Bob’s Journal for 2/15/2024

Federal Debt Projected to Steadily Increase, But at a Slower Rate

The Congressional Budget Office (CBO) issued its latest budget and economic forecast last week. It has some good news, but mostly bad news.

The good news is the federal budget deficit, as a percentage of gross domestic product (GDP), is projected to decline every year from 2024 to 2033, and the numbers are lower than in the CBO’s previous forecast.

The lower deficits as a percentage of GDP result from limits on discretionary spending enacted in the Fiscal Responsibility Act of 2023.

Part of the bad news is that the CBO’s estimates assume those spending caps will be adhered to, which doesn’t always happen in Congress.

Other bad news is that the increase in market interest rates since 2021 also adds to the federal government’s interest expense as a percentage of GDP.

The CBO’s estimates of future interest expense might be low, because it assumes the 10-year treasury yield will decline from recent levels to around 3%. If rates don’t decline, the interest expense will be more than the CBO estimates.

In 2021, the CBO estimated that, by 2031, the federal interest payments would be 2.7% of GDP. The new estimate is the interest expense will be 3.6% of GDP in 2031 and rise to 3.9% by 2034. By 2026, federal interest expense as a percentage of GDP will exceed the record of 3.2% set in 1991.

The aging population of the United States also will increase federal spending. The cost of Social Security is estimated to rise to 5.9% of GDP in 2034 from 5.0% in 2023. Medicare moves from 3.1% of GDP in 2023 to 4.2% in 2034.

The CBO estimates that the federal debt will increase from 99% of GDP today to 116% of GDP in 2034. By 2054, the federal debt will be 172% of GDP.

For comparison, federal debt was 35.4% of GDP in 2006 before the financial crisis and 79.4% of GDP in 2019 before the pandemic.

If the CBO’s assumptions turn out to be too optimistic, the actual numbers will be worse than these estimates.

Either way, there likely will be a liquidity gap in the bond markets. The Federal Reserve is trying to reduce its balance sheet and no longer will buy all the bonds the U.S. Treasury issues. Banks also aren’t buying as many treasuries as they were before 2023.

The U.S. Treasury must find buyers for its bonds to replace the Fed and the banks while it’s issuing more debt. That’s likely to keep a floor on interest rates.

The other somewhat good news in the data is that all that federal spending has helped maintain positive economic growth despite the Fed’s sharp increase in interest rates since 2021. The spending is likely to continue to act as stimulus for the economy.

Estimated Retirement Medical Spending Increases by 8%

The estimated out-of-pocket medical expenses for a retired couple during retirement are about 8% higher than they were a year ago, according to the Employer Benefits Research Institute (EBRI).

EBRI’s estimates assume a 65-year-old couple is enrolled in original Medicare and have both a Plan G Medicare Supplement insurance policy and a Part D Prescription Drug insurance policy.

EBRI estimates that to have a 50% probability of being able to pay out-of-pocket costs, a 65-year-old man needs to have accumulated savings of $106,000 solely for medical expenses and a woman needs $128,000. EBRI assumes the retirees earn average investment returns on their savings through retirement.

The spending estimates include average insurance premiums, deductibles, copayments and some noncovered expenses. They also assume median prescription drug expenses.

To have a 90% probability of paying expenses, the man needs $184,000 at the start of retirement and the woman $217,000, or a total of $351,000 for the couple.

EBRI estimates that a couple with high prescription drug expenses would need $413,000.

Prescription drugs are the wild card in retirement medical spending. Even with Part D insurance, not all prescription drug expenses will be covered.

The retiree must pay the insurance premiums plus, starting in 2025, up to $2,000 annually in out-of-pocket costs for covered prescriptions. Prescriptions that aren’t covered also must be paid out of pocket.

The estimates don’t include expenses that aren’t covered at all by Medicare, such as hearing aids, dental and vision. Long-term care costs also aren’t included.

Separate estimates for those in Medicare Advantage plans were included in EBRI’s study for the first time. Generally, EBRI estimates out-of-pocket expenses of Medicare Advantage members will be about half of those of original Medicare beneficiaries.

While EBRI presents the estimates as an amount the retiree must have accumulated by age 65 and have set aside for medical care, that isn’t really the case.

The expenses will be paid over retirement. Most of them will be paid from Social Security benefits and other regular income. Comprehensive Medicare coverage will avoid significant, unexpected out-of-pocket payments for major hospital and doctor expenses.

As I said, the real wild card is prescription drugs. Most prescriptions are generics, which are relatively low cost and often covered by insurance. But new and brand-name drugs might not be covered or only partially covered.

Even a Pet Trust Must Be Carefully Drafted

More and more people are providing for pets in their estate plans, and the law is accommodating them. But as in other parts of the estate plan, details matter.

In a recent Massachusetts case, a woman left assets in a trust for her dog, Licorice. The trust said that after the dog’s demise, the trustee could distribute the remaining trust assets to charities of his choice.

But Licorice predeceased her owner, and the trust didn’t provide clear instructions for that contingency. The woman also didn’t update her estate plan before she died.

The estate’s beneficiaries said the assets intended for the trust should remain in the estate and be distributed to its beneficiaries. Other parties said a proper reading of the will and trust indicated the property intended for the trust should go to charities.

The case went to the Massachusetts Supreme Judicial Court, which ruled that the lower court had to look beyond the words of the documents and seek additional evidence of the deceased’s intent.

Because Licorice’s owner and her attorneys hadn’t clearly stated what would happen under different scenarios and contingencies, a lot of money is going to lawyers instead of to either charities or the estate’s beneficiaries.

(In Matter of Estate of Jablonski, 214 N.E. 3d 1051 (Mass. 2023)).

The Data

The Consumer Price Index (CPI) increased 0.3% in January, following a 0.2% rise in December. Over 12 months, the CPI increased 3.1% through January after jumping 3.4% through December.

The core CPI (which excludes food and energy prices) increased 0.4% through January and 0.3% through December.

The core CPI increased 3.9% over 12 months through both January and December.

Optimism among small business owners declined to its lowest level in eight months, according to NFIB’s Small Business Optimism Index. The index was 89.9 in January, down from 91.9 in December.

The index has been between 89 and 92 for the last 12 months. It was above 100 most of the time from 2017 until the Fed started raising interest rates in 2022.

Labor quality was cited as the top problem by a plurality of small business owners. Inflation was cited as the top problem by slightly fewer small business owners.

Consumer credit outstanding increased at an annual rate of 0.4% in December after jumping 5.7% in November.

Revolving credit, which is mostly credit cards, increased 1.0% in December and 16.6% in November.

Nonrevolving credit (mostly vehicle and student loans) increased 0.2% in December and 1.8% in November.

New unemployment claims decreased by 9,000 to 218,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.871 million from 1.894 million.

The Markets

The S&P 500 rose 0.02% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 0.59%. The Russell 2000 increased 0.49%. The All-Country World Index (excluding U.S. stocks) fell 1.26%. Emerging market equities declined 1.11%.

Long-term treasuries lost 2.84% for the week. Investment-grade bonds fell 2.02%. Treasury Inflation-Protected Securities (TIPS) declined 1.00%. High-yield bonds retreated 0.70%.

In the currency arena, the U.S. dollar rose 0.82%.

Energy-based commodities increased 2.38%. Broader-based commodities fell 0.53%. Gold declined 2.15%.

Bob’s News & Updates

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A five-star review of my book, “The New Rules of Retirement” on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

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