took effect this year. But the income tax increase on high level earners was accompanied by an increase in Social Security taxes (which are regressive). So what was the net effect? Most likely, very little or no redistribution.
The Affordable Care Act would have a redistributive effect because of its health insurance subsidies for low income participants. If only people could enroll . . . .
Barack Obama has serious credibility issues. He drew a line in the dust over the use of poison gas, and Assad stepped over it. Obama squirmed, complained, and then let the Russians broker a deal. He didn't have the management skills to implement his signature legislative achievement, the Affordable Care Act. He negotiated some sort of deal on nukes with Iran, although that deal seems to have implementation issues as well. As negotiators talk, Iran continues to enrich. If you're looking for action from the White House on redistribution of income or wealth, don't hold your breath. Keep saving and investing, because you're on your own.
Predictably, Republicans stood in opposition. More government spending isn't the answer, they contend. Economic growth is the tide that will lift all boats, they say.
Republicans, whether they are right or wrong, have nothing to worry about. Barack Obama, whatever he may say, isn't really serious about changing the distribution of income or wealth. He favors reducing the cost of living adjustment for the Social Security, military and federal retirement benefits that tens of millions of Americans depend on. Cutting back on retirement benefits worsens the distribution of income and wealth.
There were some federal tax increases that took effect this year. But the income tax increase on high level earners was accompanied by an increase in Social Security taxes (which are regressive). So what was the net effect? Most likely, very little or no redistribution.
The Affordable Care Act would have a redistributive effect because of its health insurance subsidies for low income participants. If only people could enroll . . . .
Barack Obama has serious credibility issues. He drew a line in the dust over the use of poison gas, and Assad stepped over it. Obama squirmed, complained, and then let the Russians broker a deal. He didn't have the management skills to implement his signature legislative achievement, the Affordable Care Act. He negotiated some sort of deal on nukes with Iran, although that deal seems to have implementation issues as well. As negotiators talk, Iran continues to enrich. If you're looking for action from the White House on redistribution of income or wealth, don't hold your breath. Keep saving and investing, because you're on your own.
Tuesday, July 30, 2013
From the Fed: Short Term Gain, Long Term Pain
As the Fed's ultra low interest rate policies grind on for a fifth year, we can see ever more clearly that there is no such thing as a free lunch, even when it comes to central bank policies. The benefits of the Fed's low interest rate policies were easy to see at first: cheap credit, stimulus to housing, a boost to the economy. The costs didn't seem so great.
However, by persistently favoring borrowers and heaping mulch on income-seeking investors for five years, the long term costs of the Fed's policies are emerging--and painfully so. Detroit is in bankruptcy, and other cities teeter on the brink. Corporate defined benefit pension plans are becoming less common than the ivory-billed woodpecker. It's no wonder why. Pension funds rely on safe long term investments that provide solid returns. U.S. Treasury notes and bonds used to be crucially important components of pension fund portfolios. AAA-rated corporates, which would have to pay slightly better than Treasuries, also were favored investments. But pension plan returns came under stress as the returns on these low-risk investments nosedived. And pension fund deficiencies, calculated on the basis of long term returns, balloon when returns fall. Plan sponsors have to increase contributions--sometimes enormously--to keep the plans solvent. Corporate executives intent on making the big score with their stock options see little upside to signing off on these contributions. Shrinking cities like Detroit have little ability to make them. Something has to give, and pensioners seem to be doing a lot of giving these days. Detroit's problems go well beyond low long term interest rates. But the city really didn't need the Fed to push it closer to the abyss.
Neither did a lot of corporate employees whose retirements are less secure after losing their defined benefit pensions or seeing the plans capped. Most people aren't skilled at managing their finances. When fewer have defined benefit pensions, more are likely to end up with just Social Security, even if they start retirement with good-sized 401(k) account balances. When people have fewer or no private resources, cutting benefits from the government becomes political anathema.
Low interest rates hurt older folks in other ways. As income from their interest-bearing investments dries up, fear drives them to become serial economizers. That's a hard habit to break even after rates rise again (assuming they do). Consumption may be impaired for a long time. In addition, long term care insurance is getting scarce and expensive. While poorly conceived estimates by insurers of the cost of care have much to do with that, the inability of insurers to obtain decent, safe returns on investments has added to the problem. Fewer people are able to afford such policies. So we have a ticking demographic time bomb, with lots of uninsured elderly likely to need Medicaid in a decade or two or three instead of being able to rely on their own resources. Low interest rates are beneficial to the federal government's borrowing costs right now, keeping the budget deficit lower. But positioning a lot of people to need Medicaid in decades to come means we'll have pressure toward an increased deficit in the long term.
The Fed is taking a page from corporate America: focus on short term returns at the risk of increasing long term costs. The great corporate success stories don't follow this plot line. But there's not much chance the narrative will change. The Fed's easy money merry-go-round keeps the stock market buoyant. With mid-term Congressional elections coming up next year, the Obama administration needs to keep the market feeling chipper. Ultimately, everything in Washington happens for political reasons. And politics dictates that Janet Yellen, a monetary dove, will be Obama's nominee as the next Chairman of the Fed.
However, by persistently favoring borrowers and heaping mulch on income-seeking investors for five years, the long term costs of the Fed's policies are emerging--and painfully so. Detroit is in bankruptcy, and other cities teeter on the brink. Corporate defined benefit pension plans are becoming less common than the ivory-billed woodpecker. It's no wonder why. Pension funds rely on safe long term investments that provide solid returns. U.S. Treasury notes and bonds used to be crucially important components of pension fund portfolios. AAA-rated corporates, which would have to pay slightly better than Treasuries, also were favored investments. But pension plan returns came under stress as the returns on these low-risk investments nosedived. And pension fund deficiencies, calculated on the basis of long term returns, balloon when returns fall. Plan sponsors have to increase contributions--sometimes enormously--to keep the plans solvent. Corporate executives intent on making the big score with their stock options see little upside to signing off on these contributions. Shrinking cities like Detroit have little ability to make them. Something has to give, and pensioners seem to be doing a lot of giving these days. Detroit's problems go well beyond low long term interest rates. But the city really didn't need the Fed to push it closer to the abyss.
Neither did a lot of corporate employees whose retirements are less secure after losing their defined benefit pensions or seeing the plans capped. Most people aren't skilled at managing their finances. When fewer have defined benefit pensions, more are likely to end up with just Social Security, even if they start retirement with good-sized 401(k) account balances. When people have fewer or no private resources, cutting benefits from the government becomes political anathema.
Low interest rates hurt older folks in other ways. As income from their interest-bearing investments dries up, fear drives them to become serial economizers. That's a hard habit to break even after rates rise again (assuming they do). Consumption may be impaired for a long time. In addition, long term care insurance is getting scarce and expensive. While poorly conceived estimates by insurers of the cost of care have much to do with that, the inability of insurers to obtain decent, safe returns on investments has added to the problem. Fewer people are able to afford such policies. So we have a ticking demographic time bomb, with lots of uninsured elderly likely to need Medicaid in a decade or two or three instead of being able to rely on their own resources. Low interest rates are beneficial to the federal government's borrowing costs right now, keeping the budget deficit lower. But positioning a lot of people to need Medicaid in decades to come means we'll have pressure toward an increased deficit in the long term.
The Fed is taking a page from corporate America: focus on short term returns at the risk of increasing long term costs. The great corporate success stories don't follow this plot line. But there's not much chance the narrative will change. The Fed's easy money merry-go-round keeps the stock market buoyant. With mid-term Congressional elections coming up next year, the Obama administration needs to keep the market feeling chipper. Ultimately, everything in Washington happens for political reasons. And politics dictates that Janet Yellen, a monetary dove, will be Obama's nominee as the next Chairman of the Fed.
Wednesday, July 24, 2013
Managing Personal Risk
Modern businesses put a lot of effort into managing risk. They take risks, because that's how they might make big money. But they also work to mitigate the downsides of their risks, because employee stock options don't pay off real well if the CEO, or someone or something else, blows up the business.
Individuals need to manage risk as well. Bankruptcies most often result from unexpected problems, like a medical crisis or job loss. If you don't deal with the ways that life can fall apart, the chances of your life fallling apart increase. The need to manage personal risk may be one of the most under-appreciated aspects of financial planning. While there's no perfect or complete way to analyze personal risk, here are some things to think about.
Age. As you grow older, reduce risk. If anything goes wrong, you will have less time to recover, and less ability to recover as your value in the labor force declines (and it eventually will). There are variety of ways to reduce risk discussed below. The important point is that as time passes and you accumulate more gray hair, reduce personal risk.
Occupation. Your occupation can be a major risk factor. Some types of work can't be performed by older people. This would include construction, law enforcement, military service, fire fighting and other jobs that demand physical strength and endurance. It could also include jobs that don't demand physical strength, but do require certain abilities that deteriorate with age, such as flying, working as an air traffic controller, or performing surgery. If your job has a relatively limited time span, start building wealth at an early age and persist. You may be able to have a second career when the first one ends. But then again, maybe not. Don't count on what's highly uncertain. Assume your first occupation is all that you'll ever have and base your financial planning on it.
Employment stability. If your job security is unstable, build up a large pool of savings to tide you over the rough spots. A year's worth of living expenses, or more, in an emergency fund would be a good idea. If you work in a boom-bust industry, like construction or oil and gas drilling, or an unpredictable job, like entertainment, your savings account is your best friend. If you have to take on debts, or lose a car and/or house, because you didn't prepare for a layoff, your long term financial future may be cloudy.
Health. Factor into your financial planning your health problems, especially any chronic ones you have. There is no way to avoid having health problems, especially as you get older. That's why having health insurance is so important--you will definitely use it. Also have some savings available for health care expenses not covered by insurance--these expenses are one of the leading reasons for personal bankruptcy filings. If your health is good, save plenty because you may need to finance a long life span.
Debts. Debts are one of the most dangerous risks. Jobs may not be secure, but debts, once incurred, are a certainty. If you're poor, but debt free, you won't end up in bankruptcy. Poverty doesn't lead to bankruptcy; unmanageable debts do. But debts are also one of the most controllable risks. Avoid taking on debt unless it's really necessary. Pay off debts as quickly as possible, especially as you get older. A mortgage-free house is better than a sleeping pill. There are some financial planners who will tell you to have a mortgage and invest your cash in stocks. Well, if stocks maintained a nice, steady upward trend all the time, this might well be a smart move. But if stocks are sometimes volatile--well, some people do manage to eat dog food. Avoid debt and you avoid risk.
Moral and voluntary obligations. Lots of people help their kids pay for college--and then help some more when the kids rebound home after graduating. Many help their aged parents. Quite a few help siblings, nieces, nephews, friends and so on when the going gets tough. If you are likely to accept these obligations, manage your finances to be able to meet them. Being nice can be a major financial risk factor.
Riskiness of your assets. This isn't quite the same as asset allocation. This is preparing for things to go wrong with your choice of assets. Don't think your allocation is necessarily right. Almost no one predicted the financial crisis of 2008 and hundreds of millions of savers worldwide got a big tummy ache as a result. If you really think that you and your financial planner have it all figured out, contact me about buying a very nice bridge in Brooklyn, and at a bargain price, too.
But back to the first point. Stress test your investments (see http://blogger.uncleleosden.com/2010/11/stress-test-your-retirement.html). If you are uncomfortable with the potential losses you could incur, change your allocation. Of course, no matter what you do, you'll end up with some kind of allocation. The important thing is to end up with something that you can live with on good days and bad.
Insurance. Only Congress is less popular than insurance companies. But having some insurance coverage is important to mitigating risks. We've already covered health insurance. Have homeowners or renter's coverage. Maintain plenty of liability coverage on your auto policy, and buy an umbrella policy if you have a significant net worth. Get disability coverage (first check to see what your employer offers, and supplement it if appropriate). If you have dependents, like minor children, buy life insurance. Think about long term care coverage if you have significant assets. Granted, writing a check to an insurance company feels like eating sawdust. But if life takes a u-turn, it's comforting to be able to forward the bill to an insurance company.
Boost your benefits. Work as long as possible to build up your Social Security credits and any pension benefits for which you are eligible. Okay, Congress, the White House, City Hall, the boss, or somebody is always threatening to trim or take away these benefits. But they will very likely survive in one form or another, and you benefit from maximizing them because they may offer the best shelter available when cold economic winds blow.
Individuals need to manage risk as well. Bankruptcies most often result from unexpected problems, like a medical crisis or job loss. If you don't deal with the ways that life can fall apart, the chances of your life fallling apart increase. The need to manage personal risk may be one of the most under-appreciated aspects of financial planning. While there's no perfect or complete way to analyze personal risk, here are some things to think about.
Age. As you grow older, reduce risk. If anything goes wrong, you will have less time to recover, and less ability to recover as your value in the labor force declines (and it eventually will). There are variety of ways to reduce risk discussed below. The important point is that as time passes and you accumulate more gray hair, reduce personal risk.
Occupation. Your occupation can be a major risk factor. Some types of work can't be performed by older people. This would include construction, law enforcement, military service, fire fighting and other jobs that demand physical strength and endurance. It could also include jobs that don't demand physical strength, but do require certain abilities that deteriorate with age, such as flying, working as an air traffic controller, or performing surgery. If your job has a relatively limited time span, start building wealth at an early age and persist. You may be able to have a second career when the first one ends. But then again, maybe not. Don't count on what's highly uncertain. Assume your first occupation is all that you'll ever have and base your financial planning on it.
Employment stability. If your job security is unstable, build up a large pool of savings to tide you over the rough spots. A year's worth of living expenses, or more, in an emergency fund would be a good idea. If you work in a boom-bust industry, like construction or oil and gas drilling, or an unpredictable job, like entertainment, your savings account is your best friend. If you have to take on debts, or lose a car and/or house, because you didn't prepare for a layoff, your long term financial future may be cloudy.
Health. Factor into your financial planning your health problems, especially any chronic ones you have. There is no way to avoid having health problems, especially as you get older. That's why having health insurance is so important--you will definitely use it. Also have some savings available for health care expenses not covered by insurance--these expenses are one of the leading reasons for personal bankruptcy filings. If your health is good, save plenty because you may need to finance a long life span.
Debts. Debts are one of the most dangerous risks. Jobs may not be secure, but debts, once incurred, are a certainty. If you're poor, but debt free, you won't end up in bankruptcy. Poverty doesn't lead to bankruptcy; unmanageable debts do. But debts are also one of the most controllable risks. Avoid taking on debt unless it's really necessary. Pay off debts as quickly as possible, especially as you get older. A mortgage-free house is better than a sleeping pill. There are some financial planners who will tell you to have a mortgage and invest your cash in stocks. Well, if stocks maintained a nice, steady upward trend all the time, this might well be a smart move. But if stocks are sometimes volatile--well, some people do manage to eat dog food. Avoid debt and you avoid risk.
Moral and voluntary obligations. Lots of people help their kids pay for college--and then help some more when the kids rebound home after graduating. Many help their aged parents. Quite a few help siblings, nieces, nephews, friends and so on when the going gets tough. If you are likely to accept these obligations, manage your finances to be able to meet them. Being nice can be a major financial risk factor.
Riskiness of your assets. This isn't quite the same as asset allocation. This is preparing for things to go wrong with your choice of assets. Don't think your allocation is necessarily right. Almost no one predicted the financial crisis of 2008 and hundreds of millions of savers worldwide got a big tummy ache as a result. If you really think that you and your financial planner have it all figured out, contact me about buying a very nice bridge in Brooklyn, and at a bargain price, too.
But back to the first point. Stress test your investments (see http://blogger.uncleleosden.com/2010/11/stress-test-your-retirement.html). If you are uncomfortable with the potential losses you could incur, change your allocation. Of course, no matter what you do, you'll end up with some kind of allocation. The important thing is to end up with something that you can live with on good days and bad.
Insurance. Only Congress is less popular than insurance companies. But having some insurance coverage is important to mitigating risks. We've already covered health insurance. Have homeowners or renter's coverage. Maintain plenty of liability coverage on your auto policy, and buy an umbrella policy if you have a significant net worth. Get disability coverage (first check to see what your employer offers, and supplement it if appropriate). If you have dependents, like minor children, buy life insurance. Think about long term care coverage if you have significant assets. Granted, writing a check to an insurance company feels like eating sawdust. But if life takes a u-turn, it's comforting to be able to forward the bill to an insurance company.
Boost your benefits. Work as long as possible to build up your Social Security credits and any pension benefits for which you are eligible. Okay, Congress, the White House, City Hall, the boss, or somebody is always threatening to trim or take away these benefits. But they will very likely survive in one form or another, and you benefit from maximizing them because they may offer the best shelter available when cold economic winds blow.
Sunday, May 26, 2013
How Government Inflation Policies Would Smack the Middle Class
The federal government proposes to use inflation to smack the middle class. The Federal Reserve has an inflation target of 2%, and some Fed officials, fearing that deflation is around the corner--have recently been openly grousing about how inflation--running just above 1%--is too low. They want to take away your spending power faster. One of their primary tools for fueling inflation is to obliterate positive interest rates--or, stated otherwise, to deprive you of interest income. Your faint memories of the distant past, when interest income actually required you to fill out Schedule B for your tax return, will become entirely ethereal.
Meanwhile, the Obama administration has proposed to use a less generous inflation adjustment (the Chained CPI) for Social Security recipients and federal and military retirees. The Chained CPI would also be used to adjust tax brackets, with the effect that taxes would be higher than under the currently used CPI. In other words, the Fed wants to increase inflation, while the President wants less protection for retirees and taxpayers from the ravages of inflation.
Those whose incomes are middle class or lower (i.e., $100,000 a year or less) tend to be vulnerable to inflation. They have little discretionary income left after necessary monthly expenses, and consequently, not much of a buffer against increases in inflation. Retirees are especially defenseless. Add the heavier taxes resulting from the Chained CPI, and the federal government's inflation policies could effectively reduce middle class and retiree incomes in real terms.
With the sluggish U.S. economy 70% dependent on consumption, it makes no sense for the federal government to deploy inflation as a weapon against those with middle class or lower incomes. Reduce incomes and people will consume less. If these federal policies somehow stimulate greater economic growth, it isn't hard to figure who will benefit the most from that greater growth, and it ain't gonna be the lowest 80%.
The Chained CPI hasn't become law yet, and not all Fed officials want to ignite inflation. So the worst may not come to pass. But the lowest 80%, already facing uncertain employment prospects and stagnant wages, really don't need to be squeezed by inflation policies that make sense only to those well-to-do people who are insulated from their impacts.
Meanwhile, the Obama administration has proposed to use a less generous inflation adjustment (the Chained CPI) for Social Security recipients and federal and military retirees. The Chained CPI would also be used to adjust tax brackets, with the effect that taxes would be higher than under the currently used CPI. In other words, the Fed wants to increase inflation, while the President wants less protection for retirees and taxpayers from the ravages of inflation.
Those whose incomes are middle class or lower (i.e., $100,000 a year or less) tend to be vulnerable to inflation. They have little discretionary income left after necessary monthly expenses, and consequently, not much of a buffer against increases in inflation. Retirees are especially defenseless. Add the heavier taxes resulting from the Chained CPI, and the federal government's inflation policies could effectively reduce middle class and retiree incomes in real terms.
With the sluggish U.S. economy 70% dependent on consumption, it makes no sense for the federal government to deploy inflation as a weapon against those with middle class or lower incomes. Reduce incomes and people will consume less. If these federal policies somehow stimulate greater economic growth, it isn't hard to figure who will benefit the most from that greater growth, and it ain't gonna be the lowest 80%.
The Chained CPI hasn't become law yet, and not all Fed officials want to ignite inflation. So the worst may not come to pass. But the lowest 80%, already facing uncertain employment prospects and stagnant wages, really don't need to be squeezed by inflation policies that make sense only to those well-to-do people who are insulated from their impacts.
Tuesday, April 16, 2013
Your Social Security Benefits: Countering the Chained CPI
The President has proposed using the Chained CPI as the measure for cost-of-living increases in Social Security benefits, and other federal and military retirement benefits. The impact on benefits would be to reduce the annual increase by about 0.3%. While this amount seems small, it accumulates over time. After ten years, your benefits would be reduced by 3-4% per year. After twenty years, the reduction would be around 6-7% per year. If you receive Social Security for thirty years, the reduction would be around 9% or more per year. For those relying heavily on Social Security, which could be up to half of all recipients, that can hurt, especially considering the unstoppable, uber-inflationary costs of medical care for the elderly. The Chained CPI proposal is criticized for hitting the most elderly and vulnerable the hardest. Women take a bigger hit than men because they live longer and depend more heavily on Social Security.
The Chained CPI would also increase taxes. Tax brackets and certain other features of the tax system are adjusted for inflation. If the adjustment is smaller, as it would be with the Chained CPI, the effect would be to raise taxes. As with Social Security benefits, the tax increases would fall most heavily on those at the lowest income levels (who otherwise are taxed lightly).
If you're wondering if implementation of the Chained CPI would affect you, the answer is yes. It affects everyone, although the well-off would suffer the least in relative terms. The likelihood of the adoption of the Chained CPI is difficult to predict. Conservatives and many moderates generally like the idea, although the white Boomers at the heart of the Republican Party will sooner or later figure out that they would take a bullet for their party's ideology from the Chained CPI. When they do, we'll find out if there's a cure for stupid.
Anyway, how could you counter the impact of the Chained CPI, if it's adopted? Save more. Start saving more now, and save more every month. It's hard to estimate how much more, because the answer would depend heavily on the specifics of your financial situation. But a rough guesstimate might be 1% of your income or a bit more if you're in your 20s or 30s, 2% for those in their 40s, and 3-4% if you've reached the Big 5-0. This may not sound like much, but try doing it (remember, this amount would be in addition to other saving you should be doing for retirement). A lot of Americans can't. Those who fail should acquire a taste for dog food, because it looms in their futures.
President Obama may think that proposing the Chained CPI keeps federal spending at a relatively stimulative level in the near term future, to help pull the economy out of the Great Recession, while reducing long term spending to help control the deficit. But if rational Americans begin saving more to compensate for the lower benefits and higher taxes promised for their retirements, the near term impact of the Chained CPI would be to reduce consumption and retard recovery. And continuation of the Great Recession would prolong the large deficits we now have.
The President seems obsessed with attaining a Grand Compromise. He seems to think doing so will burnish his legacy. That's weird. Consider the Presidents who attained greatness through compromise. There's . . . uh . . . well . . . I mean . . . you know . . . Okay, look at the flip side of the question. Consider the great Presidents. George Washington, who lost 7 of the 9 major battles he fought in the American Revolution, didn't compromise with the British. Abraham Lincoln, who dallied initially with compromise until the Confederates digitally and martially expressed their views, became the great non-Compromisor who rid America of the curse of slavery. Franklin Delano Roosevelt, greatest President of the 20th Century, allowed Republican leaders as much input into the New Deal as Mozart had into Jailhouse Rock. Let us recall the great proponents of compromise in America's history: Henry Clay, Daniel Webster, and John C. Calhoun. Their accomplishments as progenitors of accommodation are known to as many as 26% of all high school students for a period of time not exceeding 36 hours before and 2.14 minutes after exam time. This is a desirable legacy? Well, maybe in the eyes of some, but, please, not at the expense of those least able to bear that expense.
The Chained CPI would also increase taxes. Tax brackets and certain other features of the tax system are adjusted for inflation. If the adjustment is smaller, as it would be with the Chained CPI, the effect would be to raise taxes. As with Social Security benefits, the tax increases would fall most heavily on those at the lowest income levels (who otherwise are taxed lightly).
If you're wondering if implementation of the Chained CPI would affect you, the answer is yes. It affects everyone, although the well-off would suffer the least in relative terms. The likelihood of the adoption of the Chained CPI is difficult to predict. Conservatives and many moderates generally like the idea, although the white Boomers at the heart of the Republican Party will sooner or later figure out that they would take a bullet for their party's ideology from the Chained CPI. When they do, we'll find out if there's a cure for stupid.
Anyway, how could you counter the impact of the Chained CPI, if it's adopted? Save more. Start saving more now, and save more every month. It's hard to estimate how much more, because the answer would depend heavily on the specifics of your financial situation. But a rough guesstimate might be 1% of your income or a bit more if you're in your 20s or 30s, 2% for those in their 40s, and 3-4% if you've reached the Big 5-0. This may not sound like much, but try doing it (remember, this amount would be in addition to other saving you should be doing for retirement). A lot of Americans can't. Those who fail should acquire a taste for dog food, because it looms in their futures.
President Obama may think that proposing the Chained CPI keeps federal spending at a relatively stimulative level in the near term future, to help pull the economy out of the Great Recession, while reducing long term spending to help control the deficit. But if rational Americans begin saving more to compensate for the lower benefits and higher taxes promised for their retirements, the near term impact of the Chained CPI would be to reduce consumption and retard recovery. And continuation of the Great Recession would prolong the large deficits we now have.
The President seems obsessed with attaining a Grand Compromise. He seems to think doing so will burnish his legacy. That's weird. Consider the Presidents who attained greatness through compromise. There's . . . uh . . . well . . . I mean . . . you know . . . Okay, look at the flip side of the question. Consider the great Presidents. George Washington, who lost 7 of the 9 major battles he fought in the American Revolution, didn't compromise with the British. Abraham Lincoln, who dallied initially with compromise until the Confederates digitally and martially expressed their views, became the great non-Compromisor who rid America of the curse of slavery. Franklin Delano Roosevelt, greatest President of the 20th Century, allowed Republican leaders as much input into the New Deal as Mozart had into Jailhouse Rock. Let us recall the great proponents of compromise in America's history: Henry Clay, Daniel Webster, and John C. Calhoun. Their accomplishments as progenitors of accommodation are known to as many as 26% of all high school students for a period of time not exceeding 36 hours before and 2.14 minutes after exam time. This is a desirable legacy? Well, maybe in the eyes of some, but, please, not at the expense of those least able to bear that expense.
Friday, March 8, 2013
Political Risks of Social Insecurity
The financial press has reported that the United States ranks 19th worldwide in the retirement security, lagging behind Slovenia, the Czech Republic and Slovakia, among other nations. http://www.cnbc.com/id/100534205. We're one step ahead of Britain, but well behind France and Germany. The Scandinavian countries rank at the top, along with Switzerland, Austria, the Netherlands and tiny Luxembourg. Even Japan, after more than two decades of economic malaise, ranks 15th, four steps higher than America.
This probably doesn't surprise many Americans, particularly those who are approaching or in retirement. They have probably already viscerally sensed their comparative insecurity. Herein lies great risk for politicians who would reduce America's social safety net. Our net is modest compared to the protections offered by most of the industrialized world. If it's cut, the pain--particularly for moderate and lower income Americans--could be pronounced. It's one thing if your retirement benefits may not cover as many restaurant meals as you would like. It's another if your cost of living increase is so paltry that you can't afford needed prescription medications.
That we have a fiscal imbalance is because our taxes are even lower on a comparative basis. (See http://usatoday30.usatoday.com/money/perfi/taxes/2009-11-25-oecd25_ST_N.htm.) America could without enormous pain pay for its current social safety net without having to borrow. We just don't want the taxes it would take to get there.
Many politicians in Washington sound off about cutting Social Security and Medicare benefits. This isn't just Republicans. President Obama has been quick to offer reductions in Social Security. One is to change the Social Security inflation adjustment from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Personal Consumption Price Expenditures Index (PCE). The effect of this change would to gradually erode the relative value of Social Security benefits, with the most elderly being the hardest hit over time. Is is really a good thing to whack the most vulnerable, who may have exhausted their savings and be unable to work?
Consciously or subconsciously, Americans know that their retirement benefits aren't great. And many of them won't be happy with politicians who make their retirements bleaker. If the President and the Republicans somehow reach a Grand Bargain to stabilize or even balance the budget, the political impact may surprise them. As Republicans clumsily attempt to embrace diversity, their core of older, white Americans may abandon them if they lead the charge to cut retirement benefits. President Obama, instead of being viewed as a latter day FDR, may end up appearing to fall into the mold of Herbert Hoover. And the liberal left, annoyingly shrill as they can sometimes be, may end up inheriting the White House in 2016.
This probably doesn't surprise many Americans, particularly those who are approaching or in retirement. They have probably already viscerally sensed their comparative insecurity. Herein lies great risk for politicians who would reduce America's social safety net. Our net is modest compared to the protections offered by most of the industrialized world. If it's cut, the pain--particularly for moderate and lower income Americans--could be pronounced. It's one thing if your retirement benefits may not cover as many restaurant meals as you would like. It's another if your cost of living increase is so paltry that you can't afford needed prescription medications.
That we have a fiscal imbalance is because our taxes are even lower on a comparative basis. (See http://usatoday30.usatoday.com/money/perfi/taxes/2009-11-25-oecd25_ST_N.htm.) America could without enormous pain pay for its current social safety net without having to borrow. We just don't want the taxes it would take to get there.
Many politicians in Washington sound off about cutting Social Security and Medicare benefits. This isn't just Republicans. President Obama has been quick to offer reductions in Social Security. One is to change the Social Security inflation adjustment from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Personal Consumption Price Expenditures Index (PCE). The effect of this change would to gradually erode the relative value of Social Security benefits, with the most elderly being the hardest hit over time. Is is really a good thing to whack the most vulnerable, who may have exhausted their savings and be unable to work?
Consciously or subconsciously, Americans know that their retirement benefits aren't great. And many of them won't be happy with politicians who make their retirements bleaker. If the President and the Republicans somehow reach a Grand Bargain to stabilize or even balance the budget, the political impact may surprise them. As Republicans clumsily attempt to embrace diversity, their core of older, white Americans may abandon them if they lead the charge to cut retirement benefits. President Obama, instead of being viewed as a latter day FDR, may end up appearing to fall into the mold of Herbert Hoover. And the liberal left, annoyingly shrill as they can sometimes be, may end up inheriting the White House in 2016.
Wednesday, December 19, 2012
The Fiscal Cliff Negotiations: Just Who Is Barack Obama?
Recent negotiations over the fiscal cliff, which seem to be faltering after initial signs of progress, raise a persistent question about Barack Obama: has he any political principles? After campaigning this fall to protect the poor and middle class, he agreed in fiscal cliff negotiations to changes to the income tax structure and Social Security that are more damaging to the poor and middle class than the prosperous segments of American society. By accepting Republican demands for the Social Security inflation adjustment to be the Chained Consumer Price Index, Obama has effectively reduced inflation protection for Social Security recipients, military retirees and federal civilian retirees, the vast majority of whom are low or middle income. At the same time, because the same inflation adjustment would be made to income tax brackets, the brackets would rise more slowly during inflationary times. That would effectively result in heavier taxation across the board, a seemingly regressive result. Additionally, Obama agreed to raise the threshold for higher tax brackets from his original position of $250,000 to $400,000. To be cynical, this might be viewed as a gift to the upper middle class professionals who often are his supporters and contributors. And to be more cynical, it can be observed that many lower income folks, especially older whites heavily reliant on Social Security and/or military pensions, tend to be Republican more often than Democrat. Perhaps the President sees little to lose in imposing austerity on them.
One wonders if Obama, after four years of dealing with the Great Recession, understands even the basic structure of the U.S. economy. Our economy is 70% consumption. Money in the hands of the poor and middle class gets spent. They don't have enough to save hardly a penny. This spending stimulates the economy. Money in the hands of the upper middle and upper classes is frequently saved, allowing the rich to get richer relative to other income categories. By raising taxes on the poor and middle class while cutting benefits to Social Security recipients, and military and federal civilian retirees, the President is reducing consumption and its stimulative impact on the economy, while exacerbating the inequality in wealth distribution. What policy sense does this make?
During his first term, Obama demonstrated time and time again at critical junctures that he is a clever politician and dealmaker much more than a leader. He craftily co-opted his most serious Democratic rival, Hillary Clinton, by making her secretary of state. And he kept the liberal wing of the Democratic Party at bay by putting one of their number, Joe Biden, in the Vice President's residence. But he has few loyal constituencies. His one signal achievement, the Affordable Care Act, may transform life in America. But transformational legislation doesn't necessarily bestow greatness on a President. Lyndon Johnson's Great Society programs transformed America far more than anything Barack Obama has done or will do. Indeed, the Voting Rights Act of 1965 enfranchised black and other disadvantaged Americans, paving the way for Obama to win the White House. But Johnson has been denied the mantel of greatness. While this is due in large part to his foreign policy catastrophe in Vietnam, it's also because Johnson, like Obama, was a consummate politician without any large loyal constituencies. There's no one running around singing Johnson's praises. Obama will always be remembered as the first nonwhite President, and there's a measure of greatness in that. But John Kennedy was America's first non-Protestant President, and in 1960 that was an achievement not far from Obama's achievement in 2008. Kennedy is remembered today for his charisma and charm. But he doesn't rank among the great Presidents. And, because Obama seems to value a deal more than principles or loyalty to constituents, neither will he.
One wonders if Obama, after four years of dealing with the Great Recession, understands even the basic structure of the U.S. economy. Our economy is 70% consumption. Money in the hands of the poor and middle class gets spent. They don't have enough to save hardly a penny. This spending stimulates the economy. Money in the hands of the upper middle and upper classes is frequently saved, allowing the rich to get richer relative to other income categories. By raising taxes on the poor and middle class while cutting benefits to Social Security recipients, and military and federal civilian retirees, the President is reducing consumption and its stimulative impact on the economy, while exacerbating the inequality in wealth distribution. What policy sense does this make?
During his first term, Obama demonstrated time and time again at critical junctures that he is a clever politician and dealmaker much more than a leader. He craftily co-opted his most serious Democratic rival, Hillary Clinton, by making her secretary of state. And he kept the liberal wing of the Democratic Party at bay by putting one of their number, Joe Biden, in the Vice President's residence. But he has few loyal constituencies. His one signal achievement, the Affordable Care Act, may transform life in America. But transformational legislation doesn't necessarily bestow greatness on a President. Lyndon Johnson's Great Society programs transformed America far more than anything Barack Obama has done or will do. Indeed, the Voting Rights Act of 1965 enfranchised black and other disadvantaged Americans, paving the way for Obama to win the White House. But Johnson has been denied the mantel of greatness. While this is due in large part to his foreign policy catastrophe in Vietnam, it's also because Johnson, like Obama, was a consummate politician without any large loyal constituencies. There's no one running around singing Johnson's praises. Obama will always be remembered as the first nonwhite President, and there's a measure of greatness in that. But John Kennedy was America's first non-Protestant President, and in 1960 that was an achievement not far from Obama's achievement in 2008. Kennedy is remembered today for his charisma and charm. But he doesn't rank among the great Presidents. And, because Obama seems to value a deal more than principles or loyalty to constituents, neither will he.
Wednesday, November 28, 2012
Political Risks of the Fiscal Cliff
Who faces the greatest political risks from the fiscal cliff? It ain't the Democrats. They could do nothing, and watch the pre-Bush tax rates go back into effect in 2013. While this would have a near term negative impact on consumer spending, it would lower the federal deficit. That would promote long term economic growth. The President would take some heat for the economic slowdown, but the Democrats would have four years to recover before facing the 2016 Presidential election. By then, the economy might well be improving.
If there is a deal on the fiscal cliff, it would probably include some cuts to Medicare and Medicaid, and perhaps to Social Security (although the latter is less likely, since Social Security is actually much less of a fiscal problem and more visible to the voting public). The Democrats would blame these cuts on Republican insistence (of which there is plenty). Meanwhile, the Democrats would take credit for whatever tax increases or enhancements or whatever else would be part of the deal, which probably would fall more heavily on the rich than the 99%.
The Republican insistence on no tax rate increases allows President Obama to replay his winning electoral strategy of advocating tax increases for the rich. Republicans believe too much in their own P.R., that all taxes increases are invariably bad and that spending cuts would somehow be made to prevent taxes from increasing. A majority of the electorate thinks otherwise, and the Republicans conceded these voters (let's call them the 51%) to President Obama.
The baseline problem with the Bush tax cuts is that they reduce federal revenues to the point where Social Security and Medicare--the two most sacred bovines of American politics--are imperiled. It's one thing to attack federal funding of bridges leading to nowhere. It's another to take away bread and butter from the elderly. Republicans have managed to put themselves in a corner where they seek to protect low taxes for the wealthy while trying to squeeze pensioners having modest incomes. They ultimately can't protect the wealthy from a tax increase--the Democrats can do nothing and those increases will take effect at midnight, Jan. 1, 2013. But the Republicans can manage to look like Scrooge during the Christmas season as they advocate cuts for moderate income retirees. Politically, it won't be the Democrats who tumble over the fiscal cliff.
If there is a deal on the fiscal cliff, it would probably include some cuts to Medicare and Medicaid, and perhaps to Social Security (although the latter is less likely, since Social Security is actually much less of a fiscal problem and more visible to the voting public). The Democrats would blame these cuts on Republican insistence (of which there is plenty). Meanwhile, the Democrats would take credit for whatever tax increases or enhancements or whatever else would be part of the deal, which probably would fall more heavily on the rich than the 99%.
The Republican insistence on no tax rate increases allows President Obama to replay his winning electoral strategy of advocating tax increases for the rich. Republicans believe too much in their own P.R., that all taxes increases are invariably bad and that spending cuts would somehow be made to prevent taxes from increasing. A majority of the electorate thinks otherwise, and the Republicans conceded these voters (let's call them the 51%) to President Obama.
The baseline problem with the Bush tax cuts is that they reduce federal revenues to the point where Social Security and Medicare--the two most sacred bovines of American politics--are imperiled. It's one thing to attack federal funding of bridges leading to nowhere. It's another to take away bread and butter from the elderly. Republicans have managed to put themselves in a corner where they seek to protect low taxes for the wealthy while trying to squeeze pensioners having modest incomes. They ultimately can't protect the wealthy from a tax increase--the Democrats can do nothing and those increases will take effect at midnight, Jan. 1, 2013. But the Republicans can manage to look like Scrooge during the Christmas season as they advocate cuts for moderate income retirees. Politically, it won't be the Democrats who tumble over the fiscal cliff.
Sunday, October 21, 2012
Manufacturing Matters
In the end, Steve Jobs got his revenge. Once marginalized by Microsoft and its monopoly on PC operating systems, and then kicked out of Apple, the company he founded, Jobs was recalled to Apple as it was sliding into a death spiral. He proceeded to rebuild his brain child into the most successful business corporation today. Apple is the leader of its market segment--that segment being the mobile world. It manufactures visually attractive and highly efficacious mobile devices. Okay, they had a problem with maps. But Apple has overcome its previous belly flops, and it will surely overcome this one. Its high prices may keep it out of the reach of some consumers. But those that can afford its products tend to be the well-off who are highly sought by advertisers.
By contrast, Google and Facebook are now looking at the abyss. They haven't figured out mobile, at a time when mobile products are the fastest growing consumer high tech segment. Both Google and Facebook rely heavily on advertising, but mobile screens are too small for the kinds of ads that have proven successful on PCs and traditional laptops. There isn't yet a mobile-specific advertising strategy that really works. As the world becomes more mobile, Google and Facebook face the potential for a Yahoo-style decline, unless they solve the advertising problem or find alternative revenue sources. Solving the advertising problem requires gathering more and more detailed information about individuals using their products. But that could bring them into greater conflict with governmental protections for privacy. This is a particular issue in Europe, and a growing issue in America. These privacy protections will ultimately limit the extent to which Google and Facebook can facilitate the targeting of ads. One interesting notion is perhaps Yahoo, with its banner ad business (which doesn't rely on detailed personal information), will eventually prove the tortoise in its race against Google and Facebook.
In part, Google and Facebook confront the problem of all successful high tech companies. No matter how well you're doing, the next big thing is coming and you'd better be prepared for it or others will out-innovate you and leave you in the dust. IBM didn't anticipate the PC, and it lost its standing as the predominant computer company. Microsoft didn't anticipate the ubiquity and importance of the Internet, and it's in a slow fade. RIM didn't anticipate how consumers would flock to the smart phone, and it's barely staying alive on its corporate customer base.
But failure to anticipate the next big thing isn't the only dynamic. Part of the dynamic is that Apple manufactured the next big thing. By creating products that elevated the mobile experience by quantum leaps, Apple made consumers want mobile products. By manufacturing and selling these products, Apple derives a very large part of its revenues from selling hardware and software packaged together. It doesn't give consumers stuff for free and hope that it can slip in a few ads here and there. It makes and sells stuff for cash money.
Making and selling stuff has, for millenia, been the heart of economic activity. The evolution of the industrialized world revolved around elevating the manufacturing process to a grand scale, so that vast quantities of stuff could be made efficiently and sold at prices a lot of people could afford. Steve Jobs' relentless commitment to manufacturing--and thus control over product design and quality--placed Apple at the core of the industrial process. By manufacturing high quality and innovative stuff, Apple avoided the commoditization of PCs (which bedeviled Dell, Hewlett Packard and other companies) and elevated itself to the top of the high tech world.
This isn't a sales pitch for you to run out and invest in Apple. Its stock, on a tear earlier this year, has been falling back recently. Its maps debacle hurt, and its future--always uncertain because it's in the most volatile of industries, high tech--has been made more unpredictable by the death of Steve Jobs. The point here is that Apple's business strategy of manufacturing made it strong, and is a sound idea for American economic policy. America increasingly doesn't manufacture. But you can't build a strong national economy on management consulting, investment banking, hedge funds, law practice, health care, restaurants, and services like hair salons, pet walking, personal shopping, and the secondary and tertiary retailing in websites like eBay. The foundation of a strong economy is manufacturing. Look at Germany. Look at China. America was once the manufacturing giant of the industrialized world. While it can't return to that status, it can look for ways to encourage manufacturing. We all know Apple manufactures a lot of components in China. But well under half of its revenue dollars are spent in China. Much more is allocated to spending in America, for things like retailing, distribution, employee payroll and so on. Successful manufacturing companies make their home countries strong.
Most of the debate today over fiscal policy revolves around the amounts of federal spending and federal taxation. But fiscal policy isn't just a matter of accounting. The nation benefits by spending and taxing wisely. Keeping Social Security, Medicare and Medicaid in the black will be easier if we have a robust manufacturing sector. The pie is much easier to divide if it's bigger.
By contrast, Google and Facebook are now looking at the abyss. They haven't figured out mobile, at a time when mobile products are the fastest growing consumer high tech segment. Both Google and Facebook rely heavily on advertising, but mobile screens are too small for the kinds of ads that have proven successful on PCs and traditional laptops. There isn't yet a mobile-specific advertising strategy that really works. As the world becomes more mobile, Google and Facebook face the potential for a Yahoo-style decline, unless they solve the advertising problem or find alternative revenue sources. Solving the advertising problem requires gathering more and more detailed information about individuals using their products. But that could bring them into greater conflict with governmental protections for privacy. This is a particular issue in Europe, and a growing issue in America. These privacy protections will ultimately limit the extent to which Google and Facebook can facilitate the targeting of ads. One interesting notion is perhaps Yahoo, with its banner ad business (which doesn't rely on detailed personal information), will eventually prove the tortoise in its race against Google and Facebook.
In part, Google and Facebook confront the problem of all successful high tech companies. No matter how well you're doing, the next big thing is coming and you'd better be prepared for it or others will out-innovate you and leave you in the dust. IBM didn't anticipate the PC, and it lost its standing as the predominant computer company. Microsoft didn't anticipate the ubiquity and importance of the Internet, and it's in a slow fade. RIM didn't anticipate how consumers would flock to the smart phone, and it's barely staying alive on its corporate customer base.
But failure to anticipate the next big thing isn't the only dynamic. Part of the dynamic is that Apple manufactured the next big thing. By creating products that elevated the mobile experience by quantum leaps, Apple made consumers want mobile products. By manufacturing and selling these products, Apple derives a very large part of its revenues from selling hardware and software packaged together. It doesn't give consumers stuff for free and hope that it can slip in a few ads here and there. It makes and sells stuff for cash money.
Making and selling stuff has, for millenia, been the heart of economic activity. The evolution of the industrialized world revolved around elevating the manufacturing process to a grand scale, so that vast quantities of stuff could be made efficiently and sold at prices a lot of people could afford. Steve Jobs' relentless commitment to manufacturing--and thus control over product design and quality--placed Apple at the core of the industrial process. By manufacturing high quality and innovative stuff, Apple avoided the commoditization of PCs (which bedeviled Dell, Hewlett Packard and other companies) and elevated itself to the top of the high tech world.
This isn't a sales pitch for you to run out and invest in Apple. Its stock, on a tear earlier this year, has been falling back recently. Its maps debacle hurt, and its future--always uncertain because it's in the most volatile of industries, high tech--has been made more unpredictable by the death of Steve Jobs. The point here is that Apple's business strategy of manufacturing made it strong, and is a sound idea for American economic policy. America increasingly doesn't manufacture. But you can't build a strong national economy on management consulting, investment banking, hedge funds, law practice, health care, restaurants, and services like hair salons, pet walking, personal shopping, and the secondary and tertiary retailing in websites like eBay. The foundation of a strong economy is manufacturing. Look at Germany. Look at China. America was once the manufacturing giant of the industrialized world. While it can't return to that status, it can look for ways to encourage manufacturing. We all know Apple manufactures a lot of components in China. But well under half of its revenue dollars are spent in China. Much more is allocated to spending in America, for things like retailing, distribution, employee payroll and so on. Successful manufacturing companies make their home countries strong.
Most of the debate today over fiscal policy revolves around the amounts of federal spending and federal taxation. But fiscal policy isn't just a matter of accounting. The nation benefits by spending and taxing wisely. Keeping Social Security, Medicare and Medicaid in the black will be easier if we have a robust manufacturing sector. The pie is much easier to divide if it's bigger.
Tuesday, June 19, 2012
A Social Security Hint For Stay At Home Parents and Other Part-timers
If you're a stay at home parent, or have been laid off, or are otherwise not working full time, you can still do something to prepare for retirement. That would be to work part-time, because even a small amount of earnings from part-time work builds your Social Security record.
To be eligible for Social Security retirement benefits, you first need to accumulate 40 credits. You get a credit by earning a minimum amount ($1130 in 2012 for each credit, with this amount to be adjusted over time as wages increase). You can earn up to 4 credits per year. Thus, it takes at least ten working years to earn 40 credits. If you don't have 40 credits, even a small amount of earned income from part-time work can help you earn more credits.
Once you have 40 credits, your Social Security benefits will be calculated based on your highest 35 years of earnings. People who work a full career until their 60s will have 35 or more years with earnings. But stay at home parents and many other people who, for whatever reasons, don't work a full career, may have many years with zero earnings. Those zero years bring down the level of benefits to which you would be entitled. By working even a little during some of those years, you'd reduce the number of zero years, thereby boosting your benefits.
If you're not allergic to math, here's a more detailed explanation of what happens (in 2012 dollars; the amounts discussed below will increase over time as wages increase). Social Security calculates your total earnings for your top 35 years (with the earnings from earlier years adjusted to their equivalents in today's dollars). Then it divides the total by 35 and divides the result by 12, to get an average monthly earnings for your top 35 years. It then takes the first $767 of that average monthly figure and multiplies by 90%. You'll get that 90% in your benefits. Then Social Security takes the next $3857 in your average monthly earnings and multiplies by 32%. You'll get the 32% in your benefits. Any amount in your average monthly above the $3857 tier is multiplied by 15%. That 15% is added to your monthly benefit.
In brief, Social Security replaces 90% of the first $767 of your average monthly earnings, 32% of the next $3857 of your average monthly earnings, and 15% of anything above that. When you have a lot of zero years in your Social Security record, your average monthly earnings may fall below the $767 level, and any increase in that average will improve your Social Security benefits by 90% of the increase (until you surpass the $767 level). This is worth working for.
Maybe you plan to collect under your spouse's Social Security record. That can often be advantageous, assuming your spouse has a substantial record and you remain married to that spouse long enough. But life is unpredictable, and your own Social Security record can't be taken away from you. Building it up makes sense.
These days, incomes are stagnant, investment returns are volatile and often lousy, and homes are still dropping in value (on a national basis). Upticking your Social Security benefits by working part-time, even if just a little, is a way to improve your retirement. Ignore the cocktail party wisdom that Social Security won't be around for you. It will. Maybe not in its current form. But some kind of national retirement benefits program will be in place. With half of all Americans not saving at all for retirement, and many others not saving enough, we can't afford not to have a Social Security program. Make the most of it.
For more on Social Security, see http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement.html (how Social Security benefits are calculated), http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_02.html (when to start collecting), and http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_03.html (who is eligible to collect).
To be eligible for Social Security retirement benefits, you first need to accumulate 40 credits. You get a credit by earning a minimum amount ($1130 in 2012 for each credit, with this amount to be adjusted over time as wages increase). You can earn up to 4 credits per year. Thus, it takes at least ten working years to earn 40 credits. If you don't have 40 credits, even a small amount of earned income from part-time work can help you earn more credits.
Once you have 40 credits, your Social Security benefits will be calculated based on your highest 35 years of earnings. People who work a full career until their 60s will have 35 or more years with earnings. But stay at home parents and many other people who, for whatever reasons, don't work a full career, may have many years with zero earnings. Those zero years bring down the level of benefits to which you would be entitled. By working even a little during some of those years, you'd reduce the number of zero years, thereby boosting your benefits.
If you're not allergic to math, here's a more detailed explanation of what happens (in 2012 dollars; the amounts discussed below will increase over time as wages increase). Social Security calculates your total earnings for your top 35 years (with the earnings from earlier years adjusted to their equivalents in today's dollars). Then it divides the total by 35 and divides the result by 12, to get an average monthly earnings for your top 35 years. It then takes the first $767 of that average monthly figure and multiplies by 90%. You'll get that 90% in your benefits. Then Social Security takes the next $3857 in your average monthly earnings and multiplies by 32%. You'll get the 32% in your benefits. Any amount in your average monthly above the $3857 tier is multiplied by 15%. That 15% is added to your monthly benefit.
In brief, Social Security replaces 90% of the first $767 of your average monthly earnings, 32% of the next $3857 of your average monthly earnings, and 15% of anything above that. When you have a lot of zero years in your Social Security record, your average monthly earnings may fall below the $767 level, and any increase in that average will improve your Social Security benefits by 90% of the increase (until you surpass the $767 level). This is worth working for.
Maybe you plan to collect under your spouse's Social Security record. That can often be advantageous, assuming your spouse has a substantial record and you remain married to that spouse long enough. But life is unpredictable, and your own Social Security record can't be taken away from you. Building it up makes sense.
These days, incomes are stagnant, investment returns are volatile and often lousy, and homes are still dropping in value (on a national basis). Upticking your Social Security benefits by working part-time, even if just a little, is a way to improve your retirement. Ignore the cocktail party wisdom that Social Security won't be around for you. It will. Maybe not in its current form. But some kind of national retirement benefits program will be in place. With half of all Americans not saving at all for retirement, and many others not saving enough, we can't afford not to have a Social Security program. Make the most of it.
For more on Social Security, see http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement.html (how Social Security benefits are calculated), http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_02.html (when to start collecting), and http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_03.html (who is eligible to collect).
Saturday, July 9, 2011
How Statistics Can Lower Your Standard of Living
What you don't know can hurt you.
Nothing glazes over as many eyes as economic statistics. And with good reason, since most of them, even if accurate (a big assumption) don't mean much of anything by themselves. At best, even the most important economic statistics are meaningful only when considered in light of numerous other statistics and the big picture revealed thereby.
But there are a few statistics that really matter: the ones used to figure out how much we are paid and taxed. The ongoing debate over Social Security and tax reform revolves around three of them. Pay attention, because money talks and these statistics are talking loudly.
Social Security benefits and federal pension payments are adjusted by an inflation index called the CPI-W, or the Consumer Price Index for Urban Wage Earners and Clerical Workers. Federal income tax brackets are adjusted by the the CPI-U, or the Consumer Price index for All Urban Consumers. The CPI-W and CPI-U are not identical. But they both gather information about the prices and amounts of goods and services people buy, put the information in a giant mixing bowl, swirl things around vigorously, dump the contents in a large blender, and churn out a value that reflects a composite price value, weighted by the relative amounts of goods and services people buy. Changes in prices over time increase or decrease (usually increase) the value of the composite. These changes are treated as the measured inflation rate. The CPI-W and CPI-U also take account of changing consumption patterns of consumers--i.e., as consumers buy less iceberg lettuce and more arugula (or vice versa, which may be the case in times of recession), the weights assigned to the prices of iceberg versus arugula are adjusted. These adjustments are made once every few years.
The debt ceiling/budget deficit debate has included a proposal to use the Personal Consumption Expenditures Index (or Chained CPI) in place of the CPI-W and CPI-U as the measure of inflation for adjusting Social Security, federal pensions and tax brackets. The Chained CPI takes account of substitution of goods as prices rise. For example, if the price of beef rises, consumers may eat less beef and more chicken, thus lowering their overall spending on meat. The Chained CPI doesn't increase as much as the CPI-W and CPI-U because overall meat expenditures don't rise as fast when chicken is substituted for beef. If consumers substitute beans for beef and chicken, then the Chained CPI would rise even less. The Chained CPI may, over time, rise about one-third more slowly than the CPI-W or the CPI-U. (Actually, the CPI-W and CPI-U also incorporate the substitution effect but reflect those changes only once every few years, while the Chained CPI accounts for the substitution effect much more quickly.)
Using the Chained CPI, instead of the CPI-W, to increase various federal payments will be less costly to the federal government. But that's only part of the story. The Chained CPI, as an index for increasing Social Security and pension payments, punishes people for economizing, because it treats substitution solely as a matter of price, without taking account of the loss of perceived quality. Given a more miserly inflation adjustment, people might economize some more, only to be further punished through next year's use of the Chained CPI to get a lower inflation adjustment. That in turn would continue the cycle of skimping, followed by punishment, followed by more skimping, resulting in more punishment, until people are eating sawdust instead of bread. At a time when we need to sustain and support consumer spending in order to have a foundation for economic recovery, using the Chained CPI lessens the potential for recovery.
The use of the CPI-W as an index for adjusting payments to retirees has been criticized for not fully reflecting the rising costs of health care, which are more burdensome for retirees than younger, healthier people. But the Chained CPI would only make things worse, and if people turn to alternative medicine because they can't afford mainstream care, their cost of living adjustments will be further limited by the Chained CPI. Witch doctors will rejoice.
As if retirees and other Americans receiving Social Security haven't been penalized enough, look at what happens when the Chained CPI is applied to the tax code. By law, the CPI-U is applied to increase the level at which higher tax rates are imposed. In other words, the more inflation there is, the lighter taxes become at a given income level because inflation has effectively lowered the value of that amount of income.
The inflation adjustment was enacted in the 1980s as a matter of fairness and to take away an incentive for the federal government to inflate the dollar, slyly obtaining tax increases without legislating them. If the Chained CPI is substituted for the CPI-U, the effect will be to weaken that policy by raising tax brackets less quickly when there's inflation. The Chained CPI would, in effect, to raise taxes from what current law provides. That, in turn, would squeeze consumers, forcing them to cut back on their standard of living.
The combined effect of substituting the Chained CPI for the CPI-W and CPI-U would be that retirees and others receiving federal payments would be hammered harder by inflation, and their taxes would increase in real terms to reward them for having to live with lower standards of living. As they tried to cope with their reduced circumstances, their inflation adjustments would be even less, while their taxes would effectively rise some more. Catch-22, only this isn't fiction. Even if you're not receiving Social Security yet, don't think this doesn't affect you. Your taxes will be higher than otherwise because the brackets will adjust slower.
The Chained CPI provides useful information to economists and others trying to understand consumer behavior. But if it becomes the legal basis for deciding how much the government pays to retirees and other people (recall that many receiving Social Security are disabled), and also for how much government will tax its citizens, then it may end up automatically lowering standards of living. Why this beggar the citizens policy in a time of economic stagnation is a good idea hasn't been explained. Yes, it would tend to reduce the federal deficit, but only by making the electorate poorer.
The times are beginning to hark back to the pinched, self-flagellating malaise of the late 1970s, when it seemed we could do little about OPEC oil price hikes except turn down the heat and wear sweaters. The Chained CPI proposal takes advantage of the unfamiliarity of most citizens with the complexities of economic statistics. It would lower standards of living for tens of millions of Americans while raising taxes on all, and encourages the federal government to foster inflation. Why is this a good thing? The federal deficit needs to be addressed. But surreptitiously eroding the prosperity of citizens, most of whom aren't prosperous anyway, is the wrong approach.
Nothing glazes over as many eyes as economic statistics. And with good reason, since most of them, even if accurate (a big assumption) don't mean much of anything by themselves. At best, even the most important economic statistics are meaningful only when considered in light of numerous other statistics and the big picture revealed thereby.
But there are a few statistics that really matter: the ones used to figure out how much we are paid and taxed. The ongoing debate over Social Security and tax reform revolves around three of them. Pay attention, because money talks and these statistics are talking loudly.
Social Security benefits and federal pension payments are adjusted by an inflation index called the CPI-W, or the Consumer Price Index for Urban Wage Earners and Clerical Workers. Federal income tax brackets are adjusted by the the CPI-U, or the Consumer Price index for All Urban Consumers. The CPI-W and CPI-U are not identical. But they both gather information about the prices and amounts of goods and services people buy, put the information in a giant mixing bowl, swirl things around vigorously, dump the contents in a large blender, and churn out a value that reflects a composite price value, weighted by the relative amounts of goods and services people buy. Changes in prices over time increase or decrease (usually increase) the value of the composite. These changes are treated as the measured inflation rate. The CPI-W and CPI-U also take account of changing consumption patterns of consumers--i.e., as consumers buy less iceberg lettuce and more arugula (or vice versa, which may be the case in times of recession), the weights assigned to the prices of iceberg versus arugula are adjusted. These adjustments are made once every few years.
The debt ceiling/budget deficit debate has included a proposal to use the Personal Consumption Expenditures Index (or Chained CPI) in place of the CPI-W and CPI-U as the measure of inflation for adjusting Social Security, federal pensions and tax brackets. The Chained CPI takes account of substitution of goods as prices rise. For example, if the price of beef rises, consumers may eat less beef and more chicken, thus lowering their overall spending on meat. The Chained CPI doesn't increase as much as the CPI-W and CPI-U because overall meat expenditures don't rise as fast when chicken is substituted for beef. If consumers substitute beans for beef and chicken, then the Chained CPI would rise even less. The Chained CPI may, over time, rise about one-third more slowly than the CPI-W or the CPI-U. (Actually, the CPI-W and CPI-U also incorporate the substitution effect but reflect those changes only once every few years, while the Chained CPI accounts for the substitution effect much more quickly.)
Using the Chained CPI, instead of the CPI-W, to increase various federal payments will be less costly to the federal government. But that's only part of the story. The Chained CPI, as an index for increasing Social Security and pension payments, punishes people for economizing, because it treats substitution solely as a matter of price, without taking account of the loss of perceived quality. Given a more miserly inflation adjustment, people might economize some more, only to be further punished through next year's use of the Chained CPI to get a lower inflation adjustment. That in turn would continue the cycle of skimping, followed by punishment, followed by more skimping, resulting in more punishment, until people are eating sawdust instead of bread. At a time when we need to sustain and support consumer spending in order to have a foundation for economic recovery, using the Chained CPI lessens the potential for recovery.
The use of the CPI-W as an index for adjusting payments to retirees has been criticized for not fully reflecting the rising costs of health care, which are more burdensome for retirees than younger, healthier people. But the Chained CPI would only make things worse, and if people turn to alternative medicine because they can't afford mainstream care, their cost of living adjustments will be further limited by the Chained CPI. Witch doctors will rejoice.
As if retirees and other Americans receiving Social Security haven't been penalized enough, look at what happens when the Chained CPI is applied to the tax code. By law, the CPI-U is applied to increase the level at which higher tax rates are imposed. In other words, the more inflation there is, the lighter taxes become at a given income level because inflation has effectively lowered the value of that amount of income.
The inflation adjustment was enacted in the 1980s as a matter of fairness and to take away an incentive for the federal government to inflate the dollar, slyly obtaining tax increases without legislating them. If the Chained CPI is substituted for the CPI-U, the effect will be to weaken that policy by raising tax brackets less quickly when there's inflation. The Chained CPI would, in effect, to raise taxes from what current law provides. That, in turn, would squeeze consumers, forcing them to cut back on their standard of living.
The combined effect of substituting the Chained CPI for the CPI-W and CPI-U would be that retirees and others receiving federal payments would be hammered harder by inflation, and their taxes would increase in real terms to reward them for having to live with lower standards of living. As they tried to cope with their reduced circumstances, their inflation adjustments would be even less, while their taxes would effectively rise some more. Catch-22, only this isn't fiction. Even if you're not receiving Social Security yet, don't think this doesn't affect you. Your taxes will be higher than otherwise because the brackets will adjust slower.
The Chained CPI provides useful information to economists and others trying to understand consumer behavior. But if it becomes the legal basis for deciding how much the government pays to retirees and other people (recall that many receiving Social Security are disabled), and also for how much government will tax its citizens, then it may end up automatically lowering standards of living. Why this beggar the citizens policy in a time of economic stagnation is a good idea hasn't been explained. Yes, it would tend to reduce the federal deficit, but only by making the electorate poorer.
The times are beginning to hark back to the pinched, self-flagellating malaise of the late 1970s, when it seemed we could do little about OPEC oil price hikes except turn down the heat and wear sweaters. The Chained CPI proposal takes advantage of the unfamiliarity of most citizens with the complexities of economic statistics. It would lower standards of living for tens of millions of Americans while raising taxes on all, and encourages the federal government to foster inflation. Why is this a good thing? The federal deficit needs to be addressed. But surreptitiously eroding the prosperity of citizens, most of whom aren't prosperous anyway, is the wrong approach.
Thursday, May 26, 2011
Claim and Suspend to Maximize Total Family Social Security Benefits
May 24, 2016 Update: As of May 1, 2016, a recent law has abolished claim and suspend.
The Social Security system allows those who have reached full retirement age (somewhere between 66 and 67 for most people; to determine your full retirement age, go to http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/14) to start collecting benefits, and then suspend them. While suspended, the benefits will increase, either because the person is working and building benefits, the person is getting older and benefits are increasing because the claimant is deferring them, or both. Not that many people claim and defer in order to increase their own benefits. That would happen only in the unusual instance where a person collecting benefits resumes working and earns enough to live without Social Security. So why would anyone claim and suspend?
The answer is to increase family-wide benefits. If, as between you and your spouse, you have the larger Social Security benefit, you might want to claim and suspend immediately, as soon as you reach your full retirement age. That would allow your spouse to begin collecting spousal benefits based on your Social Security record, while your benefits increase because you wait (the increase is about 8% a year even if you don't work and might be more if you do). If your spouse's Social Security record provides smaller benefits than spousal benefits under your record (or no benefits at all), a claim and suspend with the commencement of spousal benefits may increase total family benefits.
In addition, a couple who have both reached full retirement age can be better off if (a) the partner with the better Social Security record claims and suspends in order to defer benefits (and increase them); and (b) the other partner gets more by claiming spousal benefits instead of collecting under his or her own record, at least for a while. Sometimes, the latter partner's own record will provide larger direct benefits if he or she waits long enough, so collecting spousal benefits under a claim and suspend by the other marital partner may serve as a temporary way to increase total family benefits until the latter partner begins to collect under his or her own record. This strategy is allowed only if both spouses have reached their respective full Social Security retirement ages. The marital partner claiming spousal benefits for a while also has to go through the process of doing a claim and suspend with his or her own Social Security record, and then apply for spousal benefits. Note that the partner collecting spousal benefits can keep working and perhaps increase his or her benefits with an enhanced work history as well as by waiting to collect on his or her own record. Because this partner will, by definition, be at full retirement age or older, he or she will not lose any Social Security benefits from working.
Another facet of claiming and suspending is that if you reach full Social Security age and have dependents--something that's possible for grandparents raising grandchildren and late in life parents with kids at home when a parent reaches full Social Security age--the dependents can start claiming benefits if you claim and suspend. (In fact, the dependents can collect benefits earlier if you start collecting benefits yourself earlier, but you can't do a claim and suspend unless you've reached full Social Security age.) The advantage is that your dependents begin to collect benefits while you defer (and increase) your personal benefits. If you are still working or have other income you can live on, claiming and suspending in order to start benefits for your dependents may enhance total family benefits. Of course, you have to think carefully about how to handle your dependents' payments. As minors, the young ones may not have the most highly developed financial skills, so you should think about putting the money in a custodial account and saving it for their college or other post-high school education expenses.
Claim and suspend is available only if you wait until you reach your full Social Security retirement age (and your spouse, too, if he or she wants to first collect spousal benefits and then switch over to enhanced personal benefits). If you start collecting benefits early, you can't claim and suspend. Your spouse and dependents can also start collecting under your Social Security record if you begin collecting early, but their benefits, just like yours, will be reduced. How these alternative strategies might work for you and your family would depend on your circumstances. If you have trouble figuring out what's best for you and your family, contact the Social Security administration for more information (meet with someone at your local Social Security office or call 1-800-772-1213; don't try to do this by e-mail) or consult with a fee only financial planner.
Thursday, March 3, 2011
How to Avoid Running Out of Money in Retirement
The fear of running out of money may be the biggest financial dilemma for most retirees. There's no perfect solution to the problem. But plenty of people have long, enjoyable retirements and leave something behind for their heirs. So the problem isn't insurmountable. Here are some ideas.
Build up your Social Security and pension credits. Whatever Congress and the President do to reform Social Security, they won't abolish it. It will be there in one form or another when you retire. Working as long as possible to maximize your benefits ensures a lifelong stream of inflation-adjusted payments. While Social Security won't cover more than the basics, life is easier when you have the basics covered. If you're fortunate enough to have a pension, work as long as you can to boost your pension payments. Working longer, although not as much fun as shuffleboard, is one of the best ways to make sure you're as well prepared as possible for retirement.
Save. The more you save, in retirement accounts or otherwise, the better off you will be in retirement. Non-savers, by definition, have already run out of money, and poor savers will quickly fall into the abyss. It's important to have a pool of cash available for big expenses like assisted living and other medical bills. If all you have are comparatively small streams of payments like Social Security and perhaps a pension, and you need to go into assisted living, you'll have effectively run out of money even though you're still getting a monthly income.
Pay down debts. Ideally, you should have no mortgage and little or no other debt by the time you retire. Debt, and its accompanying interest expenses, are negative savings. Some financial advisers will conjure up scenarios where you supposedly might be better off with a mortgage or some other debt. But debt involves risk, and the recent financial crisis and Great Recession amply demonstrate that risk can easily lead to losses. Financial stability is very important for a comfortable retirement, and debt destabilizes.
Invest conservatively. The older you get, the less time you have to recover from investment losses. Keeping some money in assets with potential for appreciation, like stocks, is a good idea because of long term risks of inflation. But be cautious about investing in stocks and other volatile assets. Perhaps a third of your portfolio might prudently be kept in stocks. As you get older, that proportion should shrink so that you don't get walloped by the stock market when you're 83.
Consider an annuity. It's easier to establish a budget if you have a predictable monthly income. An immediate annuity can provide either a fixed monthly payment or one that rises with inflation. (The latter is costlier, but you get additional peace of mind.) Annuities are issued by insurance companies, and they can go bankrupt. If you want the benefits of an annuity, consider buying two, each for half the amount you want to invest, from different insurance companies. Both should have solid credit ratings. With two different insurers, you diversify your risks.
Be cautious with variable annuities. They tend to have high expenses and varying (as the name indicates) payments. That uncertainty of payments may, for some, defeat the purpose of an annuity.
Note that annuities lock up the capital you invest in them, meaning you can't get access to it. All you can get are the payments. You'll almost surely need some liquid assets during retirement, for medical expenses and large items like cars. Never spend more than half your savings on annuities. Indeed, given the limitations of annuities, spend only the minimum amount needed to give you the peace of mind you're trying to secure.
Think about long term care insurance. Although increasingly expensive, long term care insurance gives you hundreds of thousands of dollars of buying power if you have to go into assisted living or have other major similar needs. Long term care insurance helps to preserve your savings (which may be important if you have a spouse or partner whose financial security you wish to protect). In addition, if you want to avoid a nursing home that accepts Medicaid patients--some feel that such nursing homes provide lower quality services--long term care insurance could be essential to affording a more exclusive facility.
Work part-time. Okay, working isn't exactly what you had in mind for retirement. But it allows you to spend less of your savings while you're able to work. If and when you reach the point where you can't work, you'll be glad you worked as long as you did.
Build up your Social Security and pension credits. Whatever Congress and the President do to reform Social Security, they won't abolish it. It will be there in one form or another when you retire. Working as long as possible to maximize your benefits ensures a lifelong stream of inflation-adjusted payments. While Social Security won't cover more than the basics, life is easier when you have the basics covered. If you're fortunate enough to have a pension, work as long as you can to boost your pension payments. Working longer, although not as much fun as shuffleboard, is one of the best ways to make sure you're as well prepared as possible for retirement.
Save. The more you save, in retirement accounts or otherwise, the better off you will be in retirement. Non-savers, by definition, have already run out of money, and poor savers will quickly fall into the abyss. It's important to have a pool of cash available for big expenses like assisted living and other medical bills. If all you have are comparatively small streams of payments like Social Security and perhaps a pension, and you need to go into assisted living, you'll have effectively run out of money even though you're still getting a monthly income.
Pay down debts. Ideally, you should have no mortgage and little or no other debt by the time you retire. Debt, and its accompanying interest expenses, are negative savings. Some financial advisers will conjure up scenarios where you supposedly might be better off with a mortgage or some other debt. But debt involves risk, and the recent financial crisis and Great Recession amply demonstrate that risk can easily lead to losses. Financial stability is very important for a comfortable retirement, and debt destabilizes.
Invest conservatively. The older you get, the less time you have to recover from investment losses. Keeping some money in assets with potential for appreciation, like stocks, is a good idea because of long term risks of inflation. But be cautious about investing in stocks and other volatile assets. Perhaps a third of your portfolio might prudently be kept in stocks. As you get older, that proportion should shrink so that you don't get walloped by the stock market when you're 83.
Consider an annuity. It's easier to establish a budget if you have a predictable monthly income. An immediate annuity can provide either a fixed monthly payment or one that rises with inflation. (The latter is costlier, but you get additional peace of mind.) Annuities are issued by insurance companies, and they can go bankrupt. If you want the benefits of an annuity, consider buying two, each for half the amount you want to invest, from different insurance companies. Both should have solid credit ratings. With two different insurers, you diversify your risks.
Be cautious with variable annuities. They tend to have high expenses and varying (as the name indicates) payments. That uncertainty of payments may, for some, defeat the purpose of an annuity.
Note that annuities lock up the capital you invest in them, meaning you can't get access to it. All you can get are the payments. You'll almost surely need some liquid assets during retirement, for medical expenses and large items like cars. Never spend more than half your savings on annuities. Indeed, given the limitations of annuities, spend only the minimum amount needed to give you the peace of mind you're trying to secure.
Think about long term care insurance. Although increasingly expensive, long term care insurance gives you hundreds of thousands of dollars of buying power if you have to go into assisted living or have other major similar needs. Long term care insurance helps to preserve your savings (which may be important if you have a spouse or partner whose financial security you wish to protect). In addition, if you want to avoid a nursing home that accepts Medicaid patients--some feel that such nursing homes provide lower quality services--long term care insurance could be essential to affording a more exclusive facility.
Work part-time. Okay, working isn't exactly what you had in mind for retirement. But it allows you to spend less of your savings while you're able to work. If and when you reach the point where you can't work, you'll be glad you worked as long as you did.
Wednesday, January 26, 2011
Hope For the Financially Lost
Financial plans can be blown up because of job loss, illness, elderly parents who need support, or bad investments. Some people simply can't save. Whatever the situation, there remains hope for the financially lost to have at least a decent retirement.
Boost your benefits. Work as long as possible to build up Social Security and, if available, pension benefits. This is especially important for those that can't save. Even if you aren't working, delay taking Social Security benefits as long as you can (unless you're 70 or older). Delaying Social Security increases benefits. For more, see http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_02.html.
Stay together. Couples generally are better off than singles, because they can pool their resources. Even if their only resources are Social Security benefits, a couple are usually better off together than individually. Of course, togetherness isn't always possible. When it is, there are financial, as well as other, benefits. For more, see http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_03.html.
Get a job with a pension. Government, law enforcement, military and educational jobs usually offer a pension or other retirement plan. Although pension benefits in many state and municipal jobs are being adjusted to meet fiscal realities, they will still be better than nothing. Not everyone is cut out for these lines of work. If you find a private sector job with a pension, then try to stay there long enough to accrue meaningful benefits. For those who can't save, a pension is golden. You just have to work long enough to vest; saving isn't necessary. If you need assistance figuring out if the amount of pension benefits your employer promises is correct, contact the American Academy of Actuaries at http://www.actuary.org/palprogram.asp. They'll give you up to four hours of free help. If you think your benefits are too low, contact a regional pension counseling project for free assistance. http://www.pensionrights.org/counseling-projects.
Buy a house and pay off the mortgage. Buy a house, pay off the mortgage, and don't borrow against the house until you retire. This strategy will build equity in a piece of real estate that you can add to your Social Security benefits (and pension benefits, if any). Even though strategic defaults have become fashionable, the unfashionable may have an advantage in the long run.
None of these strategies will finance a yacht. Remember that it's never too late to save, even if you're living on just Social Security. Cash is sublime when times are tough.
Boost your benefits. Work as long as possible to build up Social Security and, if available, pension benefits. This is especially important for those that can't save. Even if you aren't working, delay taking Social Security benefits as long as you can (unless you're 70 or older). Delaying Social Security increases benefits. For more, see http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_02.html.
Stay together. Couples generally are better off than singles, because they can pool their resources. Even if their only resources are Social Security benefits, a couple are usually better off together than individually. Of course, togetherness isn't always possible. When it is, there are financial, as well as other, benefits. For more, see http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_03.html.
Get a job with a pension. Government, law enforcement, military and educational jobs usually offer a pension or other retirement plan. Although pension benefits in many state and municipal jobs are being adjusted to meet fiscal realities, they will still be better than nothing. Not everyone is cut out for these lines of work. If you find a private sector job with a pension, then try to stay there long enough to accrue meaningful benefits. For those who can't save, a pension is golden. You just have to work long enough to vest; saving isn't necessary. If you need assistance figuring out if the amount of pension benefits your employer promises is correct, contact the American Academy of Actuaries at http://www.actuary.org/palprogram.asp. They'll give you up to four hours of free help. If you think your benefits are too low, contact a regional pension counseling project for free assistance. http://www.pensionrights.org/counseling-projects.
Buy a house and pay off the mortgage. Buy a house, pay off the mortgage, and don't borrow against the house until you retire. This strategy will build equity in a piece of real estate that you can add to your Social Security benefits (and pension benefits, if any). Even though strategic defaults have become fashionable, the unfashionable may have an advantage in the long run.
None of these strategies will finance a yacht. Remember that it's never too late to save, even if you're living on just Social Security. Cash is sublime when times are tough.
Sunday, December 19, 2010
Year End Financial Checkup
Before you become too friendly with the nearest bowl of eggnog, give your finances a quick year end checkup. That way, you can roll into the new year hungover, perhaps, but with some idea of where you are financially and where you want to go. Admittedly, money issues bring less cheer than the bubbly stuff that makes the cork pop. Ignoring one's finances, though, won't lead to wealth.
A lot of year end financial advice focuses on tax planning or prognostications for next year. Like many things, though, a solid foundation in financial basics is more important than doing some transactions that invite an IRS audit or believing in the latest self-appointed soothsayer. Get the basics right and other things become easier.
Calculate your net worth. This is the where sound financial planning begins. If you don't know where you stand, you can't tell if you're making progress (or losing ground). If things are going well, you can give yourself a pat on the back. If not, save more and perhaps change what you're doing. Calculate your net worth every three months. For more, see http://blogger.uncleleosden.com/2007/04/secret-to-building-wealth.html.
Ensure adequate cash reserves. Make sure you have at least six months worth of living expenses set aside in an emergency cash fund that you never tap except during a crisis. Better yet, considering today's continuing albeit not-officially-recognized recession, have nine or twelve months of living expenses set aside. Unemployment remains a serious problem. Even though high ranking government officials are quick to tout even a tiny smidgen of improvement in employment levels, lots of people are still being laid off. Thrifty squirrels are the ones that survive winter.
Review portfolio diversification. Your portfolio's asset allocation may have changed as a result of market shifts. Most recently, bonds have been falling (contrary to every effort of the Federal Reserve to push them higher), while stocks have been rising. Consider whether you should adjust your allocations.
You may have different asset allocations for different pools of assets. The way you diversify a college fund for your kid(s) could be different from the ideal asset allocation for retirement savings. Keep these differences in mind.
Go over your benefits. Make sure you understand where you stand with Social Security and, if you have a pension, with your pension benefits. Maybe you don't believe either will be around by the time you retire. Well, people thought the same thing 30 and 40 years ago, and they're now retiring with Social Security and, sometimes, pension benefits. Figure out how to maximize your benefits. Then, maximize them as much as possible.
Review privacy. The Internet, by all indications, is becoming less private by the day. In an implicit but sharp rebuke to the private sector for its failure to display even a modicum of propriety, U.S. government regulators are now talking about setting federal standards for online privacy. Think about limiting your use of the Internet for financial matters (this includes banking, stock trading, online shopping and other online use of credit cards, debit cards, bank account numbers, and other financial transactions). The less often you do financial transactions on the Internet, the fewer opportunities you give bad guys to steal your money and/or identity. The Internet is unquestionably a convenience, but being robbed by cybercrooks can be highly inconvenient. If you must do transactions online, use the best security measures available.
A report in this weekend's Wall Street Journal (P. C1) indicates that smart phones (like the iPhone and Android) may be significantly less secure than computers. Apparently, some apps may sneak off with your name and other highly personal information without telling you or getting your permission. Avoid doing financial transactions on a smart phone, at least until security is greatly improved. If you must do financial transactions on your smart phone, check account balances and activity often. This means at least weekly and perhaps even daily for your bank accounts, credit card accounts and whatever accounts you use through your smart phone.
A cyberthief can make off with savings you took years to accumulate. Protect yourself.
Think about saving more. One of the best protections you have against an uncertain future is a nice, warm, fuzzy and large pool of savings. The more you save, the sooner you'll be able to retire and the nicer your retirement lifestyle will be. See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html and http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html.
A lot of year end financial advice focuses on tax planning or prognostications for next year. Like many things, though, a solid foundation in financial basics is more important than doing some transactions that invite an IRS audit or believing in the latest self-appointed soothsayer. Get the basics right and other things become easier.
Calculate your net worth. This is the where sound financial planning begins. If you don't know where you stand, you can't tell if you're making progress (or losing ground). If things are going well, you can give yourself a pat on the back. If not, save more and perhaps change what you're doing. Calculate your net worth every three months. For more, see http://blogger.uncleleosden.com/2007/04/secret-to-building-wealth.html.
Ensure adequate cash reserves. Make sure you have at least six months worth of living expenses set aside in an emergency cash fund that you never tap except during a crisis. Better yet, considering today's continuing albeit not-officially-recognized recession, have nine or twelve months of living expenses set aside. Unemployment remains a serious problem. Even though high ranking government officials are quick to tout even a tiny smidgen of improvement in employment levels, lots of people are still being laid off. Thrifty squirrels are the ones that survive winter.
Review portfolio diversification. Your portfolio's asset allocation may have changed as a result of market shifts. Most recently, bonds have been falling (contrary to every effort of the Federal Reserve to push them higher), while stocks have been rising. Consider whether you should adjust your allocations.
You may have different asset allocations for different pools of assets. The way you diversify a college fund for your kid(s) could be different from the ideal asset allocation for retirement savings. Keep these differences in mind.
Go over your benefits. Make sure you understand where you stand with Social Security and, if you have a pension, with your pension benefits. Maybe you don't believe either will be around by the time you retire. Well, people thought the same thing 30 and 40 years ago, and they're now retiring with Social Security and, sometimes, pension benefits. Figure out how to maximize your benefits. Then, maximize them as much as possible.
Review privacy. The Internet, by all indications, is becoming less private by the day. In an implicit but sharp rebuke to the private sector for its failure to display even a modicum of propriety, U.S. government regulators are now talking about setting federal standards for online privacy. Think about limiting your use of the Internet for financial matters (this includes banking, stock trading, online shopping and other online use of credit cards, debit cards, bank account numbers, and other financial transactions). The less often you do financial transactions on the Internet, the fewer opportunities you give bad guys to steal your money and/or identity. The Internet is unquestionably a convenience, but being robbed by cybercrooks can be highly inconvenient. If you must do transactions online, use the best security measures available.
A report in this weekend's Wall Street Journal (P. C1) indicates that smart phones (like the iPhone and Android) may be significantly less secure than computers. Apparently, some apps may sneak off with your name and other highly personal information without telling you or getting your permission. Avoid doing financial transactions on a smart phone, at least until security is greatly improved. If you must do financial transactions on your smart phone, check account balances and activity often. This means at least weekly and perhaps even daily for your bank accounts, credit card accounts and whatever accounts you use through your smart phone.
A cyberthief can make off with savings you took years to accumulate. Protect yourself.
Think about saving more. One of the best protections you have against an uncertain future is a nice, warm, fuzzy and large pool of savings. The more you save, the sooner you'll be able to retire and the nicer your retirement lifestyle will be. See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html and http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html.
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