Social Security’s Stealth Default

  • The “loophole” the feds just closed with no public debate…
  • … and it won’t even “save Social Security”!
  • A November to remember for stocks?
  • A weak pulse for manufacturing
  • The government’s $43 million gas station… college costs then and now, continued… barter income in a world where all currency is digital… and more!

Wow, that’s brazen. They took “file and suspend” out back and shot it dead. No warning at all.
We figured this technique to maximize Social Security benefits would be safe at least until the next president took office and Social Security’s looming bankruptcy would be too big to ignore.
Instead, it wound up in the fine print of the “zombie budget” Congress and the White House agreed on last week.
So how did we get here? As we said six months ago, it started as a line item in President Obama’s 2015 budget proposal.
In its own words, the budget “proposes to eliminate aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.”
Oh, those naughty “upper-income beneficiaries” and their “manipulations”!
File and suspend works — worked — like this: Say you’re about to reach Social Security’s “full retirement age” of 66 and you’re eligible for $2,000 a month in benefits. Your spouse, meanwhile, is due to collect $700 a month in benefits.
Instead of following this path, you file and suspend — forgoing your own benefits until as late as age 70 while your spouse files to collect spousal benefits. Doing so accomplishes two things…

  • Your spouse is eligible for half your monthly benefit — in this case, $1,000. That’s a lot more than $700
  • While your own benefits are suspended, you earn delayed retirement credits. Instead of collecting $2,000 a month starting at age 66, you get $2,721 starting at age 70.

More money now, more money later. Boston University professor Laurence Kotlikoff estimated this technique could goose lifetime Social Security benefits for many couples by $50,000.
Killing file and suspend will save Uncle Sam $9.5 billion a year, according to 2009 research from Boston College.
Which, as we pointed out in the spring, works out to little more than 1% of the $863 billion in benefit checks issued by the Social Security Administration last year.
However… the savings help accomplish two critical objectives of the budget deal, and this is why congressional Republicans agreed to sign onto the White House’s proposal from months ago…

  • The savings delay the day of reckoning for Social Security disability. The disability trust fund was on track to be exhausted next year — forcing a 20% benefit cut. Now that can’s been kicked down the road to 2022
  • The savings also spare certain Medicare beneficiaries a 52% increase in their Part B premiums that was due to kick in next year.

That’s right: Killing file and suspend the way the politicos did it in the zombie budget will do nothing to shore up the old-age and survivors trust fund — which former White House budget chief David Stockman figures will be exhausted by 2026. All the money’s being siphoned off for other purposes.
Anyway, it’s a done deal: Under the budget law, file and suspend goes away in six more months. It was fun while it lasted.
We’re sure Boston College’s Alicia Munnell is pleased. “Who gains?” she wrote in a MarketWatch column about file and suspend last March. “Some obvious criteria include: 1) the individuals must be married; 2) at least one member of the couple must be healthy enough to delay claiming until 66; and 3) both spouses must have an earnings history. These facts tend to tilt the benefits toward higher-earning households.”
Well, OK. We had a rather different take on the matter last May. Using Munnell’s enumerated list, killing file and suspend punishes you if: 1) you’ve worked hard to create a strong marriage; 2) you’ve worked hard to take responsibility for your health; and 3) you’ve both fed the beast as wage slaves for the last 40-odd years.
Besides, it’s not just those manipulative “upper-income beneficiaries” who stand to lose: So do divorced women.
Many divorced women have resorted to filing for Social Security benefits based on the higher earnings of their ex-husbands… and then holding off collecting their own benefits until age 70, taking advantage of delayed retirement credits.
Kiplinger recently called it one of “the best Social Security strategies if you’re divorced.” Well, no more.
Let’s call the death of file and suspend what it really is — a stealth default on Social Security.
Back in 2011, the politicos were kicking around the idea of using something called “chained CPI” as the yardstick for Social Security cost-of-living adjustments. Not surprisingly, chained CPI would have the effect of lowering the annual COLA. (In the end, the idea wasn’t enacted… but don’t be surprised to see it revived at some point.)
“This is a default,” said Ron Paul, still a member of Congress at the time. “Just because it is a default on the people and not the banks and foreign holders of our debt does not mean it doesn’t count.”
It’s at times like these we cast our gaze jealously to our north. For months now, we’ve extolled the virtues of the Canada Pension Plan — professionally managed, running a surplus, growing its reserves.
By “piggybacking” the Canada Pension Plan, you can supplement your retirement income anywhere between $400-4,700 every month. You can learn how folks just like you are doing it… and the three simple steps it takes to get started… when you follow this link.
Stocks are rallying as the new week begins. At last check, the S&P 500 is up more than half a percent at 2,092 — a mere 40 points below its all-time high.
Bonds are selling off, pushing yields up: The yield on a 10-year Treasury note is 2.19%. Gold is losing further ground, now $1,135.
“Stocks are one strong trading day away from breaking record levels again,” says Jonas Elmerraji of our trading desk. “And odds are looking pretty good of that happening.
“Historically, the November through year-end stretch is a strong environment for the stock market. In the past decade, only 2007 and 2008 brought meaningfully negative returns during the final two calendar months of the year. So seasonality looks strong here.”
America’s factory sector is still growing — barely. The ISM manufacturing index for October clocked in this morning at 50.1, just above the dividing line between expansion and contraction. It’s the weakest reading since May 2013.
Similar measures of manufacturing have come in from overseas, too. The eurozone number is 52.3. China registered 49.8 — a third straight month of contraction.
Your government in action: The Pentagon spent $43 million to build a gas station in Afghanistan — only about 86 times what it should have cost.
The government watchdog whose job is to oversee U.S. spending in Afghanistan, John Sopko, is calling out the Defense Department for a compressed natural gas filling station. Typical construction cost for such a thing next door in Pakistan: $500,000. Contracted amount with an outfit called Central Asian Engineering: just under $3 million. Actual cost: $42,718,730.
It gets better: The $43 million gas station was part of an $800 million program aimed at boosting the Afghan economy, formally known as the Task Force for Business Stability Operations. And Sopko can’t get any answers about the program. The military is restricting access to documents and telling Sopko there are no personnel who can field his inquiries.
“Frankly, I find it both shocking and incredible that DOD asserts that it no longer has any knowledge about TFBSO, an $800 million program that reported directly to the Office of the Secretary of Defense and only shut down a little over six months ago,” Sopko wrote in a letter to Secretary of Defense Ashton Carter.
That’s even though the director of the task force is still on the Pentagon payroll as a special adviser. “It is totally incredible that you now have a ghost program in the Department of Defense,” Sopko tells Fox News. “It’s almost like it’s pixie dust.”
Oy. Makes us wistful for the days of $435 hammers and $600 toilet seats…
“In the early 1970s,” a reader writes as our college-cost thread stretches into another week, “I attended Rhode Island College (a state school) for $500 tuition per year.
“I paid for it with a full-time summer job in a mill that paid $1.70 per hour, minimum wage. In 10 weeks, I netted the needed $500. No worries, no loans. (I also worked in a supermarket year-round for all the rest, including a car and girls.)
“Today, tuition only at the same state school is $8,100. A full-time minimum-wage job would give a student $9 per hour, or about $270 per week net. Ten weeks work, net $2,700, with $8,100 needed. Students who work summer jobs today are FAR worse off than I was in 1971-75.
“Why? Because the government ‘helps’ them so much. LOL.”
“To add a quick comment on the STEM issue,” writes another, “I also went to a prestigious school, got a degree in chemical engineering, got my technologist diploma also in chem eng and had to move almost to an isolated town near the Northwest Territories of Canada to get some experience.
“Then got wiped out with the oil collapse. Now I drive heavy equipment and work construction to survive. I’ve been very flexible (unlike many of my peers) and a good saver of precious metals, but it’s nearly impossible to make an honest living.”
“No one really cares where you graduate from as an undergrad,” writes a third. “Grad school, yes. Undergrad? Probably for your first job.
“And even then, if one is that concerned, transfer in for your third year. Your correspondent last week spending $60,000 per years reminds me about that part about a fool and his money being parted. Besides, Psych 101 is the same in a junior college or some giant, crowded lecture hall at Big Name U.”
“I am very worried,” a reader writes in response to our “war on cash” episode last Thursday, including the possibility of a ban on cash.
“If I trade my neighbor one chicken for help fixing my plumbing, where/how will we generate the electronic digital currency to pay our…

Federal income tax
Federal unemployment tax
State sales tax
State income tax
State unemployment insurance
State workers comp
State corporate activity tax
State trade license (plumbing services)
County sales tax
County health permit (selling food)
City income tax

“… for this transaction?
“A message brought to you from the real world, aka ‘flyover country.’”
The 5: Heh.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Tomorrow, an urgent update on a profit opportunity that’s taking shape this week.
“After Saturday, Nov. 7,” says our Ray Blanco, “the entire investing world is going to split into two groups. “Those who were in ahead of time. And those who missed out.”
We’ll explain why it’s such a game changer tomorrow. But if you don’t want to wait, you can find Ray’s exclusive briefing right here.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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