Bob’s Journal for 7/17

A New Proposal to Fortify Social Security

Two U.S. Senators came forward with a new proposal to shore up Social Security.

For years, the Social Security trust fund has been estimated to run out of money in the early 2030s. The latest estimate from the Board of Trustees is that the trust fund will be exhausted in 2033.

If Congress doesn’t act before then, an across-the-board benefit reduction of 20% to 25% would be required. Most analysts say the system can become solvent only through a combination of tax increases and benefit reductions.

In the May 9, 2024, issue of Bob’s Journal, I reported that small, informal, bipartisan groups in Congress were working on reforms they planned to make public after the 2024 election. I also indicated at least one proposal would not include tax increases or benefit cuts.

Last week, such a proposed reform was put forward by two senators, Bill Cassidy (R-La.) and Tim Kaine (D-Va.).

Their proposal is for Congress to create a separate fund to supplement Social Security. The new fund wouldn’t tap any existing Social Security resources. Apparently, it would be funded by proceeds from new government bond sales.

This is a variation of the sovereign wealth fund President Donald J. Trump has advocated, though he hasn’t mentioned dedicating the fund to a specific purpose.

The new fund would invest in diversified investments that offer a higher rate of return than the special government bonds purchased by the current trust fund. Sens. Cassidy and Kaine say the new fund should be funded with $1.5 trillion and be allowed to grow for 75 years.

In the interim, shortfalls in Social Security funding would be funded by the U.S. Treasury from general revenues. After 75 years, the new fund would repay the Treasury and also should have enough resources to fund future gaps in Social Security.

For the last several years, I’ve said the Social Security shortfalls probably would be covered by general revenues from the Treasury. Congress is unlikely to enact a series of benefit cuts and higher taxes needed to close the Social Security funding gap.

This latest proposal acknowledges that, but it expects there will be an ending date for Treasury’s commitment.

The senators made their proposal in an op-ed in The Washington Post but so far haven’t introduced a formal bill in Congress.

Beware: Wall Street is Pushing Private Assets

Private assets have been in the news a lot recently. The most recent reports are that President Donald J. Trump plans to sign an executive order intended to make it easier for private assets to be more available in U.S. retirement plans.

Other reports have indicated that financial services firms want to make private assets available to more investors, including through 401(k) plans.

Investments in private assets have been restricted to institutional and very wealthy investors for decades.

Private assets are investments that aren’t traded on the public exchanges. They include stocks, bonds, hedge funds and funds that aren’t on public exchanges or available for daily trades.

Some investors and institutions have done quite well with private investments. For example, they bought shares of today’s technology behemoths when they were small start-ups, at prices that are a fraction of today’s values.

Others bought bonds and real estate in private sales at distressed prices. They profited when the assets recovered. A prominent example is Warren Buffett’s purchase of special preferred stock issued by Goldman Sachs during the financial crisis.

The Yale University Endowment Fund made private asset investing famous. The endowment earned exceptional returns from the 1980s through the financial crisis primarily by investing in private asset funds, such as venture capital, real estate, distressed debt, buy outs, hedge funds and more.

But there are reasons for individual investors to be skeptical that they’ll replicate such successes.

There’s a wide variation in the returns of the different funds that invest in private assets. If you aren’t able to invest in the few top-performing funds (and few investors are), you’ll earn the same returns as in the public markets, at best.

Some research indicates that the returns of the top private asset funds can be duplicated by investing in publicly traded assets using leverage. Much of the excess returns of private assets could be due to increased leverage or debt, not superior investment opportunities.

Also, returns from private assets have been lower in recent years.

In the early years of private asset investing, returns of private assets exceeded those of publicly traded investments. That’s changed. Many of the pension funds and endowments that loaded up on private assets in the past have reported below-average returns in recent years.

Of course, financial service companies want to increase sales of private assets, because the investments carry much higher fees than publicly traded assets.

A key feature of private assets is that they aren’t liquid. Because they aren’t traded on public markets, they can’t be sold quickly. An investor who wants or needs to sell a private asset before it matures must find a buyer.

This was a big problem for wealthy and institutional investors during the financial crisis and at other times. They needed to raise cash. They had to search for buyers. When they could find buyers, they had to sell the assets for substantial discounts to what they probably were worth and often much less than they were worth a few years later.

You never really know what a private asset investment is worth. There’s no public market price. The firms sponsoring the private asset funds use their own methods to estimate the values and report them to investors.

Pension funds and the private asset managers frequently have disputes over valuations. Private asset managers tend to mark up the prices too slowly during bull markets and mark them down too slowly during bear markets.

Also, since the Federal Reserve began raising interest rates in 2022, the private asset managers reportedly have had difficulty selling assets at prices they find acceptable. Investors generally don’t receive money from the funds until the assets are sold.

In the last few years, there have been few initial public offerings of private assets. Instead, private asset funds sell their assets to each other or to a strategic buyer, such as a company in the same industry. There have been accusations that some firms are forming new private asset funds partly to buy assets from existing funds so the investors in the older funds can be paid.

The difficulty for individual investors is that there are fewer opportunities in the public markets. In 1996, there were 8,000 publicly traded stocks. Recently, there were about 4,000 such stocks.

In 2000, private equity funds controlled about 2,000 companies. Today, they control more than 11,500 companies, according to Pitchbook.

Private assets as a group aren’t good or bad. Much depends on the individual asset, who’s managing it and how much was paid for it, including ongoing fees. Be sure to have all the facts before investing in one of the private asset funds that will be offered to individual investors.

U.S. Population Continues to Age

The population of the United States continues to become older, according to the Census Bureau.

From 2023 to 2024, the share of the U.S. population age 65 and older rose by 3.1% to a total of 61.2 million. It’s estimated that 11,000 to 12,000 U.S. residents turn 65 each day.

The population under age 18 still outnumbers the older crowd, but the under 18 group shrank by 0.2% from 2023 to 2024. In addition, the population gap between the two groups shrank from over 20 million in 2020 to less than 12 million in 2024.

Looking at longer-term trends, in 2004 12.4% of the U.S. population was 65 or older compared to 18.0% in 2024. The percentage of the population under 18 fell from 25.0% to 21.5% over the same period.

In 2024, those 65 and older outnumbered those under 18 in 11 states. That’s up from three states in 2020. The states with more older people in 2024 were Delaware, Florida, Hawaii, Maine, Montana, New Hampshire, Oregon, Pennsylvania, Rhode Island, Vermont and West Virginia.

The aging of the population has affected and will continue to affect retirees and those nearing retirement.

Demand for goods and services primarily used by older Americans increases, potentially boosting prices or squeezing supplies. The reduction in younger people creates a shortage of people to provide services older Americans need, especially staffing in retirement-oriented communities and residences.

The Data

The Consumer Price Index (CPI) increased 0.3% in June following a 0.1% rise in May. The 12-month increase in the CPI was 2.7% through June, up from 2.4% through May.

The core CPI, which excludes food and energy prices, rose 0.2% in June after increasing 0.1% in May. The core CPI increased 2.9% over the 12 months through June and 2.8% for the 12 months ending in May.

The Producer Price Index (PPI) was unchanged in June after increasing 0.3% in May. The PPI increased 2.3% for the 12 months ending in June, down from a 2.7% increase through May.

The core PPI, which excludes food and energy prices, also was unchanged in June after rising 0.4% in May. The 12-month change in the core PPI dropped from 3.2% through May to 2.6% through June.

The Empire State Manufacturing Index improved substantially to 5.50 in July from -16.00 in June. July was the first positive reading for this index since February.

Industrial production increased 0.3% in June after being unchanged in May. The 12-month increase in industrial production was 0.7% through both June and May.

Manufacturing production rose 0.1% in June, down from the 0.3% increase in May. Over 12 months, manufacturing production advanced 0.8% through June and 0.6% through May.

New unemployment claims declined by 5,000 to 227,000 in the latest week. This was the fourth consecutive week new claims fell and brought new claims to their lowest level in seven weeks.

Continuing claims, which lag a week behind new claims, increased to 1.965 million, the highest level since November 2021, from 1.955 million.

The Markets

The S&P 500 rose 0.29% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 0.50%. The Russell 2000 fell 1.10%. The All-Country World Index (excluding U.S. stocks) declined 0.64%. Emerging market equities advanced 0.64%.

Long-term treasuries lost 1.19% for the week. Investment-grade bonds fell 0.41%. Treasury Inflation-Protected Securities (TIP) dropped 0.02%. High-yield bonds declined 0.18%.

In the currency sector, the U.S. dollar advanced 1.29%.

Energy-based commodities fell 0.62%. Broader-based commodities rose 0.64%. Gold gained 0.84%.

Bob’s News & Updates

A recent review on amazon.com of my latest book said, “Carlson is a unique national Asset while alive! Get the book, dude!” Look for “Retirement Watch: The Essential Guide to Retiring in the 2020s” (Regnery Capital: 2023) at amazon.com, barnesandnoble.com, booksamillion.com and regnery.com.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.

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A recent 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.