Tag: inflation

The day the Social Security funding crisis became inevitable

Mary Pat Campbell

Link: https://thehill.com/opinion/finance/4258578-the-day-the-social-security-funding-crisis-became-inevitable/

Excerpt:

What wasn’t inevitable was a funding crisis. In fact, from 1950 to 1971, Congress was able to increase benefits nine times. That changed in 1977 when Social Security Amendments responded to a technical error in 1972 legislation which caused retirement benefits to skyrocket and threatened insolvency by 1979. 

The 1977 law sought to slow the rapid growth in benefits for future retirees. At the time, Congress considered two options. The first, recommended by an expert commission headed by Harvard economist William Hsiao, would link the growth of the initial benefits paid to new retirees to the rate of inflation. The second approach, favored by the Carter administration, would index initial benefits to national average wage growth. 

While differing only in seemingly technical ways, the two approaches had dramatically different effects on Social Security’s long-term finances. Simply put, the Hsiao Commission’s recommendation was fully sustainable under then-legislated tax rates. It would allow, as the commission wrote, “future generations to decide what benefit increases are appropriate and what tax rates to finance them are acceptable.” 

In contrast, the alternative approach of “wage-indexing” initial benefits could not be sustained without substantially higher future taxes. 

The Hsiao Commission bluntly criticized that policy, saying that it “gravely doubts the fairness and wisdom of now promising benefits at such a level that we must commit our sons and daughters to a higher tax rate than we ourselves are willing to pay.” Congress, nevertheless, opted for wage indexing.   

 

Author(s): ANDREW G. BIGGS, JOHN F. COGAN AND DANIEL HEIL

Publication Date: 17 Oct 2023

Publication Site: The Hill

Social Security’s 2024 COLA, While Modest, Could Still Trigger Higher Taxes

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2023/10/13/social-securitys-2024-cola-while-modest-could-still-trigger-higher-taxes/

Excerpt:

And, as Mary Johnson, the league’s Social Security and Medicare policy analyst, highlighted in a call with ThinkAdvisor, there is also widespread concern about what the relatively modest 2024 COLA could mean for the taxes seniors pay on their federal government benefits.

As many as 26% of survey participants who have received Social Security for more than three years reported paying taxes on a portion of their benefits for the first time during the 2023 tax season — i.e., for tax year 2022.

“Because Social Security recipients received an even higher COLA of 8.7% in 2023, we expect more beneficiaries to become liable for federal income taxes on their Social Security benefits for the first time in the upcoming 2024 tax season,” Johnson warned.

….

“Up to 85% of Social Security benefits can be taxable when income exceeds certain thresholds,” Johnson explains. “Unlike other parts of the federal income tax code, though, the income thresholds that subject Social Security benefits to taxation have never been adjusted for inflation.”

Author(s): John Manganaro

Publication Date: 13 Oct 2023

Publication Site: Think Advisor

Real Personal Spending Rises Twice as Much as Income in June

Mary Pat Campbell

Link:https://mishtalk.com/economics/real-personal-spending-rises-twice-as-much-as-income-in-june/

Graphic:

Excerpt:

Real (inflation-adjusted) consumer spending rose 0.4 percent in June. Real disposable income rose 0.2 percent.

….

Real PCE goods peaked in March of 2021. All of the growth in consumer spending for 27 months is due to an increase in demand for services.

Author(s): Mike Shedlock

Publication Date: 28 July 2023

Publication Site: Mish Talk

Many Pennsylvania state retirees say they can’t afford inflation on their stagnant pensions

Mary Pat Campbell

Link: https://www.spotlightpa.org/news/2023/07/pennsylvania-pension-public-school-state-worker-sers-psers-inflation-retirement/

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Excerpt:

Enrollees in Pennsylvania’s two public sector pension funds — the State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS) — haven’t seen a cost of living adjustment, or COLA, since 2004. Nearly 40 other states grant some sort of COLA to retirees.

Particularly hard hit by this lack of a COLA are the almost 69,000 former public school teachers, state government workers, and other public sector employees who retired before 2001, like McVay. On average, these retirees are in their early 80s.

They retired before the legislature increased pension benefits by 25%. The average pension for a SERS enrollee who retired before 2001 is under $15,000 annually, according to the system. That number for a 2022 retiree is more than $30,000, thanks to the increase as well as a rise in average salaries for workers.

There’s a similar gap for PSERS enrollees. A person who worked for 30 years and ended with a $30,000 salary would have a pension of $18,000 if they retired pre-2001, according to Chris Lilienthal, a spokesperson for the Pennsylvania State Education Association. Under the same circumstances, a person who retired post-2001 would have a pension of $22,500.

Author(s): DaniRae Renno

Publication Date: 27 July 2023

Publication Site: Spotlight PA

Despite CPI Surprise to the Downside, Higher for Longer Interest Rate Outlook Holds

Mary Pat Campbell

Link: https://mishtalk.com/economics/despite-cpi-surprise-to-the-downside-higher-for-longer-interest-rate-outlook-holds/

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Excerpt:

Two things on the Fed’s mind are the core rate of inflation (all items excluding food and energy) and rent. Both have proven stubborn.

Despite constant talk of falling rent prices please note that Rent of primary residence has gone up at least 0.4 percent, every month for 23 straight months!

The falling rent meme has been wrong for at least a full year.

Author(s): Mike Shedlock

Publication Date: 12 July 2023

Publication Site: Mish Talk

Biden Seeks to End Cheaper Obamacare Alternatives, Expect Another Supreme Court Smackdown

Mary Pat Campbell

Link: https://mishtalk.com/economics/biden-seeks-to-end-cheaper-obamacare-alternatives-expect-another-supreme-court-smackdown/

Excerpt:

Biden’s efforts to produce more inflation are nonstop, 24×7. His latest move is a set of regulations to force people into Obamacare despite the fact a District Court already ruled against his proposed regulations.

Biden Attempts to Make Healthcare Even More Expensive

To understand what Biden wants to do, and why the Supreme Court is likely to smack it down, we need to review a District Court ruling from 2020.

On July 24, 2020, CATO reported In a Win for Consumers, a Court Ruling Affirms the Legality of Short‐​Term Health Insurance Plans

….

Jam City, Dateline July 7, 2023

The Wall Street Journal comments on Biden’s Short-Sighted New Health Rule

Behold the President’s plan to limit short-term health insurance plans in order to jam more consumers into the heavily subsidized and regulated ObamaCare exchanges. The Health and Human Services, Labor and Treasury Departments on Friday proposed rules to roll back the Trump Administration’s expansion of short-term, limited-duration insurance (STLDI) plans. Since 2018 these plans have been available in 12-month increments, and consumers have been able to renew them for up to 36 months.

These plans are especially attractive to young people whose employers don’t provide coverage. Why would a healthy 26-year-old want to pay for maternity, pediatric and other services he probably won’t use in the near future?

The Inflation Reduction Act sweetened ObamaCare’s insurance premium tax credits that are tied to income. As a result, a 60-year-old making just above four times the poverty level has to pay only 8.5% of his income toward his insurance premium while the government picks up the rest. If premiums increase, government is on the hook for more.

Author(s): Mike Shedlock

Publication Date: 9 July 2023

Publication Site: Mish Talk

Adverse Effects of Automatic Cost‐​of‐​Living Adjustments to Entitlement and Other Payments

Mary Pat Campbell

Link: https://www.cato.org/policy-analysis/adverse-effects-automatic-cost-living-adjustments-entitlement-other-payments

Graphic:

Excerpt:

COLAs for Social Security’s OASDI have had an additional significant fiscal effect. Until recently, the payroll taxes paid for Social Security each year have usually exceeded the cost of benefits paid in that year. This balance was transferred to the general fund of the U.S. Treasury, which in turn issued special Treasury bonds to the Social Security Trust Fund to be redeemed later when taxes collected were less than the benefits paid. The fund balance reached $2.9 trillion at the end of 2020. Then in 2021, the Social Security Trust Fund had to redeem $56.3 billion of those bonds to pay OASDI benefits. Social Security actuaries have calculated that increasingly larger withdrawals will continue until the Trust Fund is fully depleted in early 2035.36 Under current law, once the Trust Fund balance is fully depleted, payments to beneficiaries must be reduced to the level supported by current Social Security taxes.

If Social Security COLAs had been calculated using the combination of C‑CPI‑U and PCEPI, then the Trust Fund balance in 2020 would have been $3.5 trillion, and full depletion of the Trust Fund would have been delayed two more years to 2037. If the price indexes had also been improved to minimize new‐​item bias (the best‐​practices index), the balance in 2020 would have been $4.4 trillion, and full depletion of the fund would have been delayed until 2039 (see Figure 1).

Author(s): John F. Early

Publication Date: 22 Jun 2023

Publication Site: Cato

The Inflationary Effects of Sectoral Reallocation

Mary Pat Campbell

Link: https://www.federalreserve.gov/econres/ifdp/the-inflationary-effects-of-sectoral-reallocation.htm

PDF: https://www.federalreserve.gov/econres/ifdp/files/ifdp1369.pdf

Citation:

Ferrante, Ferrante, Sebastian Graves and Matteo Iacoviello (2023). “The Inflationary Effects of Sectoral Reallocation,” International Finance Discussion Papers 1369. Washington: Board of Governors of the Federal Reserve System,
https://doi.org/10.17016/IFDP.2023.1369.

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Abstract:

The COVID-19 pandemic has led to an unprecedented shift of consumption from services to goods. We study this demand reallocation in a multi-sector model featuring sticky prices, input-output linkages, and labor reallocation costs. Reallocation costs hamper the increase in the supply of goods, causing inflationary pressures. These pressures are amplified by the fact that goods prices are more flexible than services prices. We estimate the model allowing for demand reallocation, sectoral productivity, and aggregate labor supply shocks. The demand reallocation shock explains a large portion of the rise in U.S. inflation in the aftermath of the pandemic.

Author(s): Francesco Ferrante, Sebastian Graves and Matteo Iacoviello

Publication Date: February 2023

Publication Site: Federal Reserve

CalPERS’ Refusal to Put Clearly Insolvent Long-Term Care Insurance Plan in Bankruptcy Increases Harm to Policyholders and Makes Board and Responsible Executives Liable

Mary Pat Campbell

Link: https://www.nakedcapitalism.com/2023/02/calpers-refusal-to-put-clearly-insolvent-long-term-care-insurance-plan-in-bankruptcy-increases-harm-to-policyholders-and-makes-board-and-responsible-executives-liable.html

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Excerpt:

The CalPERS long-term care fiasco continues, with the board and staff taking a course of action that increases harm to policyholders by continuing to bleed them rather than put the program in bankruptcy.

For those new to this train wreck, the public comment at the February 14 CalPERS board meeting by policy-holder and certified financial planner Lawrence Grossman provides an introduction. A key bit of background is that state legislation allowed CalPERS to jump on the long-term care insurance bandwagon in the 1990s. Most of these insurance plans have gotten into a world of hurt by underestimating the degree to which proper elder care would extend lifepsans of policy-holders and overestimating the lapse rate (lapsed policies mean the premiums paid by dropouts benefit the remaining policyholders). But CalPERS’ recklessness and incompetence were in a league of its own.

CalPERS not only considerably underpriced its policies compared to commercial competitors, but it made matters worse via giving CalPERS policyholders the options of lifetime benefits (as opposed to fixed dollar benefits) and inflation protection. Inflation protection would seem like an incredible promise for any long-term insurance scheme. Yet the policies were advertised as CalPERS policies, not those of a free-standing “CalPERS Long-Term Care Fund,” as in not backed by CalPERS or the state of California.

….

Four years later and things are going according to CalPERS’ abusive plan. Even though Judge Highberger clearly rejected CalPERS’ position that it can violate policy terms and raise premiums, CalPERS has continued to increase premiums because the court so far has issued only preliminary decisions. Note these increases are vastly in excess of those implemented by commercial carriers.

Author(s): Yves Smith

Publication Date: 15 Feb 2023

Publication Site: naked capitalism

The Fed Goes Underwater

Mary Pat Campbell

Link: https://www.city-journal.org/fed-goes-underwater

Excerpt:

Before new trillion-dollar federal spending bonanzas became a regular occurrence, the Federal Reserve’s announcement that it lost over $700 billion might have garnered a few headlines. Yet the loss met with silence. Few Americans have noticed the huge increase in both the scale and the scope of the central bank or the dangers that it poses to the American economy. As Fed-driven inflation becomes the Number One political issue in America, that will change.

The Fed’s losses owe to a shift in the way it does business. Before the 2008 financial meltdown, the central bank tried to control interest rates by buying and selling U.S. bonds. A few billion in purchases or sales could move the whole economy, and this meant that the Fed, which operates much like a normal bank, could keep a relatively small balance sheet of under $1 trillion.

Since the financial crisis, the Federal Reserve, like other developed-world central banks, has used a different playbook. It provides enough funds to satiate the entire banking world, and it seeks to adjust the economy by paying banks more or less interest to hold those funds. These payments keep private-sector interest rates from dropping too low. When it first undertook this “floor” experiment, the Fed’s balance sheet exploded to more than $4 trillion. After the Covid pandemic, it approached $9 trillion.

A larger balance sheet means greater risks. And the Fed has added to that risk by purchasing longer-duration assets. Pre–financial crisis, the Fed bought mainly short-term federal debt. Only about 10 percent of all the U.S. bonds owned by the central bank lasted longer than ten years. Now, that figure has risen to 25 percent.

Author(s): Judge Glock

Publication Date: Winter 2023

Publication Site: City Journal

Argentina’s Inflation Crisis

Mary Pat Campbell

Link: https://reason.com/2023/01/29/argentinas-inflation-crisis/

Excerpt:

Argentina is no stranger to economic turmoil, having defaulted on its national debt three times since 2001. Now the country is facing another bout of brutal inflation, with an annual inflation rate of 88 percent reported in October, up from 50 percent in January 2022.

Argentine photographer Irina Werning captured the frustration working Argentines feel in a photo series. “Inflation destroys savings, impedes planning, and discourages investment,” she wrote in her introduction.

In August, when the reported inflation rate hit 78.5 percent, Argentine workers held a mock funeral procession, complete with casket, to mourn the “death of wages.”

Author(s): Mike Riggs

Publication Date: February 2023

Publication Site: Reason

The Biden Bucks Blowout

Mary Pat Campbell

Link: https://www.city-journal.org/the-biden-bucks-blowout

Excerpt:

Not to worry: the Biden administration is coming to the rescue. The town of Palm Beach Gardens is using $2 million in federal money from President Biden’s $1.9 trillion American Rescue Plan Act (ARPA) to build a $16 million public course, with a two-story clubhouse and driving range that should help at least partially slake the new thirst for golf. The city’s project, one of several golf-course investments that the Biden legislation is funding, is entirely within the spirit of the “rescue” act, which devotes only about 9 percent of its money to public-health causes that fight the virus but allocates hundreds of billions of dollars to local governments and schools for the vague task of providing “support for a recovery” and funding “investments in infrastructure.” As one wag at a South Florida newspaper observed, “If this keeps up much longer, Palm Beach Gardens may get an equestrian center from it.”

Showering local governments with unprecedented federal dollars, ARPA is the last of several emergency packages, totaling more than $5 trillion, to come from Washington in response to the pandemic. Though termed a “rescue bill” to enhance its appeal, the Biden legislation was more of a stimulus, designed to stoke spending by the country’s tens of thousands of local governments to boost economic activity. Signed by the president in March 2021, even as the economy was recovering and tax revenues were rebounding far faster than most analysts had predicted, ARPA allows for wide discretion in how to spend “Biden Bucks.”

The federal money has turned pols into the proverbial kids in the candy shop. They’re using it to restart parades, fund street performers, upgrade high school weight rooms and sports fields, and build bike paths, golf courses, pickleball courts, and other “essential” infrastructure. Billions of dollars are going to illegal aliens. Cities are testing efforts to give low-income residents guaranteed money that supporters say will end poverty. Municipalities are moving to construct their own broadband networks, in competition with the private sector. It’s all part of a program whipped up so quickly that it included billions of dollars for municipal governments that don’t even exist.

To many local officials, ARPA’s allocations seem like free money. But it comes at a cost to the United States. The act’s funds haven’t been generated by taxes or other federal revenues. Instead, they’re financed by “printing” new money (something done mostly via electronic keystrokes these days)—massively expanding the dollars in circulation and thus intensifying our current inflation, the highest in decades. Aside from the pain that the upward spiral of costs is causing ordinary Americans, inflation is also raising the price that governments pay for essential services like police and fire protection, even as politicians rush to spend their one-time Biden Bucks on ephemeral projects and untested programs. With a Federal Reserve–induced recession, sparked by high interest rates to curb inflation, now a distinct possibility, Biden Bucks may soon be remembered as the spending blowout that preceded a local government budget bust-up.

Author(s): Steve Malanga

Publication Date: Autumn 2022

Publication Site: City Journal