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Social Security 101: Surviving Insolvency

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Social Security 101: Surviving Insolvency

It has emerged from the battle of left and right wing parties that social security is under threat.

Speculated by many, the program may be unsustainable by the year 2034, which is 19 years from now.

How bad is the current state of social security?

William Baldwin, contributor from Forbes said:

“Social Security is doomed; it has more money going out in benefits than from what’s coming in with payroll taxes. The US Treasury is trying to cover costs by collecting income tax, printing money, and borrowing.”

Currently, $714 billion is going out in benefits and overheads, with payroll taxes only bringing in $646 billion.

This short of inflow is the predicted cash flow, taking the budget into account from 2010.

social security cash flow

Cash flow graph analysis:

This data shows the clear nosedive in funds, as it meets negative figures by 2015.

Social Security has been in the red for a year, and it’s bound to get messy for those who survive on benefits.

A trust fund was initially set up, leaving aside a $2.7 billion, but it has recently been discovered that the fund doesn’t exist.

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The consequence of social security going bust

A Social Security bust means a risk to the social security payouts, and everybody’s payouts will stop – as well as vital public services facing closure.

The short-term

Benefits won’t be axed immediately, but the insolvency does mean major overhauls will be made to the Social Security Administration – particularly in the areas of benefit eligibility and payroll taxes.

Many people have resorted to drawing benefits out early, with some as young as 62.

This is because the majority are afraid of Congress making cuts, or stopping payouts.

What happened to Social Security’s trust fund?

Unlike a standard trust fund where savings are used to finance capital assets (services, businesses, etc.), the Fed instead made investments into their bonds.

If we take an example:

A fish stall holder puts away $30 a week in savings, but when his fishermen stop catching fish, he then starts using emergency funds and replaces the value with a bit of paper which says IOU – retirement.

If you are using savings to patch up the profit loss, then it’s never good news in the long term.

Eventually, this way of thinking would ultimately blitz his business, especially if the money put aside is no longer there to help.

How about the income side of social security?

Theoretically, the bond interest and a portion of income tax collections should be creating the payouts.

The following is a graph showing the growing gap between outgoings and revenues:

P1.2-1

Also note:

There have been attempts to boost tax returns.

One example of this is the quantity of tax disclosure has gone up to 85%, from only used to being 50% in the good old days.

The population boom danger

The population boom certainly doesn’t help matters, especially with all the baby boomers now planning retirement.

The mass retirement is probably a foreseen issue as for the massive births during the baby boom years.

Let’s have a look at the population growth in the USA from 1961 – 1985:

P1.3

Graph Analysis

  • Not only is social security experiencing lower income, but also the after effects of the big baby boomer spike now all coming through to retirement.
  • There just doesn’t seem to be any hope, unless the agency undergoes drastic measures to change their methods of business, looking at the figures.
  • Future outlook:
  • If they do not do anything soon, then its predicted only 75% will receive their promised benefits and the trust will be thoroughly exhausted.
  • Ideas on ways that Congress could rebalance outflow and income:

The following would seem like a shrewd move by the government, however given the rate at which the population is growing they become absolutely imperative:

  • Make cuts to cost of living adjustment by limiting damage to those on higher income or a legislator could play around with the formula.
  • Raise payroll tax; a bigger contribution would potentially give a two-point boost on closing up revenue s
  • Put up the retirement age; now being 66, if it went up to 69 then this would cut benefits by 10%.
  • As Chris Christie proposition, if you reduce social security payments to retirement incomes above $80,000 (and completely stopping if over the $200,000 bracket), then less money would be wasted on those who don’t need it.
  • Raise income tax from 85% to 100% on the maximum fraction benefits.

 

Is Congress likely to take action?

The first five bullet points are most likely to be put into movement in a diluted combination, while overall it is unlikely that the rich will be the target.

What can you do?

Find out how much your social security benefits are worth.

There’s even an online calculator available, which will apply all the formulas you need.

It can calculate the following:

  • Your benefit streams of income.
  • Any discounted time off you take.
  • Your health and mortality.

What you should not do:

It would be a big mistake now to start claiming early, even those doing it now, could be making a big mistake by messing up their financial future.

What you can do:

Instead, focus on your career, as the benefit formula only counts 35 of your highest earning years – go 45 years and then quit at 62 (early retirement).

You do have the risk of payroll taxes going up, so that’s why it’s a good idea to start planning for early retirement.

You should consider going Roth IRA:

  • IRA stands for Individual Retirement Arrangement
  • This IRA is a type of retirement plan, subject to US law, which offers a tax deduction to savings under certain conditions.
  • It is significantly different to other plans, as the tax break comes from withdrawal rather than on the amount saved.
  • The advantages of a Roth IRA:
  • You can withdraw money which is a penalty and tax-free after five years but is subject to qualifying terms and conditions.
  • If you make the maximum $10,000 from earnings, then withdrawals can also qualify if the Roth IRA owner is using the savings to purchase the primary residence (also by the Roth IRA owner’s immediate family, descendants, and ancestors – if they haven’t brought a home in 24 months).
  • You can still make contributions to a Roth IRA, even if the holder has any other plans in place – like the 401(k) plan (do note that other retirement plans may not be tax deductible).
  • In the event of death for the retirement plan holder, then his/her spouse will inherit the Roth IRA trust, and will merge if they own a separate account.
  • They have higher limits to contribution (in comparison to standard IRAs); this is because the post-tax contribution is a larger equivalent to a bigger pre-tax contribution from any other IRA plans – the tax deduction will give you higher returns from your savings.
  • The majority of employer funds tend to be more similar to the standard IRA plans, rather than Roth. Ultimately, you’ll diversify tax risk and gain higher returns for your pension pot.
  • Large estates can also have taxes reduced.
  • However, there are some disadvantages to a Roth IRA:
  • You can’t use the funds as collateral towards any loans, financial leverage or any cash management tools used for investment.
  • Qualifying for a Roth will be determined by your income limit, whereas the standard IRAs do not have any income limits.
  • While withdrawals are subsidized in this unique plan, contributions to Roth are not subject to tax deductions – so is only beneficial for after retirement.
  • It doesn’t reduce the taxpayer’s adjusted gross income (AGI), in comparison to other retirement plans where AGI can be reduced (this can benefit for minimizing taxable income) – other perks that are missed are a disqualification for deductions and tax credits. Other lost subsidies include reducing student loans, child tax credit, and earned income credit.
  • The contribution set at the current taxpayer’s income tax rate – it’s the norm for the majority in retirement to see their income fall, which also downgrades the retiree’s tax bracket. The reduction of the bracket can certainly put some risk into your retirement investment (this may also be likely if Congress lower income tax rates before the retirement age). So the more traditional plan would otherwise benefit from providing immediate tax breaks.
  • If a taxpayer pays state income taxes, while also paying into a Roth IRA, then they’ll have to pay the state income tax towards the contributions in the same year. But if the taxpayer retires on a lower income tax rate (or on no income taxes), then the opportunity is lost to avoid paying state income taxes – an advantage offered by the traditional IRA pension plans.

Conclusion

There are always pros and cons for doing something, so whether you go the Roth IRA route or not will depend on your personal circumstance. However, forming a private pension plan and being less reliant on the state may be thanked by your future self – especially with social security facing much uncertainty.

There are many methods for taking control of your financial future, for example, downloading an online calculator like My Money Platform.

Not only can they accurately work out your retirement age and how much you can earn, but also increase saving contributions by scrutinizing your budget.

Taking control of your finances now will offer you a much brighter retirement, where you can enjoy life and spend more time with family and friends.

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GOP, White House Reach ‘Fundamental Agreement’ On Next Stimulus Bill

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GOP, White House Reach ‘Fundamental Agreement’ On Next Stimulus Bill

Senate Republicans announced last night that they have “reached a fundamental agreement” with the White House on the best path to move forward for the next stimulus bill.

A small group of GOP Senators met with Treasury Secretary Steve Mnuchin and White House chief of staff Mark Meadows for a third time this week. The GOP and the White House are “completely on the same page,” as a result. They also are “in good shape” to move the relief bill forward.

This positive development stands in contrast to reports that discussions within the GOP had broken down. Some say it’s broken to the point that Sen. Ted Cruz asked, “What the hell are we doing?”

Senate Majority Leader Mitch McConnell has recently indicated that he doesn’t expect the new bill to include a payroll tax cut, and it remains to be seen if that will be removed to gain bipartisan support.

“There are some differences of opinion on the question of the payroll tax cut and whether that’s the best way to go. And so we’re still in discussion with the administration on that,” McConnell added.

The GOP is expected to release their plan today, but it’s now “a handful of bills now instead of just one bill,” according to Roy Blunt, the chair of the Rules Committee.

He added, “So we’ll have one appropriations bill, we’ll have several authorization bills that explain in more detail how that appropriated money will be spent, and obviously there will be a bill that will talk about any money that is distributed in direct payments or any other way.”

Here’s what is expected to be included in the proposals:

Testing

The bill will include $16 billion in new funding for testing, to add to $9 billion in previously appropriated funds. The combination of funds is a compromise between the White House and Senate Republicans. The former desires a lower funding amount and the latter wants $25 billion. The funding will be focused on testing in schools, daycare centers, nursing homes, and senior centers.

Schools

Republican have agreed to $70 billion in funding for K-12 education for all schools on a per capita basis. Half of the money will go to covering costs for schools that have announced plans to reopen.

$30 billion in funding would go to colleges and universities whether or not they reopen this fall.

Republicans are willing to spend $105 billion so that schools can “safely reopen,” McConnell said earlier this week. Democrats originally asked for $100 billion. However, they are now asking for more than $400 billion in school funding.

“We’ve agreed on the school front on ways to get people back to school and encourage them to go back to … school, as much as possible,” Blunt said.

Stimulus checks

Treasury Secretary Mnuchin told reporters that there is an agreement in place regarding stimulus checks. He says it is to provide Americans with another round of direct payments. However, the final amount hasn’t been determined. He added, “I’m not going to get into specifics right now, but there is an agreement.”

Unemployment insurance and payroll tax cut

There appears to be no short-term extension of the enhanced unemployment benefits in the next bill. This comes despite reports earlier this week that some Republicans were open to the idea.

“We’re really looking at trying to make sure that we have a comprehensive bill that deals with the issues,” chief-of-staff Meadows told NBC News in an interview. “Any short-term extensions would defy the history of Congress, which would indicate that it would just be met with another short-term extension.”

There has also been no agreement on a payroll tax cut, a top priority for President Trump.

“We really are not in a position to talk any specifics,” Meadows said, adding “We’re going let Leader McConnell talk about that after he actually has a more thorough conversation with his senators.”

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As Benefits Expire, Millions Of Americans Facing Financial Hardship

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As Benefits Expire, Millions Of Americans Facing Financial Hardship

Congress has started to work on the next stimulus bill, which Treasury Secretary Steve Mnuchin said will “start” at $1 trillion. However, many of the current benefits from the CARES Act will expire at the end of the month.

That could create a significant economic disruption for millions of Americans as unemployment benefits expire. It will also cause payments on student loans to be no longer deferred. Additionally, evictions and mortgage foreclosures will resume.

Impact on Millions of Americans

Half of the American households reporting that they have lost income during the coronavirus pandemic. Also, unemployment rates still above 10%. With this, the sunsetting of the enhanced unemployment benefits at the end of the month will have a significant impact. It will greatly affect nearly 25 million Americans who are receiving the benefits.

“If policymakers don’t act this week to extend the increased benefits, they will expire while unemployed workers and the economy need substantial support,” said Center on Budget and Policy Priorities chief economist Chad Stone.

Without the enhanced Federal unemployment benefits, those 25 million Americans will only have their state unemployment benefits to rely on. In some states, like Oklahoma, that’s only $100 per week.

“These benefits are wholly insufficient,” said Michele Evermore, senior policy analyst for the National Employment Law Project.

“Losing the $600 will mean people will put themselves in physical jeopardy by showing up to unsafe jobs to keep themselves afloat,” she then added. “For the people who can’t find jobs, they’re going to lose their homes. They’re not going to be able to afford food, and they’re going to take on debt that will stay with them for years.”

Possible Solutions

Many Republicans, including President Trump, don’t want the enhanced benefits extended. They feel it is a deterrent to getting Americans back to work.

Treasury Secretary Steve Mnuchin is in favor of another stimulus check for every American instead. He believes that people can use the money immediately. He also mentions, “we can get that into hard-working Americans’ bank accounts very, very quickly.”

For the nearly 45 million Americans who are paying back student loans, the payment pause ends in September, putting additional financial stress on those who must resume payments.

“If borrowers are forced to resume repaying their student loans on Oct. 1, delinquencies and defaults will skyrocket,” said Mark Kantrowitz, nationally-recognized expert on student financial aid, scholarships and student loans. “This year’s college graduates are entering the worst job market ever,” he also said.

On Eviction Proceedings

In the meantime, 30 states are now allowing eviction proceedings to resume, and the eviction moratorium for properties backed by a federal mortgage or receiving government-assisted housing ends on July 25.

This means up to 40 million Americans could lose their homes in the next few months, said Emily Benfer, a housing law expert.

“This data shows us that all the terms people have been using to describe what’s coming – ‘cliff’, ‘tsunami’, ‘avalanche’ and so on – might actually be an understatement,” said John Pollock, coordinator of the National Coalition for a Civil Right to Counsel.

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Biden Is Latest Dem to Support Ridiculous Free Housing Proposal

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Biden Is Latest Dem to Support Ridiculous Free Housing Proposal

Presidential candidate Joe Biden is the latest Democrat to throw their support behind the ridiculous idea that housing should be free

During an appearance yesterday, Biden said he agrees with “forgiving” both mortgage and rent payments. He says this as the country struggles with the coronavirus pandemic and 38 million Americans are without a job.

“There should be rent forgiveness and there should be mortgage forgiveness now in the middle of this crisis. Not paid later, forgiveness. It’s critically important to people who are in the lower-income strata.” said Biden

Tara Raghuveer, housing campaign director at People’s Action, a political network devoted to grassroots organizing, aired her opinion. She said, “The tenant is the most vulnerable person in the economy right now.”

She added, “The alternative to not canceling the rent is complete bottoming out of the market. And tens of millions of people literally never financially recovering from this moment.”

Calls for Housing Relief

Biden’s call for rent and mortgage relief echoes efforts by Minnesota Rep. Ilhan Omar. Omar introduced legislation that would bar landlords and lenders from collecting monthly payments. It would also impose late fees “through the duration of the pandemic.”

Under Omar’s plan, renters and mortgage borrowers who skip payments wouldn’t need to pay back anything once the rent and mortgage forgiveness policy ended. And any lender or landlord who violated the plan would face penalties.

Correctly, housing industry experts point out that allowing renters to skip payments also needs to consider the consequences of the landlords not being able to pay their own mortgages on the property.

“If multifamily landlords, particularly the small mom and pop landlords who own just maybe one to four units can’t make their mortgage payments and can’t stay in business, those are affordable units that are going to be lost to the private market,” said Flora Arabo, the national senior director of state and local policy at Enterprise Community Partners.

“Rent forgiveness without rental subsidies could be pretty catastrophic for tenants,” Arabo said.

Omar’s plan addresses these concerns, supporters say. It does so because it creates a fund for landlords and lenders so that they could recoup any losses.

Not surprisingly, Raghuveer’s organization, People’s Action, worked with Omar in drafting the bill. The organization threw in more stipulations for landlords to collect those funds. These include providing information on their revenues, refraining from discrimination based on the source of income, and other tenant protections.

Biden’s Impact

Biden’s support for the rent and mortgage forgiveness plans doesn’t really mean much. However, the biggest problem with these free housing proposals is that they demonize landlords. They let the tenants immediately skip payments, but force the landlords to deal with bureaucracy and red tape to receive relief funds.

According to the Census Bureau, individual investors own nearly 75% of our nation’s rental units, not massive corporations. Those mom and pop landlords likely aren’t any more sophisticated than their tenants. They would also find themselves in the same dire financial situation should they lose the ability to collect rent.

Bob Pinnegar, president and CEO of the National Apartment Association, said in a recent interview, “Rent cancellation proposals do not adequately address the problem and fail to recognize that many property owners are in the same dire situation as their residents — substantial loss of income amid ongoing financial obligations.”

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