Bob’s Journal for 5/9

Social Security Trust Fund Estimated to Last One Year Longer

The trust fund that helps pay for Social Security retirement and survivors’ benefits is expected to run out of money in 2033, according to the latest annual report from the Trustees of Social Security and Medicare.

That’s one year longer than estimated in last year’s report. The trustees say the slight improvement in the trust fund’s health is due primarily to an assumption of higher labor productivity than last year and a lower incidence of long-term disability.

I continue to believe that some of the assumptions are too optimistic, and the trust fund could be depleted earlier.

Depletion of the trust fund won’t mean the end of Social Security. Annual payroll and self-employment taxes will continue to roll into the program, and the trustees estimate those will be sufficient to pay 79% of promised benefits.

If Congress doesn’t make changes in time, the law mandates an across-the-board reduction in benefits. There are numerous proposals to reform Social Security being discussed that include different combinations of higher taxes and lower benefits.

A couple of informal groups in Congress are working behind the scenes on some bipartisan proposals that they don’t plan to make public until after the 2024 election.

One proposal that isn’t fully formed would avoid significant tax increases and benefit reductions by borrowing money and investing the funds in the stock market. Dividends and long-term gains from the stocks would make up part of the program’s shortfall.

Over the last few years, I’ve come to believe the most likely scenario is that Congress won’t change the program much.

Instead, Congress could decide to use general tax revenues to close the gap between the promised benefits and the program’s annual tax receipts.

General tax revenues effectively are funding the gap now. The trust fund lent money to the U.S. Treasury over the decades. The Treasury gradually is paying back the debt with interest.

The Treasury’s cash flow wouldn’t change much if the shortfall is funded from general revenues, but the government’s accounting would be different. Social Security officially would be part of the annual deficit.

The Congressional Budget Office projects that, regardless of how it is funded, over time Social Security will increase from 5% of gross domestic product (GDP) currently to 5.9% in 2034.

Other changes also are likely, such as imposing Social Security taxes on incomes above $400,000 and perhaps on all salaries and self-employment income.

I continue to recommend that retirement plans have contingencies for possible changes in Social Security such as an across-the-board reduction in benefits or targeted reductions and tax increases for higher-income beneficiaries.

Costco, China Help Fuel Gold’s Rise

Gold rose to record highs this year. It took a pause in the last month but appears to be stabilizing this week.

Gold generally is considered an inflation hedge, so the steady price increase while inflation was declining mystified many analysts.

Increases in gold also usually accompany declines in the dollar, but the dollar’s been rising against most currencies this year.

One force behind the price appreciation might be that Costco Wholesale created a new group of gold buyers.

In August 2023, the warehouse retailer began selling one-ounce gold bars. The initial offering sold out quickly, and Costco continues to offer the bars for sale.

An analyst for Wells Fargo estimates the retailer sold more than $100 million of the gold bars in the first quarter they were available and now is selling about $200 million worth per month.

Costco reportedly sells the bars for only 2% above the metal’s spot price. In addition, its Executive members receive 2% cash back and those who purchase through the Costco/Citigroup credit cards receive another 2% cash reward. Each customer can buy no more than five ounces.

As I’ve reported previously, central banks also increased their gold buying over the last year, especially Asian central banks.

China has been the leader there. China is the top producer and consumer of gold, according to Bloomberg. China’s central bank steadily increased its purchases of gold over the last 17 months.

There are other gold buyers, of course, and they’re motivated by geopolitical conflicts and sticky inflation, among other factors. But purchases from central banks and new outlets, such as Costco, increased demand while supply was stable.

More Warnings About Medicare Benefits

In the last week, we received two more warnings about the sustainability of Medicare.

In the latest annual report, the Trustees for Social Security and Medicare estimated that the trust fund that helps pay Part A benefits will last only until 2036. The good news is that is five years later than estimated last year. But it won’t be long before the trust fund is depleted.

After the trust fund is depleted, annual tax revenue would be sufficient to cover 89% of promised Part A benefits, which primarily are hospitalization and related care.

Another warning came from CVS Health, a major insurer of Medicare Advantage plans and the second major provider to warn about its Medicare programs.

CVS, which owns and operates Aetna Medicare Advantage plans, recently announced that its first-quarter earnings were below expectations and 2024’s earnings would be lower than the estimate it issued three months earlier.

CVS aggressively marketed its Medicare Advantage business for 2024, enrolling about 200,000 more members than it expected. It also purchased a medical clinic business directed at seniors and a home health care company that caters primarily to Medicare beneficiaries.

Earlier this year, Humana said its Medicare Advantage business wasn’t doing as well as expected.

Both companies reported it would take at least a couple of years to restore profit margins in their Medicare Advantage plans.

As the companies were expanding their Medicare Advantage businesses, government regulators began reducing payments to insurers. In addition, members’ use of medical services increased beyond the companies’ estimates.

CVS said its members made higher use of outpatient services during the first quarter and also had more inpatient hospital admissions. The company indicated it believes more than half the excess expenses were specific to the first quarter and not likely to be repeated.

These are additional signs that Medicare beneficiaries need to be prepared for changes in their Medicare coverage beginning in 2025, whether they are enrolled in Medicare Advantage or original Medicare.

The Data

The services sector contracted a little in April, according to the ISM Services Index. The index was 49.4 in April (any reading below 50 indicates a contraction), down from 51.4 in March.

But the PMI Services Index indicated expansion with a 51.3 reading in April, though it was down from 52.1 in March.

The PMI Composite Index for the economy was 51.3 in April and 52.1 in March.

Productivity increased only 0.3% in the first quarter following a 3.5% rise in the fourth quarter of 2023. Output increased by 1.3% and hours worked rose 1.0% in the first quarter.

The productivity increase over 12 months was 2.9% through the first quarter and 2.7% through the fourth quarter.

Unit labor costs surged at an annualized rate of 4.7% in the first quarter after being unchanged in the fourth quarter. That’s the result of the modest 0.3% increase in productivity and a 5.0% jump in hourly compensation.

Factory orders rose 1.6% in March, building on the 1.2% increase in February. But excluding the volatile transportation sector, orders increased 0.5% in March and 1.1% in February.

The number of jobs in the United States increased by 175,000 in April, following a 315,000 jump in March, according to last week’s Employment Situation reports.

The unemployment rate increased to 3.9% from 3.8%.

Average hourly earnings climbed 0.2% in April and 0.3% in March. Over 12 months, average hourly earnings rose 3.9% through April and 4.1% through March.

Consumer credit outstanding increased at an annual rate of 1.5% in March, while February’s advance was revised higher to 3.6%.

Revolving credit (mostly credit cards) inched 0.1% higher in March and nonrevolving credit (mostly vehicle and auto loans) increased at a 2.0% annual rate.

In the first quarter of 2024, total consumer credit outstanding increased at an annual rate of 3.2%. Revolving credit jumped at a 5.7% rate and nonrevolving credit advanced at a 2.2% pace.

New unemployment claims were unchanged at 208,000 in the latest week.

Continuing claims, which lag a week behind new claims, also were unchanged at 1.774 million.

The Markets

The S&P 500 rose 3.02% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 2.81%. The Russell 2000 increased 4.63%. The All-Country World Index (excluding U.S. stocks) added 3.05%. Emerging market equities advanced 3.12%.

Long-term treasuries gained 3.21% for the week. Investment-grade bonds increased 2.07%. Treasury Inflation-Protected Securities (TIPS) added 1.07%. High-yield bonds gained 1.69%.

On the currency front, the U.S. dollar declined 0.76%.

Energy-based commodities lost 1.08%. Broader-based commodities rose 1.16%. Gold gained 1.06%.

Bob’s News & Updates

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