Social (in)Security

This week Tim shares his perspective on the current economic state, Bennett digs into the Social Security shortfall, Jon provides several ways to control your finances despite the current mayhem.

01. Mugs & Money next week!

From Nate Hoskin, Founder & Lead Advisor

On Sunday, April 2, we are bringing a group of motivated investors together to make the most of our 401(k)s. In 45 minutes we will cover:

1. How employers match your contributions

2. When to elect Roth vs Traditional contributions

3. How to use a 401(k) for your business and side hustles

4. If/when to take a loan from your 401(k)

5. How to take money out of a 401(k) for an early retirement

6. How to use the Mega-Backdoor Roth to contribute $66,000 to a 401(k) per year

As usual, we have a topic in mind but will answer any question you may have. If you want to know our take on the current economy, the future of markets, or careers in finance, we are happy to answer.

Save Your Seat

02. Things will get worse before they get better.

From Tim Frenzel, Head of Data Analytics & Research

The FOMC meeting had some interesting takeaways for us as investors. It turns out that the FOMC's economic forecast is weaker than the baseline forecast, with slower GDP growth of 1.2% in 2023 and an unemployment rate of 3.6%.

Hence, we can expect that the stress coming from small and midsize banks will most likely result in a tightening of lending standards and could impose a 0.25-0.5% drag on GDP growth.

Powell has also made it clear that price stability is a top priority, even if it means slower growth and softer labor market conditions. This might bring some pain to households and businesses, but it seems necessary to reduce inflation. This could also have a negative effect on the US dollar, as tighter credit conditions tend to deter portfolio flows and weaken the currency.

Gold, on the other side, has rallied on the back of banking stress (+10% in 2 weeks!), against the US 2-year yields recording historic declines. The downside in the case of a soft landing or further Fed hawkishness is significantly less than gold's upside in the case of a growth shock that pushes the economy into a recession.

Let's also not forget about the ECB, which has explicitly targeted credit conditions over much of the last decade. The easier financing conditions have prompted portfolio inflows into the Eurozone, while credit-focused ECB policies have operated mainly through the confidence channel. This may be a useful example for the Fed as it navigates the current economic landscape.

03. What’s the deal with Social Security?

From Bennett Fees, Economic Research Associate

OASDI or The Old-Age, Survivors, and Disability Insurance program, is made up of two parts: the Old-Age and Survivors Insurance (OASI) program and the Disability Insurance (DI) program. These two funds are separated by law but can be tallied together to map out the projected soundness of Social Security funding. Since 2021, Social Security’s total cost has been higher than its income and since 2010, costs have been higher than non-interest income. According to 2022 projections, Social Security reserves are on track to become depleted in 2035 at which point revenues are only sufficient to pay for 77% of scheduled benefits under OASI, while DI is sound for at least 75 years. When hypothetically summed together, 80% of scheduled benefits are available starting in 2035, as seen in this graph.

The source of this income primarily comes from payroll taxes and was chosen for primarily political rather than economic reasons. FDR famously said that payroll taxes were chosen to make people believe they earned their benefits, making it impossible for any “damn politician can ever scrap my social security program”. In reality, this pre-paying mentality is an illusion since Social Security is mainly paid concurrently with the present generation paying for the previous generation’s retirement.

So what went wrong? While policymakers accurately foresaw the influx of retirees; unforeseen real wage stagnation sapped payroll tax income, and the increased medical costs relative to the medicare component of the payroll tax, designed only for hospital costs, help explain our problem. In any case, Gen Z is now paying for Baby Boomers’ retirement.

So what happens after 2034? 

Policymakers from both parties recognize that something must be done. If the scheduled benefits were to remain constant, payroll taxes would have to increase from a rate of 3.24% to 15.64% starting in January 2022! Such a policy is unlikely, but other alternatives are available.

Bill Ackman, as recently summarized by Nate, has floated the idea of giving babies $7,000 but let's look at some other options. One is to raise the retirement age. Partial benefits, which people are eligible for at 62, could possibly change. That said, a move in the full retirement age is unlikely since full benefits have already been pushed out to age 67.

Another option would broaden the source of income that pays for Social Security beyond payroll taxes. Since payroll tax changes are very noticeable to wage earners, this option is the least likely to result in public outcry. In addition or in combination with this, the annual taxable limit, known as the contribution and benefit base, could also be moved beyond the current $160,200 threshold at which contributions are constant at 6.2%. This change would keep the focus on payroll taxes, but increase the load for those with higher incomes.

Finally, an option that avoids both an overhaul and increasing taxes would be to change how the Social Security Trust Fund is invested. All SS money is currently invested in US Treasuries. This means the inflation-adjusted return for the last 20 years has been less than 1% per year. In that time, the S&P 500 returned 7.6% adjusted for inflation.

Regardless, Social Security is an extremely touchy subject and any changes will have extreme economic and political ramifications for everyone involved.

04. Focus on what you can control

From Jon Scott, Lead Author

It probably seems like there’s a lot going on right now. From the collapse or rescue of some of the world’s largest banks to the layoffs of more than 100,000 workers in tech alone, economic conditions do not appear to be particularly rosy. However, in times like these the most important step is to control what you are able to control. This means your saving and spending.

If you feel your earnings are under threat by the possibility of an economic downturn, now more than ever is the time to stash away as much money as possible. For security, make sure to either start or increase your emergency fund savings to cover 6-9 months of expenses. You can find more information about Emergencies Funds on our Knowledge Base. With inflation still three times higher than the Fed’s target, it still makes sense to reduce spending on high inflationary items as much as possible.

Finally, remember to save for retirement. The ultimate outcome of spending decades of your life preparing for work via school then spending the next decades working is that at some point you will no longer need to work–or at least be able to take up work that brings you happiness (however, if you’re working and already there, good for you!). This week on the Knowledge Base Jessica Dosseh explains the Solo 401K, which is a retirement account that solo business owners can set-up to save more than $60,000 per year!

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“Social Security is a promise we cannot and must not break.”

- Bernie Sanders

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