• The Congressional Budget Office determined Social Security will need to cut benefits by 2034 when the trust fund goes broke
• A solution from Congress isn’t anticipated soon because it would require benefits cuts or higher taxes
• Advisors suggest preparing by protecting the value of savings with physical precious metals

Social Security Benefits Threatened

In the wake of demographic shifts and economic uncertainties, the specter of Social Security’s funding gap is casting a longer and longer shadow over the financial security of millions. Right now, one-quarter of US adults aged 50 or over have no retirement income outside of Social Security benefits. And unless there is significant action by Congress, most Americans are facing cuts in those benefits. Economists are emphasizing that people prepare now so they aren’t counting on benefits that might not exist when they need them.¹

Americans are rapidly losing faith in the sustainability of Social Security. According to recent polls, 75% of adults aged 50 and older are worried Social Security will run out of funding in their lifetime. A further 24% of adults of all ages believe they won’t get a dime of benefits they have earned.²

To keep things in perspective, Social Security won’t run out of money entirely. But it is facing a massive financial shortfall. Social Security benefits are funded primarily through payroll taxes paid by current workers. Those taxes go to today’s beneficiaries. Payroll taxes aren’t going anywhere anytime soon. But they won’t be enough to completely cover future benefits.

Taxes haven’t fully funded Social Security in recent years. The SS Administration has been tapping its trust fund to bridge the gap and avoid cutting benefits. The trust fund is currently around $2.85 trillion.

The Congressional Budget Office (CBO) determined the trust fund will be exhausted as of 2034. After that, the program can only pay out as much as it takes in from payroll taxes. That is estimated to be around 80% of future benefits. So, retirees could expect a 20% cut in benefits if lawmakers can’t find a solution before then.³

⁴

The CBO noted the impact on starting benefits would be felt beginning with those born in 1969 (those turning 65 in 2034). For those born in the 1970s, there would be a 25% reduction in initial benefits. For those born in the 1980s, 26%. And 28% for those born in the 1990s (assuming you start taking benefits at 65). ⁵

Why the Shortfall

Social Security’s ticking time bomb can be traced to a few reasons. Birthrates have collapsed from the days of the baby boom. And people are living longer. So not as many people are paying into the system while more people are collecting benefits for longer.

Another factor contributing to the shortfall is the payroll tax cap. Incomes for the best paid 6% of earners rose by 62% from 1983 to 2000. For the other 94%, incomes rose by just 17%. The net result is that the lion’s share of US income growth was above the Social Security tax cap. All that income wasn’t subject to the program’s payroll taxes. The situation hasn’t changed. Last year, almost 20% of earnings weren’t subject to payroll taxes. An overall increase in wages during that time drove up benefits. But tax receipts didn’t keep pace. Some economists are now proposing to raise the cap or eliminating it altogether to help keep the fund solvent.⁶

Fixing the Problem

Despite headlines highlighting the program’s issues and its profound impact on all Americans, no action has been taken to address the problem thus far. Any changes to Social Security would require 60 votes in the Senate. Therefore, it would have to have agreement from both parties. But a solution would involve either raising taxes (by a third), cutting benefits (by a fourth), or a combination of both. Solutions that each party would vote against.

The Inflation Problem

Social Security has another problem besides benefit cuts. The benefits themselves have lost a substantial amount of buying power over the years. Social Security is designed to keep up with inflation. In most years, beneficiaries will receive a cost-of-living adjustment (COLA) to help benefits maintain their buying power.

However, inflation has consistently outpaced these COLAs. In fact, since 2000, Social Security has lost a whopping 40% of its buying power. If this trend continues, Social Security may be even less reliable in the future. If you’re expecting to depend on your monthly checks in retirement, it may be time to come up with a backup plan.⁷

Solutions

Financial advisors suggest there are ways to prepare for the Social Security shortfall. Off the bat, increasing your savings is a simple method to reduce your dependence on Social Security.

Another option is to consider delaying Social Security. Waiting until age 70 to start taking benefits will earn you at least 24% extra each month on top of your full benefit amount. That could potentially add up to hundreds of dollars per month. Since that adjustment is permanent, you’ll collect larger checks every month for the rest of your life.

An additional option to prepare for sharp cuts in benefits is to safeguard the value of your current retirement funds from inflation. You can investigate how physical precious metals such as gold and silver hedge against inflation. And if they are put in a Gold IRA, they also gain tax-advantages as they preserve your purchasing power. To learn more about how a Gold IRA can help safeguard your retirement from potential Social Security cuts, call us today at 800-462-0071.

Notes:
1. https://www.fool.com/retirement/2023/09/19/is-social-security-going-bankrupt-most-older-adult/
2. https://www.fool.com/retirement/2023/09/19/is-social-security-going-bankrupt-most-older-adult/
3. https://www.fedweek.com/retirement-financial-planning/report-projects-possible-long-term-impacts-of-social-security-shortfall/
4. https://www.pgpf.org/sites/default/files/based-on-the-trustees-projections-combined-social-security-benefits-could-be-cut-by-20-percent-in-2034.jpg
5. https://www.fedweek.com/retirement-financial-planning/report-projects-possible-long-term-impacts-of-social-security-shortfall/
6. https://www.marketwatch.com/story/heres-the-real-cause-of-the-social-security-funding-shortfall-according-to-the-programs-chief-actuary-1a0e7d4b
7. https://www.fool.com/retirement/2023/09/19/is-social-security-going-bankrupt-most-older-adult/

• The Federal Reserve voted to keep interest rates at a 22-year high
• Fed Chair Powell said to expect more hikes in the future as rates stay higher for longer
• Stocks drop as hopes for rate cuts diminishes

Fed Hits the Pause Button on Rates

As predicted, the Federal Reserve chose not to raise interest rates again after their latest meeting. They voted to keep interest rates at their 22-year high. Since March 2022, the Fed has lifted interest rates 11 times and held them steady twice, including September’s pause.
Even with a temporary break, the rate hikes are still impacting the stock market, gold, and retirement funds.

¹

Fed Policy Statement Changes

The Federal Reserve Policy statement is a periodic announcement by the Federal Reserve that outlines its decisions on key interest rates and provides insights into its current economic assessment and monetary policy intentions. Economists read it like tea leaves, deciphering every word to make predictions. In this latest statement, the pace of economic activity changed from “moderate” to “solid.” This is being interpreted to mean that the job market is still too strong, so more rate hikes can be expected to drive up unemployment.

Future Hikes

Officials forecasted an additional rate hike before the end of the year to bring down inflation. Powell said, “We’re prepared to raise rates further if appropriate.” He kept his comments on future hikes ambiguous. Powell told reporters that future decisions will be based on upcoming economic data. But a looming government shutdown added more uncertainty to the economy. It could limit the Federal Reserve’s ability to get key data and hinder policy making.²

“A resilient US economy and high consumer spending over the next several months will likely prompt the Fed to raise rates again heading into the new year,” said Frank Lietke, executive director and president at Ally Invest Securities.³

Rate Cuts

The Summary of Economic Projections is a consensus of Fed opinions about policy and economic conditions. It showed that most central bank officials now expect fewer rate cuts next year. That is compared to their estimates from last June. Economists anticipate rates to remain elevated for longer. A sharp economic downturn, like a severe recession, would be necessary to prompt more rapid cuts.

They may get that recession. Unemployment is predicted to jump up to 4.5% over the next two years. They did round up their growth projections for 2024. It went from 1.1% in June to 1.5% now. But that growth rate is still lagging behind inflation.

There are numerous negative consequences when growth lags inflation. The purchasing power of individuals and households diminishes. This means that the money people have becomes less valuable over time, making it harder for them to afford the same goods and services they used to. As lingering inflation erodes purchasing power, people may have to allocate more of their income to cover rising costs. This leaves less room for savings and discretionary spending. A lower standard of living, reduced savings, and worse returns on investments are all potential results. The increased uncertainty reduces business investment and hastens deeper recession.

Market Reacts

Both the S&P 500 and the Nasdaq dropped after Federal Reserve Chair Powell said that the central bank did not consider a soft landing a “baseline expectation.” A soft landing is where the US economy avoids a recession but successfully lowers inflation. Powell said avoiding a recession is possible. But he continued that price stability is the Fed’s top priority. Price stability, in the context of the Fed’s mandate, is typically defined as a low and steady rate of inflation. It aims to achieve an inflation rate of around 2 percent over the longer run. Long term high interest rates are seen as bad for business and profitability. Hence, the fall in stock prices.

Gold

The Fed’s announcement could create a good long-term position for gold. Prices for the metal have been holding steady despite recent hikes. An eventual reduction in interest rates coupled with lingering inflation create a positive environment for gold prices. Those seeking safe haven from inflation tend to turn away from lower paying Treasuries and towards gold.

Conclusion

According to the Fed, inflation is far from over. And neither are rate hikes despite a few months reprieve. Americans can expect at least one more before year’s end. Economists foresee interest rates staying higher, longer. No one can say when they will be cut. If high interest rates push us into recession, and inflation remains unresolved, we may find ourselves mired in stagflation. Much to the demise of savings, stocks, and retirement funds. For those who want to protect the value of those funds, a Gold IRA may be the right choice. To learn more contact American Hartford Gold today at 800-462-0071.

Notes:
1. https://cdn.statcdn.com/Infographic/images/normal/21023.jpeg
2. https://www.cnn.com/business/live-news/markets-fed-meeting-september/index.html
3. https://www.cnn.com/business/live-news/markets-fed-meeting-september/index.html

• Inflation rose for the second consecutive month in August
• Stubborn inflation may trigger even higher interest rate hikes from the Fed
• JPMorgan Chase CEO Dimon warns of an impending downturn

Inflation Climb Continues

Pushing consumer prices to alarming new heights, unrelenting inflation continues to be a major concern. It accelerated for a second consecutive month in August. The Consumer Price Index (CPI), which measures the price of everyday goods like gasoline, groceries, and rents, surged in August compared to the previous month. This increase marked the steepest monthly rise this year. On a year-over-year basis, prices climbed by a daunting 3.7%, exceeding the reading in July. The seemingly unsolvable problem of inflation has financial experts growing more concerned about recession.¹

The problem reaches beyond just headline inflation. That rise is largely attributable to a leap in gas prices. Core prices, which exclude the more volatile measurements of food and energy, also rose in August. It came in much higher than expected. Core prices are showing just how intractable inflation is becoming. They remain more than two times higher than pre-pandemic levels.

²

The Fed Response

The Fed has been aggressively raising interest rates to combat inflation. They are on one of the fastest tightening paces in decades. Despite efforts to curb inflation, it remains well above the Federal Reserve’s 2% target. As of now, the Fed is expected to maintain rates at their current 22-year high during their upcoming meeting in September. However, August’s hotter-than-expected inflation report could influence further rate hikes in the fourth quarter. That is much to the dismay of Wall Street, which was hoping for a pause, or even a cut, in rates that could spur the growth of stock prices.

Inflation’s Personal Impact

Benjamin Franklin said small leaks will sink great ships. Governments and corporations can argue about what effect a small percentage change in data will have on the macrolevel. But inflation’s impact on the individual is what truly moves the economy. And that impact is looking grim.

US household income faced a decline in 2022 for the third consecutive year. This decline was primarily attributed to the soaring 7.8% inflation rate. It marks the largest annual increase in the cost of living since 1981. People are running out of savings to keep up with rising prices. Total household debt reached $17.06 trillion in Q2 2023 and credit card debt exceeded $1 trillion.³

The Supplemental Poverty Measure (SPM) considers participation in government programs. It increased from 5.2% in 2021 to 12.4% in 2022. The data highlights the financial struggle faced by many Americans as the cost of living continues to rise.⁴

People shouldn’t expect relief anytime soon. Robert Frick is an economist with Navy Federal Credit Union. He said, “This was bad news for Americans who feel inflation most acutely when filling their tanks and writing their rent checks… And given core inflation rose, it’s clear inflation around current levels may be with us for months.”⁵

A Warning from Wall Street

JPMorgan CEO Jamie Dimon issued a stark warning about the US economy. Dimon said, “We’ve been spending money like drunken sailors around the world…To say the consumer is strong today, meaning you are going to have a booming environment for years, is a huge mistake.” He cited several significant headwinds to the economy. He included stubborn core inflation, continuing war, and high interest rates.⁶

Dimon has previously warned about an impending “economic hurricane.” He now expresses doubts about the concept of a “soft landing.” While some economists anticipate a gentle economic slowdown, Dimon remains skeptical. He raised concerns about the Federal Reserve’s quantitative tightening campaign, increased reliance on fiscal deficits, and the downstream impact of various economic factors. Dimon emphasized that the impact of these changes might not be evident immediately. Businesses should be prepared for potential disruptions in the coming year.

Protecting Your Portfolio from Inflation

In times of rising inflation and economic uncertainty, it’s essential to consider strategies to safeguard your funds. A Gold IRA from American Hartford Gold can provide a valuable hedge against inflation. Precious metals like gold have historically preserved wealth and retained their value when traditional assets falter. By diversifying your portfolio with a Gold IRA, you can mitigate the impact of inflation and economic turbulence, ensuring a more secure financial future. Learn more today by contacting American Hartford Gold at 800-462-0071.

Notes:
1. https://www.foxbusiness.com/economy/cpi-inflation-august-2023
2. https://www.foxbusiness.com/economy/cpi-inflation-august-2023
3. https://www.newyorkfed.org/newsevents/news/research/2023/20230808
4. https://www.foxbusiness.com/economy/us-household-income-fell-2022-census-data-shows
5. https://www.foxbusiness.com/economy/cpi-inflation-august-2023
6. https://www.foxbusiness.com/economy/jamie-dimon-warns-risks-us-economy-weve-been-spending-drunken-sailors

• The national deficit is projected to double from $1 trillion to $2 trillion
• Increased deficits can lead to inflation, high interest rates, and recession
• Safe haven assets like physical gold and silver can protect funds from the effects of soaring deficits

Deficit Doubles

The American economic landscape is approaching a steep cliff that is growing drastically higher. The US federal budget deficit is projected to double this year. The non-partisan Committee for a Responsible Federal Budget (CRFB) estimates it will grow from about $1 trillion to a staggering $2 trillion. The chasm between government spending and revenue collection is widening at an alarming rate, unseen since major crises such as World War II and the 2008 financial meltdown. The soaring budget deficit could have catastrophic consequences for retirement funds and the economy as a whole.¹

²

Deficit Growth Paradox

Traditionally, deficits tend to shrink during periods of economic growth. Increased business activities and higher income levels lead to greater tax revenues. Also, government must spend less on unemployment benefits. However, economists are baffled. The current deficit surge defies conventional economic wisdom. It is occurring during a time of strong economic growth, record-low unemployment rates, and thriving corporate profits.

Deficit Causes:

The deficit explosion follows a record drop in the budget deficit last year. It fell from about $3 trillion to roughly $1 trillion. That drop was due to an uptick in capital gains revenue as Americans sold more stock and recorded large gains. The Treasury department in 2022 also benefitted from a spike in general tax collection. Inflation pushed up the nominal income for millions of households.³

Several factors contribute to the exponential growth of the federal budget deficit in 2023:

High Inflation: Soaring inflation rates are eroding the purchasing power of the dollar. The government must spend more to provide essential services and pay off debt.

Escalating Interest Payments: As the government accumulates more debt, interest payments rise substantially. Funds need to be diverted away from other critical areas of the budget.

Declining Tax Receipts: Falling markets have led to a sharp decline in capital gains revenue. Higher tax brackets and standard deductions resulted in less tax revenue for the IRS in 2023.

Government Expenditures: Government spending increased in 2023. Social Security and Medicare costs rose since they are indexed to inflation. Also, the 2022 Inflation Reduction Act started disbursing billions of dollars.

The Deficit’s Worrisome Transformation

From August 2022 to July 2023, the federal government spent approximately $6.7 trillion while collecting only $4.5 trillion in revenue. This represents a stark 16% increase in spending compared to the previous year. That is coupled with a 7% decrease in revenue.⁴

The change has economists worried. Marc Goldwein is the senior policy director at the CRBF. He said, “That’s pretty scary, because normal before the pandemic was $1 trillion. And in 2015, it was $500 billion. So, we went from $500 billion is the normal, to $1 trillion is the normal, to $2 trillion is the normal in less than a decade.”⁵

Deficit Impact

The deficit surge comes as lawmakers rush to avert a government shutdown. They are looking to pass a short-term deal to keep the government running. Expect deadlock as the sides spar over spending cuts and expiring tax cuts. If talks stall, a government shutdown would be catastrophic for the country.

Economists anticipate annual deficits approaching $3 trillion within a decade. Such high deficits can lead to inflation, higher interest rates, and ultimately, a debt crisis. Soaring interest rates could stifle private investment and make loans prohibitively expensive.

Brian Riedle is an economist at the Manhattan Institute. He warns, “A debt growing much faster than the economy will drive up interest rates, reduce economic investment, and over time make interest payments the largest federal expenditure — risking a federal debt crisis.”⁶

Higher deficits also hamper the government’s ability to respond effectively to economic downturns. This could lead to prolonged recessions and even depressions.

The Mounting Interest Burden

Interest on the national debt is projected to soar to $5.4 trillion by 2053. That surpasses the amount spent on critical programs like Social Security, Medicaid, Medicare, and defense. It could consume up to 35% of all federal revenue in three decades. Interest payments alone are estimated to triple to a staggering $1.4 trillion by 2032. These spiraling interest costs, coupled with surging national debt, could make borrowing money for the country increasingly expensive. The risk of an existential crisis for the country is real.⁷

“Higher interest costs could crowd out important public investments that can fuel economic growth — priority areas like education, research and development, and infrastructure. A nation saddled with debt will have less to invest in its own future,” the Peter Peterson Foundation said.⁸

Conclusion

The ballooning US federal budget deficit poses an existential threat to the nation’s economic stability and prosperity. As the deficit spirals out of control and the national debt skyrockets, it becomes increasingly vital to safeguard your financial future, including your retirement funds.

To protect your retirement funds, consider exploring alternatives such as a Gold IRA from American Hartford Gold. In uncertain times, diversifying your investments with assets that historically retain their value, like precious metals, can offer a measure of financial security. Contact us today at 800–462-0071.

Notes:
1. https://www.foxbusiness.com/economy/us-federal-budget-deficit-projected-double-year
2. https://www.washingtonpost.com/business/2023/09/03/us-debt-deficit-rises-interest-rate/
3. https://www.foxbusiness.com/economy/us-federal-budget-deficit-projected-double-year
4. https://www.washingtonpost.com/business/2023/09/03/us-debt-deficit-rises-interest-rate/
5. https://www.washingtonpost.com/business/2023/09/03/us-debt-deficit-rises-interest-rate/
6. https://www.washingtonpost.com/business/2023/09/03/us-debt-deficit-rises-interest-rate/
7. https://www.foxbusiness.com/economy/the-us-paying-record-amount-interest-on-national-debt
8. https://www.foxbusiness.com/economy/the-us-paying-record-amount-interest-on-national-debt