Social Security is going broke. It needs to be fixed, and quickly, or future benefits will be sharply reduced. That would be extremely unpopular among the high-voting population we affectionately call “Seasoned Citizens.” Currently, that population is about 61 million strong.
Congress created the Social Security System, and, unfortunately, only Congress can fix it. For decades, the easiest way to get a politician “unelected” is for him or her to even mention cutting Social Security.
How, then, can Social Security be reformed and sustained for future generations? Theoretically, it could be done, but getting a majority of Congressmen and Senators to agree on a solution is like herding cats. Only harder.
Many interested parties have proposed solutions to Social Security’s funding problem. In my opinion, any acceptable solution begins with raising the qualifying age for collecting benefits. Simply increasing the future benefits eligibility age to reflect rising life expectancies renders Social Security actuarily sound for some time. It works despite requiring no new taxes or benefits reductions, and it provides an important, though incomplete, “fix” to the System.
One of the more interesting suggestions is from the Association of Mature American Citizens (AMAC), a conservative group supporting Seasoned Citizens. AMAC would impose a benefits COLA (Cost of Living Increase) that varies with income levels. For beneficiaries with smaller monthly benefits, the annual increase would be a minimum of 3%, with a cap of 4%. The highest benefit recipients would have a COLA ranging between 0.5% and 1.5%. Full Retirement Age (FRA) would slowly increase from 67 to 70. Additionally, AMAC would create a voluntary add-on account called “Social Security Plus” that would be invested mostly in stocks.
It is significant that AMAC has not yet “priced out” their proposal. Somehow, Social Security must find a new source of revenue, at least until the large younger generation reaches working age. President Biden campaigned on raising taxes on high-earning Americans, but “the rich” can handle only so much, and they are already strained.
Remember that Federal General Revenues can only be enhanced through raising taxes, borrowing money, and/or printing fiat currency. (Fiat currency is money created with no residual store of value to back its worth.) We already see the inflationary effects of flooding the economy with fiat currency. Cooler heads must eventually prevail. It is time to step up. Congress, do your job.
Van Wie Financial is fee-only. For a reason.
Bank accounts of millions of Americans received a boost in July, as IRS issued the first round of payments under a new Child Tax Credit program. Roughly 60 million parents received Child Tax Credit payments in July, and others may be eligible. The new payments range up to $300 per child for eligible families.
Similar payments received prior to July, whether for Stimulus or Child Tax Credits, were essentially gifts to taxpayers. They had no effect on tax returns. Earlier or later, it was new money to the recipient, and had no effect on the regular tax refund (or tax due).
Parents everywhere have become accustomed to receiving IRS payments under various stimulus programs from the COVID-19 economic meltdown. But, if you received a check or a direct deposit starting in July, 2021, you need to see if you are truly qualified. There are definitive income restrictions. Further, you need to decide if you want payments in 2021, or if you’d rather wait until April 15, 2022, when tax returns are due. Before you make any decisions, here is what you need to know and understand.
The new round of “Tax Credits” is very inappropriately named. They are “prebates.” In other words, IRS is sending your own money back to you before you even pay it in. Every dollar you receive in 2021 will either lower your refund or raise your amount due. Wait, it gets worse.
Income used for determining eligibility for payments is from tax filings 2 or 3 years ago, and may not be relevant today. If you are earning substantially more this year, you may find that you are ineligible, yet receiving payments. IRS will “clawback” these payments, even if you already spent the money. You need to stop the payments now.
Opting out of future monthly Child Tax Credit payments is straight-forward. Go to the IRS website (www.irs.gov), and they will provide a calculator to test your eligibility, based on your 2021 income. If you are not eligible, opt out of further payments while on the website.
Avoid receiving a shock from your tax preparer in April, 2022. Know where you stand on the 2021 payments. While I believe that the government is not fulfilling its obligation to keep us adequately informed, stay safe by knowing where you stand.
Van Wie Financial is fee-only. For a reason.
On July 9, 2021, President Biden added to his impressively high stack of Executive Orders (EOs), signing a three-part plan purporting to improve opportunities for workers. The stated goals are: (1) limit or ban Non-Compete Agreements (NCAs), (2) eliminate unnecessary occupational licenses, and (3) allow HR professionals to share more information.
Before the ink dried on this epistle, I questioned the probable outcome of these mandates. Do the underlying assumptions make economic sense? Do these proposals pass the Constitutional smell test? Finally, will they help or hurt workers?
Non-Compete Agreements are generally used to prohibit (for a period of time) terminated key employees and sellers of businesses from creating or entering into competition with the employer who has paid them handsomely, or the business buyer who helped enrich the seller. Biden seems to believe that eliminating NCAs would somehow enhance workers’ job possibilities.
Personally, in the absence of an NCA, I would expect a business seller to receive substantially less from the sale, knowing that competition from him or her could be immediate. Many business sellers offer the buyer an NCA in order to receive a higher sale price. For key employees, the argument is similar. A key-person would be unlikely to receive the same compensation if not for the NCA. Again, why pay someone handsomely when that person could leave and compete immediately? This one seems to me to be a loser.
Elimination of Unnecessary Occupation Licenses is long overdue. Biden’s own party has relentlessly expanded occupation licensing requirements for jobs that certainly do not require a certificate on the wall. Flower arrangers, hair cutters, interior designers, shampooers, upholsterers, and many more must today be licensed. The public is more than capable of deciding who does a good job, and who does not. Customers will vote with their feet. Besides, prices will come down, making life better for everyone.
HR professionals today are unable to share much information beyond, “Did so-and-so work there from this date to that date?” Workers’ privacy is well protected, and job seekers perceive more flexibility to request higher salary ranges under today’s “don’t ask, don’t tell” rules. Allowing HR people to share more data will likely reduce some applicants’ ability to demand a better deal, fearing his or her previous earnings may be publicized. At the very least, workers will have less privacy under the new EO.
I am baffled how the Administration is expecting improved opportunities.
Van Wie Financial is fee-only. For a reason.
Today we look back at our blog posting from February 26, 2020, at the beginning of the Coronavirus pandemic. At the time, we issued a mass email to clients and friends, and also discussed these points on the Van Wie Financial Hour. How did we do in the face of that uncertainty? We’ll dissect the discussion, using actual quotes from the 2020 blog (italicized), with current comments following.
“When market conditions become unusually disrupted, it warrants communication with our clients and friends.” Looking back, the markets were actually roiling, trading halts were being imposed, sometimes even before the market opened. It was a scary time for investors, and there was much to discuss.
“We won’t try to sugar coat this morning’s market futures – they are ugly.” Time has told the tale, and this was accurate. The market dropped more than 27% over the next month. Responding responsibly to those uncertain conditions would prove critical to our long-term investment outcome.
“Our concentration is always on the outlook for the business environment and corporate profits, which have been doing very well. How much impact will ultimately be felt on Q1, 2020 profits are unknown”. We foresaw the disruption, including interruption of worldwide supply chains. Under no scenario would our short-term economy be a pretty sight. But over-reacting is not really an option.
“With a product-oriented company, the result will mostly be felt in delayed sales, rather than lost sales. Some service businesses, particularly restaurants and bars, will incur actual lost sales. Bottom line – there will be some impact on profits.” These cautions have been spot-on, as many service businesses faltered, and far too many failed. Fortunately, demand for products is still playing catch-up, and the appetite for restaurants, etc. is now voracious and growing.
“Looking at the positive side, Americans have been finding out (the hard way) that diversification in supply chains is as important as diversification in portfolios.” Supply chain diversification was moving forward nicely, and America was winning the onshoring battle for critical supplies. Under the current Administration, progress has been halted and is actually starting to reverse, as companies are once again offshoring, apparently caring more about saving money than protecting production.
“We are finally energy independent, something I remember being promised back in the 1970s.” Our energy independence dream was fulfilled in 2020, but now, in 2021, gasoline prices are much higher, and much domestic production has been severely curtailed. We are again becoming dependent on countries that do not like us.
“How long it takes for the market to attain another new high is unknown. In the interim, we look at the fundamentals, and we see strength.” We know how far the market dropped, and we have witnessed unusual speed and magnitude in the recovery. Several new market records have been set, and on Friday, July 9, 2021, all three major indices (DJIA, S&P500, and NASDAQ) closed at all-time highs.
“Our suggestion is to ride this out, even if a market correction occurs. After all, a correction is about a 10% drop in equities, and we have gains over the past 14 months far above that number. Also, our portfolios have components of bonds, cash, and alternatives, which will not fall like the equities.” While we actually experienced a Bear Market (20% or greater decline), the recovery has been stellar, and our clients’ portfolios are reflecting the strength and speed of the recovery.
“Should anyone feel that they will lose too much sleep, please call us. Otherwise, enjoy a good book and avoid the fearmongers.” Results have proven this to be good advice, even in the face of adversity. It was a difficult time for investors and advisors, and our approach was a solid call. Rushing to “do something” is a general formula for inferior investment performance. We invest for the long term.
Van Wie Financial is fee-only. For a reason.
Not everyone starts a tech company and becomes a billionaire. But Peter Thiel did, after his 1998 startup Confinity became successful and valuable. Within 3 years of startup, the company was handling over $3 Billion in annual online payments from over 10 million commercial customers. His success was rewarded and in a novel and unusual manner. Because of his Roth IRA, it is forever tax-free.
In 2000, Confinity merged with X.com, Elon Musk’s online banking site. It was used primarily by eBay. In June of 2001, Confinity became PayPal, which went public in 2002. On day 1 it gained 50%. When eBay bought PayPal in October of 2002, the company was valued at about $1.5 Billion.
Now, about Thiel’s Roth IRA. In 1999, he made a $2,000 contribution to his Roth IRA. Roth IRA assets are never taxed because contributions to the Roth IRA were made using already-taxed funds. In Thiel’s Roth IRA, he purchased 1.76 million shares of his startup company Confinity for $.001/each ($1,760.00). As success was achieved, his Roth IRA stock value rose, and because of Roth Account rules, will never be taxed.
While the average Roth IRA balance today is about $39,100, Thiel’s Roth is currently valued at about $5 Billion (9 zeros). Thiel’s account is exactly the same size as anyone else’s would have been, had they made the same investment when he did, and then let it grow tax-free. He has received no preferential treatment under the law. I should also note that he was audited by the IRS, and passed. Remember that, in an audit, the taxpayer (rather than the accusor) has the burden of proof. Thiel met the burden, and his Roth IRA was declared lawful.
What he has received is criticism from the likes of investigative website ProPublica. In a recent report created by them, they illustrate that a lot of rich people pay little or no taxes. The ProPublica report was based on illegally leaked tax returns for Jeff Bezos, Elon Musk, Warren Buffett, and the like. IRS claims to be looking for the leaker, who has committed several felonies. (As an aside, many of us believe that no one will ever be punished for the leaks.)
What’s the bottom line on those rich people’s returns? They didn’t pay taxes because they didn’t owe any. What a concept! Thiel’s tax-free wealth was due to the Roth IRA’s tax-free environment. Other wealthy people pay little tax due to untaxed capital gains on appreciated stock. Appreciated assets are only taxed upon being sold (so far, anyway).
Taxation rules are defined and codified in the U.S. Tax Code, written by some of the very people who complain about Thiel and other wealthy people. American class envy is at work once again, and some influential people want to change the rules because of Thiel. They want a piece of his enormous pie. Many apparently feel that they deserve it, for reasons I cannot comprehend.
Responses to the ProPublica report ranged from Thiel’s no response to Musk’s single question mark, to Bezos’ explanation that, while he believes the Tax Code needs changing, at his death 99.5% of his fortune will go to a combination of taxes and charities.
Here’s my take on all of this. Get over class envy, America. It doesn’t look good on you. If you care to speculate in your Roth, and if you hit a home run, good for you. A word to the wise in Congress; don’t make any Tax Code changes based on an individual, or even on a small group of people. It never works out well over time.
Van Wie Financial is fee-only. For a reason.
On Tuesday, June 15, 2021, financial media was frantic with headlines claiming retail sales had fallen 1.3% compared to the prior month. This lead most economic reporting for a couple of days, and was surprisingly negative, given the true situation. Negative economic news from the mainstream media during this Administration is rare, so we wondered what was going on.
First, look at the “reasons” proffered by the media. Supposedly, people are spending less on things, and more on experiences. Anyone who has followed the spending patterns of young people for the past decade knows that to be a trend. COVID-19 limited the universe of available experiences. Americans are now being released to pursue those delayed experience-oriented opportunities. No surprise then, that they are exercising their regained free will.
One of the more obvious data points in the comeback of experiences shows in the relationship of food purchased in grocery stores vs. restaurants and bars. Prior to COVID-19, restaurant and bar sales had overtaken food store sales, but that quickly reversed during the pandemic. In May of 2021, “food eaten out” sales once again eclipsed grocery sales.
Taking a deeper dive into data under the headlines is revealing. Actual statistics bely the negative tone of May sales headlines. Despite experiencing a slight decline in May, the overall level of recent retail sales has been spectacular. In the past 3 months, retail sales in the U.S. increased by 50.5% on an annualized basis. Those of us who have inhabited this planet for a long time have never seen data this strong. Among the largest changes were sales of cars and trucks (up 90.5%), clothing (up 145%), and “food out” (up 116%). Again, all figures are annualized from the prior 3 months’ data.
Adding to what should be good news was an upgrade to the Atlanta Federal Reserve’s estimate of overall economic growth for the quarter, which is now an astounding 10.5%. Again, unprecedented in our lifetime.
Inflation data was the downside of the week’s economic data. May monthly data showed a whopping CPI increase of 0.8%, bringing the 3-month annualized rate to 9.9%. For the preceding 12 months, inflation data showed a reported 6.6% increase. Despite the FED’s diligence in reporting the lowest possible increase in inflation, these changes are scary large.
Back to the original premise, what was the pro-Biden media trying to accomplish with those negative headlines? As with so many media proclamations, I have no earthly idea. Excluding inflation data, our economics are just plain good. For now, anyway.
Van Wie Financial is fee-only. For a reason.
“Actions have consequences,” our parents told us. “Elections have consequences,” warned Barack Obama. “Every action has an equal and opposite reaction,” Isaac Newton explained. “The Road to Hell is paved with good intentions,” goes an old English proverb. Good observations. We should all pay attention.
Since I cannot resist one more cliché, “What goes around, comes around.” From both an economic and a social perspective, we are currently seeing evidence of problems in the economy, our society, the educational system, our borders, and foreign conflicts, that once seemed to be resolved. Are these problems planned, or unintended results from flawed policy decisions?
Our post-COVID-19 American economy is rebounding with admirable strength and velocity. Job growth is rampant, wages are rising, yet millions of people remain unemployed. “Coincidentally,” the Federal Government is subsidizing unemployment with an additional $300/week, which is actually down from $600/week earlier. Even with reduced payments, millions of people are being handsomely rewarded to remain unemployed. Many exhibit little or no motivation to return to work until those payments end. Shouldn’t we have expected this, or is it merely an unintended consequence of government over-reaction?
Automobiles by the thousands are being stored in parking lots, nearly complete, but unable to be offered for sale. They sit, week after week, due to a shortage of computer chips that would allow them to be operated. Where are the semiconductor manufacturing plants? Largely in Asia, with many in Taiwan. Taiwan is under threat from Mainland China and COVID-19. Yet most microchips are single-sourced. Shouldn’t our automakers have predicted this, or is it an unintended consequence of shopping for components by price?
Inflation is rampant, and we all know it. Government bean counters and the Federal Reserve are in denial and doing their best to “fix” their numbers so they appear less scary to the public. Inflation is a monetary phenomenon, caused by “printing” too much fiat money in a short time. It is happening daily and has happened before. Earlier this year, those of us who remember the 1970s predicted today’s environment. In the words of Yogi Berra, “It’s déjà vu all over again.” Can we really plead unintended consequences?
These items constitute a small sampling of the problems we face today, and they could all be remedied. It would take time, it would be painful in some cases, and it would involve educating Americans to understand what is necessary. That would take a great deal of Congressional will. I can’t see any.
Van Wie Financial is fee-only. For a reason.
On April 13, 2020, we published a Blog explaining why it was a poor time to own Treasury Inflation-Protected Bonds or TIPs. A mere 14 months later, our position has reversed, but not because we are wishy-washy or undecided. The national situation has changed dramatically, so investment strategies need to be revised and updated to reflect our current financial environment.
Since 1997, TIPs have presented investors with bond interest, plus an extra “kicker” in the form of an inflationary adjustment. The inflation adjustment is made by raising the principal value of the bond by the reported rate of inflation for the prior year.
Early in 2020 the world was presented with a COVID-19 pandemic, and the resultant economic shutdown drastically reduced overall consumer demand for goods and services. Reported inflation turned negative. While TIP values are not revised down during deflationary periods, they are not revised up until all accumulated deflation has been offset by subsequent inflationary increases.
Also in early 2020, interest rates were already close to zero and showed few signs of being increased any time soon. With U.S. inflation reports being negative and interest rates being close to zero, we could not justify buying TIPs in early 2020. However, nothing stays the same for long.
Fast forward to June 2021, and conditions are vastly different. Consumer demand has outstripped supplies of many goods and services, leading to rising prices. Even government wizards, who manage to vastly underreport inflation, are admitting that the Consumer Price Index (CPI) is now rising rapidly. The period of declining CPI is over and forgotten (for now, anyway), and the cost of living is higher than ever.
Adding to the pro-TIP argument is the fact that several members of the FED have stated that ZIRP (Zero Interest Rate Policy) cannot last much longer. Rates will have to rise in an attempt to dampen inflation. In the new environment, TIPs are looking more sensible, and investors are paying attention.
While TIPs can be purchased in a number of forms, we like the iShares TIP Exchange-Traded Fund (ETF). Fourteen months ago, the market price of TIP was about $121.85. oN June 4, 2021, the closing price was $127.48, representing an increase of about 4.7%. In addition, TIP pays a monthly dividend whenever the combination of inflation adjustment plus underlying bond interest is positive.
Since June 1, 2020, TIP has paid a monthly dividend only half the time. This month, TIP is paying over $0.68/share, the largest monthly payout since June of 2008. This reflects the recent rising inflationary environment. We anticipate more inflation and more TIP dividends for the balance of 2021. This could be helpful for investors who are seeking diversification and income.
Van Wie Financial is fee-only. For a reason.
Sometimes a Certified Financial Planner® (CFP®) can provide the frosting on the cake of your personal financial planning. Accountants, attorneys, other tax preparers, stockbrokers, and insurance agents all fulfill necessary functions. But for some important retirement decisions, more is better. Recently, we had an interesting client case involving a 1-time income windfall and its consequences on Roth IRA contributions. We’ll set the table with some basic background.
- Married couple, both contributing monthly to IRAs; one to a deductible Traditional IRA, the other to a tax-free, non-deductible, Roth IRA. Neither makes maximum annual contributions
- During 2020, our clients sold an asset at a significant gain
- That gain elevated their joint income above the annual limit to make Roth contributions
- Since Roth contributions had already been made, a correction was necessary
In reviewing the case, we saw that Roth contributions had been a steady $150/month, and had been at that level for years. Therefore, $1,800 of 2020 Roth contributions were disallowed. Since contributions made before Tax Day can be for the prior year, we could reclassify those early 2020 funds as 2019 contributions. That represents Part 1 of the correction.
Here’s where it got creative. Remember what the actual Tax Due Date was in 2020 (for 2019 Returns)? COVID-19 response legislation made April 15 irrelevant, instead postponing the date for filing, paying, and contributing, to July 15, 2020.
The client’s 2019 Roth contributions actually made in 2019 were only $1,800, so we reclassified the first 7 (January through July, rather than 4) contributions made in 2020 back to 2019 contributions. That still kept the client below the $6,000 maximum for 2019.
While the sum of money may seem insignificant because we were able to preserve the funds in the Roth IRA when the funds are eventually withdrawn, the gains will not be taxable. Further, there will not be Required Minimum Distributions (RMDs) on that amount, plus growth. The penalty for failure to remove disallowed Roth contributions is 6% for every year the problem goes uncorrected.
The remaining five months of 2020 Roth contributions (August through December) in the account had to be moved out immediately. That represents Part 2 of the correction. For that, we use a process called a “Back-Door Roth IRA Contribution,” which allows contributions to end up in the Roth, after a couple of legal transactions have been completed.
First, the remaining money ($750.00) was moved to a Traditional IRA, with no deduction taken. Next, we converted those funds back to the Roth IRA, tax-free. Problem solved; the entire $1,800.00 remains in the Roth IRA. The main advantage of keeping the money in the Roth is the absence of later Required Minimum Distributions.
Perspective from a Certified Financial Planner® often makes a situation better. Details are constantly changing in the Retirement Account arena. We remain current in order to assist our clients in staying on course toward financial independence.
Remember that Van Wie Financial is not a tax preparer, and does not render tax advice. What we do well is Tax Planning, which is a no-extra-cost part of our comprehensive personal financial planning service. Does your financial advisor do that? Give us a call.
Van Wie Financial is fee-only. For a reason.
All walls are barriers, but not all barriers are walls. Barriers don’t have to be physical in nature. The Biden administration wants to discourage U.S. multinational corporations from shifting investments, production, and profits overseas. Their plan is to create barriers, such as regulations and taxes, in their attempt to keep businesses home. Oh, and incidentally, while they squeeze dramatically higher taxes out of all corporations.
“When other countries see us lower our rate, they lower theirs to undercut us,” Treasury Secretary Janet Yellen said last Wednesday. “The result is just a global race to the bottom.” Bottom of what? Competing international corporate tax rates, that’s what. Instead of old-fashioned competition, which is a “carrot” approach, the current Administration proposes taxes and penalties, using the “stick” disincentive.
According to the Treasury Department, corporate tax revenue in the USA is at historic lows. But, the unspoken reason corporate tax revenues have been running lower is COVID-19, and that is quickly reaching an end. Corporate tax collections are rising quickly, and are projected to continue rising for a decade.
First of all, the government cannot “pay for” anything until it stops running an annual deficit. Before any new spending is proposed every year, we will have already borrowed over $1 Trillion (12 zeroes) to fund the current budget deficit. Balancing the budget would allow us to consider new expenditures and how they would be funded. Printing money and spending has already caused a huge spike in the inflation rate. It will only get worse.
In 2017, President Trump spearheaded a change, slashing the maximum corporate tax rate from 35% to 21%, thus encouraging companies to return money and production to our shores. Immediately, factories began reopening domestically, new ones were built, and jobs were returned to the U.S. (along with hundreds of billions in cash). Barriers had been lifted. The Trump “carrot” worked. No “stick” is needed.
Among other provisions, Biden’s corporate tax proposal encourages other nations to join a global agreement to enact a minimum global tax. Many countries will play along to curry favor with the U.S., which can be very generous in return. Other countries won’t join, as they would rather compete in the business market.
The Biden Administration’s proposed 15% minimum tax on book income (rather than taxable income) of large companies ignores several facts. Aside from basic competition, a minimum tax overrides the U.S. Tax Code. Some companies (notably Amazon) use legal provisions of the Code to reduce taxable income by making legal investments and acquisitions. In so doing, they benefit employees and customers alike.
Last week, President Biden announced a $2.2 trillion proposal to upgrade the nation’s roads, bridges, broadband, and clean energy infrastructure. He wants to “pay for” most of the sweeping overhaul by raising the corporate tax rate from 21% to 28% and encouraging other countries to enact a global minimum tax. Global taxes, dictated by the United States? Be afraid, America, be very afraid. Personal income tax increases cannot be far off.
“It changes the game we play,” Yellen said of the blueprint. So, Janet Yellen apparently thinks that this is all a game. How many of you get seriously scared when you hear that?
Van Wie Financial is fee-only. For a reason.