If Congress cannot raise the debt ceiling, Social Security and Medicare payments could be put at risk. Image from Wikimedia Commons.

Currently, the United States Congress and the president are locked in a battle over raising the debt ceiling for the government. It seems to be yet another partisan squabble, but the consequences could include Social Security and other payments could be defaulted on if the debt ceiling isn’t raised.

Congress to forgo Fourth of July recess to work on debt issue

One of the biggest political and economic issues to arise in the past year or so has been the national debt ceiling, essentially the credit limit of the United States government. The government is not allowed by law to exceed more than $14.3 trillion in debt, according to Reuters, which was reached in the middle of May. Yet the government has been making payments on it through last-minute measures.

Some members of Congress, mostly comprised of Congressional Republicans, have been refusing to raise the debt limit without substantial changes to fiscal policies. Senate Majoirty Leader Harry Reid Leader has announced that the Senate is going to forgo the traditional week-long recess after the Fourth of July holiday  in order to work on the debt ceiling, reports CBS. It has to be raised before August 4.

Warnings issued against default

Though there is nearly a month to forge an agreement to raise the debt ceiling, there are already warnings being issued against allowing the federal government to default on its debt. Besides a potentially catastrophic effect on global financial markets, credit rating agency Standard & Poor’s has warned that default on debt would result in currently maturing U.S. Treasury bonds being issued a “D” rating if those bonds are not paid out on August 4. The U.S. has $30 billion in interest payments due on short term loans acquired through sale of Treasury bonds. Chairman of the Federal Deposit Insurance Corporation Sheila Bair has warned Congress that they are getting into “a dangerous game,” according to NASDAQ, should they fail to successfully raise the debt limit.

Potential fallout in case of default

The American government is currently borrowing 40 cents of every dollar it spends, and in August of 2011 alone, the government is slated to spend $134 billion more than it will take in, according to USA Today. Up to 44 percent of government payments could be missed. Granted, this may seem a faraway issue to some people, but the largest and most urgent payments could hit the most vulnerable citizens where it hurts. Social Security payments to retirees, disability benefits, Medicare and Medicaid benefits and other forms of social aid such as welfare and food stamps may go unfunded. Federal employees may also be furloughed and contractors, including defense contractors, may go unpaid or have their contracts cancelled.

It is projected that there won’t be sufficient funds for the $23 billion payment to Social Security and Social Security Disability Insurance, or SSDI, recipients on August 3. Social Security represents 50 percent or more of all income for 53 percent of all couples aged 65 or older and 73 percent of all people over the age of 65.

Sources

Reuters

CBS

NASDAQ

USA Today

Social Security Administration facts at-a-glance

The AARP, a key lobby for the elderly, is starting to be receptive to reduced Social Security Benefits. Image from Wikimedia Commons.

The AARP has begrudgingly given its blessing to reducing Social Security benefits should Congress move to reduce payments to retirees. The AARP, or the American Association of Retired Persons, normally advocates against reducing benefits but is conceding that Social Security is in need of reforms to remain solvent.

Entitlement programs in Congressional crosshairs

There has been a flurry of Congressional activity in the past few years concerning financial reform, especially concerning government spending. Since entitlement spending, such as programs like Social Security, Medicare and Medicaid, make up almost half the federal budget, there are a lot of elected officials who say they have to be cut. However, some groups such as the AARP oppose any cuts to Social Security and to Medicare, as these programs make up the “safety net” that provides income to retirees. In fact, according to the Social Security Administration, 90 percent of elderly people in the United States receive Social Security income, and Social Security payments make up 41 percent of income for elderly people. However, the AARP recently conceded that they would be open to “some” cuts to benefits, according to the New York Times.

Powerful lobby group concedes to certain cuts

The AARP, formerly called the American Association of Retired Persons, recently said that it would accept some cuts to Social Security payments. The group has maintained that it doesn’t want benefits to be drastically cut, but would not be opposed to minor reductions that would help keep the system solvent. The board of Social Security Trustees, according to Bloomberg, recently announced that the Social Security Trust Fund, where all money the Social Security Administration doesn’t pay out is placed, will be depleted by the year 2036 based on current projections. The AARP also maintains that payroll taxes should be raised to cover any gaps. Legislators are already putting forward proposals such as decreasing benefits or raising the retirement age.

Safety net in danger

Social Security is already slated to spend almost $190 billion more than it takes in this year alone, according to USA Today, and is projected to do so next year. It was also revealed recently that the Social Security administration is estimated to have overpaid by more than $6 billion in 2009, according to Time magazine, by making payments to people who shouldn’t have received them or by paying too much. The federal government is estimated to have distributed $125 billion more than it should have that year. The system, as it stands, appears to be unsustainable. In order for Social Security to continue as the social safety net for the nation, payroll taxes may have to go up and many Americans could realistically expect to retire later, and possibly on less than they would like.

Sources

New York Times: http://www.nytimes.com/2011/06/18/us/18aarp.html

Bloomberg: http://www.bloomberg.com/news/2011-06-17/aarp-says-it-will-back-social-security-cuts-to-ensure-solvency.html

USA Today: http://www.usatoday.com/news/opinion/editorials/2011-06-16-Payroll-taxes-raid-Social-Security_n.htm

Time: http://www.time.com/time/nation/article/0,8599,2077690,00.html

Social Security Administration: http://www.ssa.gov/pressoffice/basicfact.htm

The national debt soars. This clock is a little slow. Image: Raphiq Phillips/Flickr/CC BY-SA

The U.S. will soon hit the $14.294 trillion debt ceiling, prompting Congress to vote on again raising the limit. But Congressional Republicans have threatened opposition if the vote does not include budget cuts and long-term debt reduction. If an agreement is not reached by August, it will be an unprecedented situation that will be felt by all consumers.

The limit the U.S. can borrow

The debt ceiling is the maximum limit the government is allowed to borrow to pay its current debts. In the past, Congress has always voted to raise the limit.

If the issue is not settled by August, military employees and dependents may see severe income losses. Those dependent on Social Security may be left out in the cold. The loss of Medicare could drive healthcare expenses to levels beyond the reach of most people. Interest and credit rates could drastically increase, as well as taxes.

Taxes pay only 60 percent

“Given that the government currently only raises taxes to cover 60 percent of what it spends, being able to borrow means that the services people depend on from the government continue,” explains Stan Collender, a partner at Qorvis Communications. If Congress fails to vote for a limit increase, it could lead to much higher taxes, a reduction of expected services or both.

T-bills considered secure, for now

The U.S. government raises money by selling Treasury Bonds, or T-bills, which promise a small return on the money borrowed. As long as the purchasers are confident that the loans are safe, they are willing to trade security for small returns. However, if national loans are defaulted on, the global marketplace will lose faith in the dollar, causing foreign goods to become more expensive. The marketplace would reflect that lack of confidence by an immediate increase in cost of fuel, electronics and many other items dependent on overseas suppliers.

Jobs could be at stake

Jobs could be at stake not only for those on the government payroll, but for those in the private sector as
well. “We don’t know what will happen because this hasn’t happened before,” says Collender. “But if the debt ceiling isn’t raised and the government runs out of cash, at some point the president may decide he has to stop doing certain things, like paying government contractors, for example. That may not sound like such a big deal, but it is if someone in your family, or someone you know, is working for that contractor, or for the supplier of that contractor, or if that contractor is a big employer in your neighborhood or your state.”

Wall Street remains confident

At this point, the market seems to be ignoring the debt ceiling debate, confident that a solution will be reached. Banks are still lending money, interest rates remain low and the stock market is relatively stable.

Sources

Daily Finance
CBS
Huffington Post

Two-thirds of global investors believe the U.S. should raise taxes. (Photo Credit: CC BY/Alan Cleaver/Flickr)

Recent results on the quarterly Bloomberg Global Poll of investors, traders and analysts indicate that global investors support the idea of the U.S. raising taxes to combat the budget deficit. Nearly two-thirds of investors polled believe that substantial deficit reduction will not be possible without additional tax revenue, a position that runs counter to the Republican stance on how to handle the federal deficit.

No easy agreement between Obama and GOP

Sixty percent of investors polled have significant doubt that President Obama and Republican lawmakers will be able to agree upon deficit-reducing measures before the start of the next fiscal year on Oct. 1. However, an even higher percentage of respondents (70 percent) are “confident” that Congress will raise the $14.29 trillion debt limit in order to avoid default that would send borrowing costs skyrocketing for everyone, eliminate millions of jobs and hurl stocks, home values and retirement savings into a financial abyss.

Obama’s reinvigorated popularity can’t change facts

Obama’s popularity ratings have risen globally since the death of Osama bin Laden, but that has done nothing to quell foreign investor fears over what could happen if something resembling the GOP’s plan to keep taxes low is put into action. While the majority of U.S. investors in the Bloomberg poll favored the GOP approach to the nation’s budget, 55 percent of them still don’t think it’s possible to cut the federal deficit “significantly” without raising taxes.

As it currently stands, the U.S. budget deficit will decrease slightly to $1.1 trillion in fiscal 2012. Fiscal 2011 will end with an approximate deficit of $1.5 trillion.

Taxation, without entitlements

Sacred cows like Social Security and Medicare-related programs, which make up more than 40 percent of the federal budget, have traditionally been off limits from spending cuts. This has prompted some to assert that higher taxes are the only way to make a deficit-busting difference. While unpopular, if a presidential administration were to be able to convince lawmakers and the electorate that tapping into such entitlements is a good idea, it could lower the national debt for future generations. Currently, Social Security, at 20 percent of the federal budget, receives $707 billion annually, according to the Center on Budget and Policy Priorities. Medicare and related programs receive $732 billion (21 percent).

Instead of dipping into entitlements, Harvard University economics professor Martin Feldstein suggests in a recent New York Times op-ed that a better alternative may be increasing tax revenue, rather than tax rates, by limiting tax deductions, credits and exclusions.

Higher interest rates

Bond market yields are at a 10-year low, according to Bloomberg. As there is an inverse relationship between bond values and interest rates, numerous experts fear that interest rates will become dramatically higher, a traditional result of a market crisis. The number of investors who believe another market crisis will hit the U.S. rose from 18 to 22 percent between the last two quarterly Bloomberg polls.

Sources

Bloomberg

Center on Budget and Policy Priorities

New York Times

Wikipedia entry for bond market

Cenk Uygur on taxes and the deficit

Social Security benefits are becoming more difficult to garnish under new government regulations. Image from Wikimedia Commons.

A newly enacted law makes it more difficult for debtors to garnish Social Security benefits. Banks cannot garnish any benefit payments like Social Security or disability unless there are two months of benefit payments, which is not incredibly likely to happen. However, the new rule only applies to banks.

Government benefits under new protections

The Department of the Treasury and other government agencies have changed a key rule concerning debt collection and recipients of federal benefits including Social Security, disability or other federal benefit payments, according to CNN. Banks are prevent from garnishing or taking money out of the accounts of people who are recipients of government benefit payments, unless the account has at least two months of benefits sitting in it. However, since many people who depend on government benefits do not always have that much in savings, that means that withdrawing funds for overdraft or other account fees may become a bit more tricky. Bank fees, including checking account fees and overdraft fees, have not been decreasing with the recession in the slightest, according to WalletPop, and Americans are expected to pay at least $38 billion in fees for 2011.

Slight change for creditors

Creditors, on the other hand, can still garnish government benefits. However, the rule for creditors changed slightly. Any creditor has to obtain a court judgement which allows them to garnish income before they can start extracting payments for past due balances. Whomever someone owes for credit cards, same day loans or installment loans, the creditor has to get the go-ahead from a court to do it. Before the funds can be accessed, though, a creditor has to determine which funds technically came from government benefits, whereas they previously did not have to. Government, on the other hand, can garnish anyone’s benefit payments if that person owes the government money.

Social Security checks phasing out

Soon, Social Security checks will be an anachronism, as the Social Security Administration is phasing out paper checks in favor of direct deposit, according to USA Today. For those recipients that don’t have bank accounts, the SSA will furnish them with a prepaid debit card in a partnership with Comerica bank. Currently, about 85 percent of Social Security recipients already receive their benefits through direct deposit. Each direct deposit transaction costs the federal government about 10 cents to complete. Each paper check written out and mailed costs about $1. The government issues about 120 million checks every year, and switching to a paperless system will save taxpayers over $100 million per year.

Sources

CNN

WalletPop

USA Today

“Hang on, pops! You'll be returning to work – if you know what's good for you.” (Photo Credit: CC BY-SA/Sean Fornelli/Flickr)

Some people look forward to retirement at 65 as the time when they’ll finally be able to focus entirely upon the things they want to do. However, retiring at age 65 may be a thing of the past, suggests the Los Angeles Times. According to geriatrician Dr. Katherine Schlaerth of the USC School of Medicine, the U.S. retirement age may even be unhealthy.

Working longer for your health

Intellectually and physically, Schlaerth has found that her retirement-age patients who worked later into life were more healthy. Retirees who had suffered from high blood pressure, memory lapses and other ailments improved dramatically upon returning to work. They lost weight, experienced much less hypertension and avoided the kinds of depression that prey on idle minds. And considering the current U.S. economic landscape, returning to work was also a welcome financial boost for many of her patients.

Research suggests that the decline in physical and mental activity that often comes after retirement place great burdens upon a retiree’s health. A 2007 study of British civil servants corroborates this, as the risk for cognitive decline increased after for subjects after retirement. A more recent study by the Rand Corp. and the University of Michigan found that “men and women in countries where people worked longer did better on a test of cognitive skill involving memory than those in countries where early retirement was the norm,” writes Schlaerth.

Similarly, an Israeli study of septuagenarian workers found that the activity involved in the completion of daily work duties kept people healthy and increased individual feelings of independence and satisfaction.

The troubles with Social Security have paved the way

As Social Security slides toward complete collapse – and more people are taking it early – younger workers are looking toward a future where the retirement age will be significantly higher. Those who receive Social Security today grew up in a time when families averaged four children, while post-1960s families have averaged two. This means that there will be fewer worker contributions to the pool over time, which in turn will contribute to Social Security’s decline.

Where the septuagenarians are

According to RetirementJobs.com, employees 50 and older tend to cluster in the following industries:

1. Airlines (American Airlines is the top employer)
2. Utilities
3. Insurance
4. Retail
5. Chemicals
6. Aerospace
7. Packaging and containers
8. Forest and paper products
9. Food production
10. Beverages

Sources

Los Angeles Times

RetirementJobs.com

Retirees: Back to work, back to school

Government employees will be affected most by a government shutdown, most of whom will be white collar workers outside of some essential core agencies. Image from Wikimedia Commons.

There is a lot of speculation about whether a government shutdown will occur if Congress fails to agree on budget proposals. If the shutdown does happen, it may win some ideological kudos from some people, but there will be consequences. Government employees would feel most of the pinch.

Basic services would continue under federal shutdown

The current battle over spending and deficits may force the federal government to shut down temporarily when it reaches its debt ceiling, which will happen by May 16. If a shutdown occurs, basic services will continue. The United States Postal Service will continue to operate, as that service is mostly self financed. According to MSNBC, any government service “involving the safety of human life or the protection of property” cannot legally be stopped in a government budget showdown. Social Security benefits would also likely be exempt as well.

Government workers to pay the price

The people who stand to lose the most are government employees. Some will not have to worry; air traffic controllers will still be needed, and allowing members of the military to miss a paycheck would be political suicide. However, employees in agencies that are involved in clerical, managerial or financial roles will probably be put on a furlough. Many of these employees have already had their pay frozen by the Obama administration. Contractors who work for the government, many of whom are small businesses, will also lose revenue, according to the Wall Street Journal. Any revenue that contractors or government employees lose might not be reimbursed.

Contingencies

There are some contingency plans in case a government shutdown happens. According to Credit Union Times, the Cabrillo Credit Union in San Diego will offer zero percent interest furlough loans to its members who are temporarily laid off by a federal government shutdown. That organization offered similar assistance in the 1995 – 1996 shutdown, and government employees should check with their local credit union to see if there are similar programs available if they are members. If the shutdown does occur, Treasury Secretary Timothy Geithner has said he would not rule out dipping into the Social Security Trust Fund and other sources to keep some government services fiscally viable until the shutdown subsides, according to Reuters, which means that some employees and services may continue to be funded.

Sources

Wall Street Journal

Reuters

MSNBC

Credit Union Times

Experts claim the SSDI plate will be empty in just a few years. (Photo Credit: CC BY-SA/Alpha/Flickr)

In 2005, the Social Security Disability Insurance fund began to dish out more money than it was bringing in via tax receipts. That trend has continued each year — plus the number of Social Security beneficiaries grew by 489,488 in 2010, the highest one-year increase in history. This has led experts to predict that SSDI will exhaust surplus funds in four to seven years, reports the Wall Street Journal.

Social Security will spend $22 billion more than it makes

By 2015, projections indicate that Social Security will spend $153 billion in benefits and other costs. That’s $22 billion more than it is expected to take in, underscoring a problem that many Americans will soon face. With no changes at all, the Social Security retirement fund will last until about 2040 (and Medicare until 2029). Federal intervention will be required to keep SSDI alive for more than 7 years, say government auditors.

Social Security: Drowning in applicants

The recession sent a huge wave of new applicants into the Social Security program. Over the past decade, numbers swelled from 6.6 million beneficiaries to 10.2 million. Numerous U.S. states and territories depend upon SSDI funds. Texas’ enrollment has reportedly increased by 85 percent over the last 10 years, while New Hampshire’s has grown by 69 over the same span. As a percentage of total population, West Virginia receives more SSDI money than anywhere else.

Health problems related to manual labor are believed to be the cause, a common theme among states where agriculture and manufacturing are vital. U.S. territories like Puerto Rico heavily depend upon Social Security, considering the rash of factory and military base closures in recent years. Not coincidentally, such states also tend to have the highest unemployment numbers. In the case of Puerto Rico, political corruption is also an issue.

SSDI depends upon doctor’s orders

Unlike age-based programs like Medicare and Social Security retirement benefits, SSDI is closely tied to medical opinion. As someone else pays the bills, local medical officials don’t have the immediate incentive to keep enrollment numbers down. While SSDI benefits can be modest in scope – payments averaged $1,064 per month in 2009 – participants gain access to other government benefits, which increases the cost for taxpayers. SSDI expert David Autor of the Massachusetts Institute of Technology estimates that such additional programs amount to an average of $300,000 paid out per person over the lifetime of someone who receives SSDI benefits regularly.

Are higher taxes on the way?

In the short term, the only way Congress can save SSDI without tax increases is to fold it into the main Social Security fund. This would drain away retirement funds, forcing retirees to swallow benefit cuts sooner than they would have otherwise. However, as Nancy Altman of the activist group Social Security Works contends, something must be done.

“This is a program of crucial importance to every working American and his or her family,” she said.

Sources

Social Security Online
Wall Street Journal

Milton Friedman on Social Security: Save your money

More than half of Americans have insufficient amounts saved for retirement. Photo Credit: Miki Yoshihito/Flickr.com/CC-BY

The number of people who feel financially confident about entering retirement are an increasingly small portion of the population. Falling real estate values and a volatile stock market have made soon-to-be retirees fairly nervous. To make matters worse, energy prices could be due for a large increase, and politicians may be gunning for Social Security.

Survey indicates most don’t save enough for retirement

The Employee Benefit Research Institute recently released a survey that found about 50 percent of the people who were surveyed did not feel confident about their finances after retirement, according to USA Today. In the survey, 33 percent said they were “not too confident” and 27 percent they were not confident at all. The survey also found that 56 percent of subjects had less than $25,000 saved or invested for their retirement, not including their homes. And 29 percent had less than $1,000 set aside for retirement. The survey also found that 74 percent of workers planned to find other work post retirement, and 22 percent said they have major debts.

Traditional bedrocks of retirement not so solid

One of the traditional foundations of a solid retirement plan is real estate. Some people finish paying off their homes before retirement and thus don’t have to worry about paying for housing. Homeowners also have the option of pocketing the cash from selling their homes. However, home values have fallen 31 percent since the pre-recession peak, according to CNN. Since it is also being predicted that real estate values will fall again, or “double dip,” people staring down the barrel of impending retirement are not likely to realize nearly as much of a profit from the sale of their homes as they planned. Since very few people ever pay off a mortgage in full, the profit realized from the sale of a home is likely to be very modest in the current market.

Social Security could be in Congressional sights

The climate in Washington D.C. is currently favors cutting spending. The largest single budget item, Social Security, ran a deficit last year for the first time in more than two decades, according to MSNBC and will need an overhaul before it depletes all the surplus cash in the Social Security trust fund in 2037. There is a lot of speculation that the Social Security Administration is going to experience major cuts, especially in benefits, in the near future as the Baby Boomers will put further strain on the national pension plan. Few workers enjoy a traditional pension, or defined benefits pension plan that lasts for life upon retirement. Only 33 percent of private sector workers had that luxury in 2005, according to Forbes. As Social Security becomes less dependable and investments like real estate become less valuable, retirement may soon become a luxury reserved only for the wealthy.

Sources

USA Today

CNN

MSNBC

Forbes

Social welfare benefits are expected to rise as more Baby Boomers reach retirement age. (Photo Credit: CC BY/chrstphre campbell/Flickr)

An independent study utilizing Bureau of Economic Analysis data indicates that more than one-third of total U.S. wages and salaries go toward government payouts like Social Security, Medicare and other social welfare benefits. This has shocked numerous economists. CNBC Fast Money Executive Producer John Melloy suggests that this record figure will continue to expand as the majority of the Baby Boom generation retire.

Solving the US wage equation

The U.S. wage survey, which was conducted by TrimTabs Investment Research, indicated that the percentage of salaries has grown significantly, even since 2000. The chunk of wages derived from government aid in 2010 was 35 percent, but in 2000 it was 21 percent. In 1960 it was only 10 percent. As a small consolation, data indicates that the welfare wage is 44 percent in the U.K.

The United States’ dependence upon government stimulus must be broken, said TrimTabs’ Director of Macroeconomic Research, Madeline Schnapp.

“The U.S. economy has become alarmingly dependent on government stimulus,” she said. “Consumption supported by wages and salaries is a much stronger foundation for economic growth than consumption based on social welfare benefits.”

Increasing salaries by 35 percent (from $6.5 trillion to $8.8 trillion) or a 23 percent cut to social welfare payouts (tumbling down 23 percent to $1.7 trillion) are the best options available, according to Schnapp. Considering that the federal government is already stringing together short-term, shoestring measures to avert a government shutdown, experts believe only a serious compromise will turn the tide for U.S. salaries versus social welfare services.

Will the US approve of cutting Social Security?

Difficult decisions must be made to keep the U.S. government from reaching terminal bankruptcy velocity. Yet two of the most often discussed options – cutting Social Security and Medicare – are quite unpopular, according to a Wall Street Journal/NBC News poll. Across all age groups in the survey, a vast majority checked “unacceptable” when it came to the question of drastically reducing Social Security. That included 67 of respondents who labeled themselves tea party supporters, who generally do not support big government programs.

A majority of poll participants did voice their support for two alternative measures: cutting Social Security and Medicare payments to U.S. citizens in higher income brackets (which received 60 percent support) and increasing the U.S. retirement age to 69 by 2075. Currently, full retirement benefits kick in at age 66. The age isn’t scheduled to increase until 2027, and then it will be 67.

Resources for battling the recession

The recession that set in during 2008 hit the U.S. hard. Thus, it comes as little surprise that welfare payments increased by a mind-boggling $514 billion since then, reports TrimTabs. As the the U.S. housing market remains on shaky ground, dramatic recovery may still be far away. Thus, a cure for the 35 percent welfare wage percentage may still be far away.

Sources

CNBC

Wall Street Journal

For those who can’t afford to work

New estimates for Social Security indicate the program will run deficits until 2037, when the trust fund will run as dry as the Bonneville Salt Flats. Image from Wikimedia Commons.

New estimates project that Social Security will run out of cash by 2037. The estimates, from the Congressional Budget Office purport that Social Security will run a deficit until 2037, when the trust fund will be completely depleted. Recent tax cuts already have given advance cash out of Social Security revenue.

Constant deficits projected for Social Security

A new series of projections for the Social Security program by the Congressional Budget Office estimates that Social Security will run a deficit from now until 2037, according to MSNBC. The new projections are a reversal from last year, when the CBO had a far rosier estimation of the health of the Social Security Administration. In 2010, the SSA ran a deficit for the first time since the Reagan administration, but the CBO estimated Social Security would recover from any shortfalls by 2012. Previous estimates had projected a $45 billion shortfall for 2011, but it is now estimated that the shortfall will increase to $130 billion. The CBO also contends that Social Security will continue to post deficits until 2037, when the Social Security Trust Fund is expected to run out, leaving retirees from Alabama to Arizona high and dry.

Rare losses

The Social Security Administration had not run at a loss since the 1980s, though it is the single largest expenditure in the national budget. Budget surpluses of Social Security, which have been constant until recently, were put into the Social Security Trust Fund but have been a frequent source of emergency loans for the U.S. government. This year, the government is expected to run a $1.5 trillion deficit, which is more than a government can take out some personal loans to cover.

Tax cuts a partial culprit

Part of the problem, if the CBO’s estimates prove correct, is that the Bush era tax cuts that were re-extended included a reduction of Social Security payroll taxes. The loss of revenue will only exacerbate the loss, though Congress has pledged to put up the necessary funding to cover the loss.

Source

MSNBC

If you're going to spend your payroll tax holiday, and you will, make sure you do it up right. Image: CC Dan 4th/Flickr

The payroll tax holiday is giving everyone with a paycheck a 2 percent raise for the next two years. Personal finance advisers suggest using that extra money to pay down debt, but the government hopes you will spend it to stimulate the economy. If you’re like most people, you will spend it, so spend it wisely.

Get real about your payroll tax holiday

Most people don’t have the personal finance discipline to do what personal finance experts suggest with the payroll tax holiday. That fast cash will be spent as quickly as it comes in, and the economy will get a $120 billion shot in the arm. That should be good for everyone. So instead of letting your payroll tax holiday blend into your routine spending unnoticed, figure out how much extra money you’re making. Then buy something you’ve always wanted or something you really need. The Obama administration will thank you.

How much is your payroll tax holiday?

The 2 percent raise made possible by the payroll tax holiday is actually a reduction to 4.2 percent from 6.2 percent of the amount taken out of your paycheck for Social Security. If you make $40,000 a year, that adds up to an extra $800, or $66 a month. Personal finance experts will tell you to divert 2 percent of your paycheck to an additional savings account or increase the minimum monthly payment on your credit card with the highest interest rate. But the economy you depend on lies in the balance. In the spirit of national unity, why not buy yourself an $800 present?

Money to burn

Invest your payroll tax holiday in your health. A gym membership and a new pair of running shoes goes a long way toward your physical and mental well-being. Speaking of mental well-being, take your significant other out to dinner and a movie more often, or take the vacation you’ve been putting off while you’ve been waiting for the economy to turn around. Get an iPad, buy a professionally tailored suit for the first time in your life, take a cooking class, or learn how to speak Chinese. The payroll tax holiday is one of those rare moments when you have money to burn. Be sure to enjoy it.

Source

Philly.com

The Social Security Administration just closed a loophole that some wealthy people exploited for a quick payday at everyone's expense. Image from Wikimedia Commons.

Recently, Congress closed a loophole in Social Security that some people were exploiting for a quick payday. The loophole allowed the well off to get more instant cash out of the system than they would have otherwise. The government was not amused and closed the loophole.

Quick payday loophole in Social Security

Some people are creative when it comes to getting a quick payday. One way some people figured out how to was the Social Security administration, according to USA Today. People can file for Social Security benefits at age 62, but they get reduced benefits as long as they receive them. The loophole was that a person could withdraw their application to receive benefits and refile for benefits at full retirement age. They would get the full benefit they were entitled to, only if they repaid the quick cash they had already received. Essentially, some very wealthy people were getting low interest loans, in fact no interest loans, from the government.

Social Security Administration end scheme

Financial advisers had known about this and some told seniors to exploit this loophole. Social Security checks would go into savings, until they withdrew their request for benefits and refiled for benefits at full retirement age after repaying the government. The Social Security Administration figured the scheme out and put a halt to it. A retiree now has to file an application to cancel benefits within 12 months of originally receiving them. There had been no set window prior to the rule change. The scheme, while crafty, takes present and future money out of the pool for people receiving benefits. It isn’t as if the SSA can get payday loans if it needs them.

Social Security only way for some to subsist

Social Security is the only way some people are able to keep a roof over their head. There is some debate over whether it should exist, but it is hard to get past the fact that since Social Security and Medicare and Medicaid were launched, life expectancy and standards of living for seniors drastically improved in the United States.

Sources

USA Today

The belt was going to have to tighten sometime, and austerity measures will happen in the U.S. Image from Wikimedia Commons.

The national debt for the United States is approaching $14 trillion and climbing. Estimates indicate that it could exceed the total gross domestic product of the nation if unchecked. Austerity measures, like those in France and Greece, are assured to happen.

National debt must be reduced

The President appointed a debt panel not too long ago, and large cuts were part of their recommendations. The debt panel’s recommendations went up for a vote on Friday, Dec. 3, needing 14 of 18 votes to get the recommendations sent to Congress. Only 11 of 18 voted for it, according to CNN. Among the recommendations is to drastically overhaul the tax code, and reign in a lot of spending that will hit some people where it hurts. For instance, a lot of tax cuts will be eliminated, but rates will be lowered. Social Security and how many retirees subside would face cuts. Recipients of Medicare may be asked to shoulder some of the burden for health care. The idea is to start serious reductions of the budget deficit and federal debt by 2015, which means austerity measures are coming.

Austerity measures are all the rage

If the United States starts implementing these reforms, it will be part of a global trend. France, Spain, Greece and Great Britain have all instituted austerity measures, which led to Greek riots and the French strikes. These measures are never popular with citizens, but there is a basic truth which has to be accepted by a lot of people: governments rely on tax revenue, and recessions mean less revenue. Therefore, spending cuts have to be made.

Fundamental assessments

Americans (or at least a lot of us) hate paying taxes. However, we also take many government benefits for granted, like Social Security and public education. Either the level of services has to be reduced, or Americans need to get used to the idea of perhaps paying more in taxes to enjoy those benefits. Compared with almost every other industrial nation on earth, Americans pay some of the least in taxes. Perhaps it’s time to stop whining.

Sources

CNN

Capitol Hill is not going to have an easy time of implementing suggestions from Obama's debt panel. Image from Wikimedia Commons.

A national debt panel has just released findings concerning recommendations for reducing the national debt. The conclusions should be no surprise. The largest national expenditures are for Medicare, Medicaid, Social Security and defense. Those are the programs which are recommended for trimming. The United States won’t be the first nation to undergo austerity measures.

National debts and basic economics

Part of basic economics pertaining to governments is that there are limited ways to deal with debts and deficits. Revenue can be increased, or in other words, taxes have to be raised. Expenditures can be cut, or in other words, programs have to have budgets cut or be canceled outright. There is the middle road, where governments use a combination of those. Most, if not all, Americans, are always dead set against raising taxes, and in fact a tax revolt was part of the reasoning for the American Revolution. The danger, of course, comes when taxes are cut but expenditures are not. In order for tax cuts to be truly effective, the government has to spend less on services.

National deficit panel recommendations are hard

The debt commission convened by President Obama came out with some very unpopular proposals. First, benefits from Medicare, Medicaid and Social Security are recommended for reduction, according to the New York Times. The retirement age is recommended to be raised. Also, according to Reuters, defense spending, like the F-35 program, would be cut as well. Farm subsidies and discretionary spending allotments would also be cut. The panel also is recommending an incremental 15-cents-per-gallon increase in the gas tax. Tax breaks for individuals and on businesses would be done away with, but the overall rate would be reduced.

Payments have to come from somewhere

In order for deficits and the national debt to be paid down, the money cannot be borrowed. Austerity measures aren’t popular, but the tug of war in government is always between revenue and services. Americans don’t like paying taxes, but many want to continue or expand the services rendered. Something has to give somewhere.

Sources

New York Times

Reuters

The leaders of President Obama's bipartisan deficit commission are considering raising the retirement age to 69. (Photo Credit: Public Domain/Pete Souza/Wikipedia)

The federal deficit is in excess of $1 trillion, which will make the work ahead for President Obama’s bipartisan deficit commission difficult. However, as the Associated Press reports, commission leaders Erskine Bowles and Sen. Alan Simpson already have a dramatic plan of attack that will prove controversial. Reducing cost-of-living increases to government pensions, raising the retirement age to 69 and chopping down tax breaks like the mortgage interest deduction – among other changes – are up for consideration.

The deficit commission also wants to cut Medicare and Social Security

As if the above ideas aren’t unpopular enough, Obama’s deficit commission is also considering cuts to Medicare and Social Security payments. For these reasons, suggests the AP, it does not appear that a consensus among the 14 deficit commission members will be possible. Only then could the proposals be taken to the floor of Congress for debate.

Cost of living just became too expensive

The deficit commission’s idea regarding government pensions centers upon reducing annual cost-of-living increases. By changing the inflation measurement used in calculating COLAs, Bowles and Simpson figure the savings for America would be significant.

Along similar lines, Medicare COLAs would be cut, although the timing would surely be unpopular. As seniors already have to face the fact that there will be no Social Security COLA in 2011 – the second straight year without an increase – cutting benefits back even more could sow more seeds of dissent.

The retirement age problem

By 2075, the U.S. full retirement age would be 69 under the proposed deficit commission plan. France recently raised its retirement age, and that resulted in widespread rioting and disruption of utility and goods transport. The United States would face serious trouble, if such a measure could even make it off the ground, suggests the AP.

Decision time by Dec. 1

Obama’s deficit commission originally was slated to meet a Dec. 1 deadline for deficit-cutting ideas to bring before Congress, but current reports suggest it may be impossible within that time frame. The president has voiced a goal of cutting the federal deficit to 3 percent of the gross domestic product.

Sources

Associated Press



Sorry, no COLA to Social Security next year, either. (Photo Credit: Public Domain/U.S. Government/Wikipedia)

Since Congress established the annual cost of living adjustment (COLA) for Social Security payments in 1975, only twice have Social Security payments actually failed to rise. According to the Associated Press, 2010 was the first year without a COLA for Social Security, and 2011 will be the second. The Social Security Administration blames the lack of a COLA on inflation rates being too low.

Congress working to make up for lack of Social Security COLA

More than 58 million American retirees and disabled people depend on Social Security, and all of them look forward to the annual COLA. In response to what will be the second straight year without a raise in benefits across the board, the House of Representatives plans a November vote on a bill that would give each Social Security recipient $250. House Speaker Nancy Pelosi hopes to move the bill through the House, but the AP indicates that there is already stiff opposition in the Senate. Such news will no doubt add to the already heavy burden many retired Americans carry. Savings and home values are still low thanks to the recession, and the cost of living continues to rise as COLAs fall by the wayside.

“We’re a little bit upset because our bills are going up and our Social Security isn’t,” said retiree Betty Dizik, 83, to the AP. Dizik’s only source of income is a $1,200 month Social Security check. And her situation is far from unique. The average Social Security check is $1,072 per month. The Social Security Administration also indicates that 64 percent of those who received Social Security compensation in 2008 depended upon it as their sole income.

The last Social Security COLA was a big one

Social Security is currently supported by a 6.2 percent payroll tax paid by workers and employers. The maximum wage cap for which the tax still applies is $106,800. With the last Social Security COLA in January 2009, payments went up 5.8 percent, the largest increase in 27 years, reports the AP. An increase in energy prices led to that abnormally large COLA.

By law, a Social Security COLA will not occur again until consumer prices rise above 2008 levels. Social Security Administration anticipates that this will occur in 2011, leading to a 1.2 percent COLA that will hit in January 2012.

Sources:

Associated Press

AP coverage of COLA-less Social Security

Having a Roth IRA can give your retirement fund teeth. (Photo Credit: ThinkStock)

Retirement planning is a frustrating yet necessary process, especially with the precarious position of Social Security. Here are the top five reasons a Roth IRA retirement account is for you, courtesy of Smart Money.

Make tax-free withdrawals upon retirement with a Roth IRA

A Roth IRA enables you to put your contributions in after taxes. Thus, it is unnecessary for you to pay taxes on that money once it is withdrawn upon your retirement. More money is always helpful. Payday loans are fine in a pinch, but they don’t constitute a retirement plan.

Social Security won’t enable you to maintain your standard of living

You’ve heard the debates over whether Social Security will actually continue to exist forever. But let’s assume that it sticks around, and you believe it will cover you post-retirement. The government hasn’t let you down before, right?

Wrong. It’s all too common to read something like this on a Social Security statement: “You can retire on the princely sum of $2,000 per month. You may already be a $24,000 winner!”

Roth IRA beats 401k mutual funds

A 401k retirement account gives a retiree the option of choosing from one of two different types of mutual funds. That is very limiting. With a Roth IRA, you have a greater ability to manage your retirement funds.

Flexibility is always nice

Smart Money points out that Roth IRAs give the retiree a great amount of flexibility when it comes to managing their funds. Contributions can be withdrawn without establishing a compelling cause. Furthermore, a Roth IRA can be used to save for a child’s education. There are other benefits to being flexible, too. Check with your financial adviser.

Diversity in numbers

Putting all your eggs in one basket is never a good idea, and this old saying holds true with your next egg. Some people look to both a Roth IRA and a traditional IRA or 401k in order to more readily absorb the bumps and bruises of fluctuating tax rates. It’s a sound strategy that anyone concerned about retirement should discuss with a financial adviser. Be prepared and minimize your need for short term loans.

Sources:

Smart Money

Roth IRA basics

Wikipedia entry on mutual funds

When former news anchors hawk IRAs

Playtime's over. Time to pay up, pops. (Photo Credit: ThinkStock)

As of now, the National Debt Clock reads nearly $13.5 trillion. That’s what the United States government owes to satisfy its debts. Individual debt is separate and equally massive. Atlantic Magazine argues that it can’t be an infinite spiral. As the nation’s annual gross domestic product is only about $14 trillion, someone has to step up to the plate and clear the bases, because they’ve been clogged for too long. Atlantic’s humble suggestion is that the “lazy, self-indulgent, drugged-out, draft-dodging, mincing flower-power hippies” who moved on to Wall Street and began chanting the mantra “greed is good” should clean up the mess they caused. The Baby Boomers, in other words, are on the hook.

Amidst the tongue-in-cheek, a real call for Baby Boomer action

Paying off the national debt seems impossible. “Raising taxes by even 1 percent of GDP would be a triumph of leadership …  and fatal to the career of whomever proposed it,” writes the Atlantic. Yet if Baby Boomers were to pick up the pieces before moving on, it would be quite a parting gift – and it could possibly be handled via estate taxes, suggests Atlantic. The publication cites a 1999 study estimating that $41 trillion will be transferred from parents to children and grandchildren from 1999 to 2052. If just 20 percent of that sum is collected via something related to but rather different than the federal estate tax that may be reinstated in 2011, more than $8 trillion in tax revenue would be generated.

It isn’t taxing the same income twice

The criticism levied by some is that estate taxes are unfair because it amounts to taxing someone’s income two times: when it’s earned and when the person dies. However, this is incorrect, as most of what estate holders have near the end does not consist of wages, but “unrealized capital gains,” as Atlantic puts it. It’s property. If the property isn’t sold, income tax isn’t paid, which is a significant tax loophole. The Atlantic’s suggestion – the “Boomer Tax” – would only apply to capital gains, not wages.

Even the average household can contribute, says the Fed

For those who aren’t convinced, consider a recent Federal Reserve study. Atlantic writes that “the average American household aged 65 to 74 has assets worth more than $1 million.” Factor in illness and increased medical care after that age window and the figure gets cut approximately in half. In other words, it falls below the estate tax threshold of $1 million. If there were a tax on Social Security – which sent out $682 billion in checks in 2009 – America would be that much closer to closing the deficit. There would have to be sufficient incentive to induce the heirs of the deceased to return their Baby Boomer parents’ unused Social Security, however, or the estate holder would spend it down before death. Which could come sooner rather than later if health care rationing were to become the norm, as Atlantic suggests.

While these ideas are decidedly unpopular in the current political climate, Atlantic suggests that they would pay down the national debt. It would be a gift of great magnitude from Baby Boomers to future generations of Americans.

Sources:

Atlantic Magazine

U.S. National Debt Clock

Borrow your way to wealth!

Cut my Social Security? Does that mean the poor house – or the glue factory? (Photo Credit: CC BY/Mick Rogers/Whizzer's Place)

According to a recent poll conducted by research firm GfK Roper and funded by AARP, Americans largely disapprove of cutting Social Security in order to reduce the national deficit. The Huffington Post reports that polls results show that 85 percent of adults are against cutting Social Security. A large sample (72 percent) “strongly opposes” such action.

‘Me first,’ say Social Security recipients

For a 75-year-old Social Security system that has received a great deal of criticism, such support may seem surprising. However, considering that AARP funded the poll and many AARP members are or are about to begin collecting Social Security benefits, perhaps it all makes sense. Another interesting related figure to surface from the poll is that 57 percent of American adults younger than 50 claimed they’d be willing to pay higher payroll taxes to ensure that they’ll have Social Security to collect after they retire. While a tremendous national deficit will certainly affect future generations for decades to come, the grim reality is that the sense of entitlement commonly associated with the “Baby Boomer” generation makes their refusal to cut Social Security less than surprising.

Raiding the trust fund

The Obama administration is currently looking into what should be done with Social Security, as the insurance program clearly is not sustainable in its current form. Many fear that their shrinking nest eggs will be taken away. Current tax levels aren’t enough to maintain into the system, and privatization may help younger workers, but not the scores of Baby Boomers who need the money now.

Two-thirds of Americans believe Social Security cuts would leave them destitute

While two out of three Americans fear the direct effect that cutting Social Security would have on their budgets in the golden years, a whopping 80 percent are wary of indirect financial stress such action would cause families of fixed-income retirees. Clichéd old fears of a “poor house” or “debtors’ prison” rear their ugly heads, giving way to hysteria. However, nearly 80 percent of “the sky is falling” types don’t even know – according to the poll – that if the Social Security trust fund is in fact drained, they’ll still receive benefits, just at a slightly lower level.

Sources:

AARP survey

Cato Institute

Huffington Post

Social Security Online

Milton Friedman on the Social Security myth: