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Last week, I talked about mounting problems for state and city pension funds … along with the possibility that some of them could ultimately go belly up.
And while a lot of folks continue to say such a thing could never happen, I have yet to hear a good explanation for where the needed money is going to come from.
In Illinois they’ve already jacked personal income taxes up 67 percent this year alone!
How much more money can state and local governments extract from their residents before the levee breaks? Before bondholders run for the hills? Before citizens rebel? And before businesses move elsewhere, heaping on more economic pain in the process?
Moreover, as I concluded last week, Uncle Sam is certainly not going to bail these funds out.
If anything, he’s the poster boy for failing retirement systems. Consider the latest news we heard just this past week …
The Social Security Trust Fund Has Now
Entered a PERMANENT Period of Deficits!
That’s the conclusion reached by the Congressional Budget Office’s latest report on the U.S. budget.
As you might remember, last year marked the system’s first annual deficit since the 1980s. But even then, Social Security’s trustees were still claiming it would only be a temporary slip … and that a permanent state of deficits would begin in 2016 at the earliest.
Apparently that’s no longer the case!
According to the CBO:
- Social Security will collect $45 billion less than it pays out this year …
- It will come up $547 billion short from 2012 through 2021 …
- Plus, the disability portion of the program will run out of money within six years!
As I’ve explained before, there are number of reasons that Social Security is falling apart, including continued expansion of coverage (even to folks who don’t contribute) … the latest recession … along with simple demographic trends such as an aging population and increasing life expectancies. And none of this has been helped by Washington’s recent decision to let all employees contribute two percentage points LESS into the system this year!
Yes, I’m personally grateful for that reprieve. But anyone who accepts lawmakers’ promise to make up for the related shortfall is out of their mind!
For starters, the CBO is projecting an overall deficit of $1.5 trillion for 2011 — so it’s not like Uncle Sam is sitting around with a stack of cash.
On top of that, these are the very same politicians who consistently borrowed aggressively from the Social Security fund as it ran surpluses over the last thirty years.
This situation is tantamount to asking the fox to REPLENISH the hen house!
If Anything, Washington Is Now Trying to
Kick the Can FURTHER Down the Line …
I fully expected this year to be the turning point when Washington decided to tackle our nation’s current retirement mess.
And make no mistake — big changes ARE coming at some point. There’s simply no way around it.
But it sounds like President Obama is now content to drag his feet on the issue and wait until after a re-election attempt.
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During his State of the Union address, all he said was that we need “a bipartisan solution to strengthen Social Security for future generations.”
Gee, really?
The bipartisan panel that Obama previously put together has already suggested raising the retirement age to 69 among other things. Yet there was no mention of any of this during his speech — probably because recent polls suggest that the majority of Americans don’t support such a move.
Obviously, there are NOT going to be easy fixes. But like any problem … the sooner we get serious about addressing it, the better.
The CBO’s latest report is like a blaring horn, reminding us that our nation’s biggest pension woes lie ahead … and are bearing down on us at faster and faster pace.
Will politicians continue playing chicken all the way until the final collision?
I sure hope not. But I continue to recommend planning as if they will — especially by building a diversified income portfolio of your own.
As to where to find the best sources for income, let’s take a look at the current menu choices:
A. Near-zero returns from money market funds and CDs …
B. 3.3 percent a year from a 10-year U.S. Treasury … with no hope of future interest rate increases and exposure to Washington’s fiscal mess …
C. Maybe 4 percent a year from an “AA rated” 10-year municipal bond … with little transparency on the issuer’s financial health and substantial downside risk from here …
OR
D. As much or MORE than any of these other choices from cash-rich companies with long histories of continuously increasing shareholder payments
I think the choice is pretty simple right now, which is why I continue adding dividend stocks to my own father’s income portfolio, and why I recommend you consider them as well.
There’s no doubt that any income portfolio should be well diversified, and there will be plenty of buying opportunities in other categories at some point.
But today, while Washington — along with many states and cities are going broke fast — U.S. corporations have never had more cash on hand …
And as an income investor, you need to go where the money is!
Sincerely,
Nilus
{ 7 comments }
Great article Nilus. You’ve laid out the big picture magnificently and a strong investment theme emerges. The market will demand good quality dividend paying companies as a source of income for retirees. So look for solid companies with good growth prospects an expanding dividend. These companies will probably demand a premium in the future, so by choosing wisely now, an investor can earn a good (and expanding) income while participating in significant capital gains in the future.
Nilus, I am a member of your “father’s income portfolio group” and have enjoyed your philosophy of investing over the past few years as being among the most sensible, and least frantic.
But here I disagree with you. The Federal Social Security program has been the most successful government program ever, and was a genius idea. It is not in trouble ( unlike Medicaid and Medicare, which are). The simple and FAIR fix is to continue raising the income limit at which deductions apply, currently, I believe, around $105,000. As so many agree, the wealth and income inequality in the U.S. and the disappearance of the middle class, like me, is one of the biggest barriers to a healthy future U.S. economy. Many of the wealthiest people, especially the Big Bankers do not realize how much corporate welfare they have run off with at the expense of the Middle Class. It is wrong to suggest Social Security is in any trouble.It can be fixed straight-forwardly by raising the income limit.
But Nilus, all your advice of how each of us can save and invest beyond Social Security is right on! I love your calm, reasoned , non-gambling approach. You are a calm breeze in a frantic and risky investment world..Jim A
Why don’t they just remove the Social Security cap at $100k? People who make over $100k can afford to pay for Social Security just like everyone else, and Social Security would be able to pay its bills without raising the retirement age.
Nilus, the report below presents a less negative outlook for Social Security.
How do you view the article’s credibility? I’m very concerned that those in Washington have initiated a propaganda campaign to attack the solvency of Social Security to gain public acceptance of privatizing the program. Why? Because privatizing the program might allow canceling the $2.5 trillion debt the government owes the S.S. Trust Fund. That, in turn, would cancel the debt’s interest payments the government currently pays the trust fund which would achieve a big portion of the spending cuts Republicans are intent on making. I estimate such annual spending for S.S. interest payments to be about $ 125 billion.
News from EPI: CBO Budget Report Shows Little Change to Social Security Outlook
January 27, 2011
For Immediate Release: Thursday, January 27, 2011
Contact: Phoebe Silag or Karen Conner, news@epi.org 202-775-8810
By EPI economist Monique Morrissey
Yesterday’s Congressional Budget Office budget report showed that the weak economy continues to be a drag on Social Security’s short-term finances as payroll tax receipts lag pre-recession projections. Outlays are also higher than anticipated before the downturn, as Social Security has helped cushion the blow for older workers who have lost their jobs. This will have little impact on Social Security’s long-term finances, however, in part because workers who take early retirement receive reduced benefits.
Social Security is still projected to run an $868 billion surplus over the next decade, building up a trust fund sufficient to last through the peak baby boomer retirement years.
Nevertheless, gloomy news reports—in particular an Associated Press story by Stephen Ohlemacher—show that when it comes to Social Security, no news is bad news. The AP story claims that “Social Security will run at a deficit this year and keep on running in the red until its trust funds are drained by about 2037.†The story misrepresents the trust fund’s solvency by excluding interest earnings, a major source of revenue for Social Security. The article also fails to mention that even if nothing is done to shore up the system’s finances, current tax receipts will be sufficient to cover most benefits in 2037, which will still be higher in inflation-adjusted terms than benefits are today. Social Security is not in crisis.
A paper released yesterday by EPI looks at Social Security’s long-term finances, concluding that the biggest cause of Social Security’s projected long-term shortfall is not rising life expectancy or the baby boomer retirement, but rather stagnant wages and growing inequality.
During the 1960’s, it became very unfashonable to have children. You may or may not be old enough to remember the book “the Population Bomb”. There was talk about how many schools would have to be closed, etc. Anyway, the birthrate plumeted. SS made reference to the fact that when sanity returned that there would be a dip in payees and this has happened and like was said in the “60s”-this problem would fix itself and it will. The percentage of people over 65 is not changing much. Our politicians simply became very free with the money because it was there to be spent and that is a temptation no politician can resist. Big surpluses! As to people living longer-not so! In fact a study done in the 1990’s was refrenced on a business program. The study took records of people who had reached 60 in 1890 and compared them to people who had reached 60 in 1980. Life expectancy was only a little over a year and a half longer. Do NOTconfuse median life expectancy with longevity because they are not the same thing.
The information and conclusions in Mr. Mattive’s article border on being deceptive. An increase in payroll deductions years ago has dealt with the baby boomer “bulge”. Taxpayers have bought and paid for a surplus to carry Social Security through the boomer years. The government has been prudent in this matter and now it is time for those who paid for the surplus to collect their retirement funds. Of course, the opportunists are circling and would love to redirect that surplus. That is why the “experts” recomend raising the retirement age to 69. They carefully edit information, raise false alarms about Social Security’s solvency, conflate it with the very real Medicare and Federal deficits and what to collect that redirected money. The diabetes epidemic building in the population will only make that surplus larger. The looting of the middle class continues.
Why doesn’t Congress put back the Social Secutity Funds they took from us so the funds are back to where they Belong?