Protecting Yourself When Your Data is in Danger

It’s been exactly one year since I published my article “Protecting Yourself from the Latest Cyber Scams.” It’s time to update that article, given that not a week goes by without hearing about another corporate data breach, which makes our personal data and information available for anyone to see or exploit.

National Public Data, a consumer data broker, confirmed last week that a hacker had targeted the company in December 2023, "with potential leaks of specific data in April 2024 and summer 2024.” (1)

Other reports indicate that this leaked data had already been found on the dark web and could include millions of Americans' names, addresses, phone numbers, and Social Security numbers. (2)

A data breach of this magnitude is especially worrisome and is the latest in a string of major data breaches this year. (3)

If you're wondering what you can do to help protect yourself against the growing threat of identity theft and related scams, here are some steps to consider.

Consider Fraud Alerts and Credit Freezes

One way to reduce your risk after a data breach is to place a fraud alert or a credit freeze on your credit report. Both are free tools that can help you prevent fraud but work somewhat differently.

A fraud alert is a notice placed on your credit report that warns potential creditors that your identity has been compromised. It allows them to check your credit but requires them to take extra steps to verify your identity before issuing new credit in your name.  You can place a fraud alert by contacting one of the three major credit bureaus (Equifax, Experian, and TransUnion), and that agency will notify the others. An initial alert will last for one year but can be extended to seven years if you have become an actual, rather than potential, victim of fraud.

A credit freeze (sometimes called a security freeze) may also help protect you if you suspect your personal information was stolen, but it's more stringent. Once you have a credit freeze in place, potential creditors won't be able to access your credit report or credit score (there are some exceptions.) This helps prevent identity thieves from opening fraudulent accounts in your name. You must contact each of the three major credit reporting agencies to request a credit freeze. The credit freeze will stay in place until you decide to lift it, which you must do at least temporarily before applying for credit.

Following each credit bureau's instructions, you can set up a fraud alert or credit freeze online, by phone, or by mail. This may also be an excellent time to request a free credit report to check recent credit activity. Here are the three major credit bureaus' website addresses and phone numbers:

·       Equifax at Equifax.com 888-298-0045

·       Experian at Experian.com 888-397-3742

·       TransUnion at Transunion.com 800-916-8800

Monitor Your Personal and Financial Information and Implement Technology Controls

·       If you need extended support, consider subscribing to a credit monitoring service. These services come at a cost, but they may bundle credit report monitoring, credit report locks, scans of the dark web, help recovering from identity theft, and insurance.

·       Periodically review your credit reports to spot suspicious activity. You can receive free weekly online reports from all three credit bureaus at the official site, annualcreditreport.com.

·       Sign up for alerts for your bank, financial, and credit card accounts. These alerts notify you when an unusual transaction occurs, or someone has signed into your account. Check your accounts frequently and review your statements monthly.

·       Pick strong passwords that are different for each account and change them periodically. For an extra layer of protection, use a password manager that generates strong, unique passwords you control through a single master password.

·       Enable multifactor authentication when offered. For example, in addition to providing a password, you may be required to enter a code sent to your phone or email, answer a security question, use a physical security key, or sign in using a facial or fingerprint scan.

·       Keep your device and security software up to date. Operating system and software updates may include security fixes. Turning on automatic updates is an easy way to do this.

·       Add security software to your smartphones and tablets, just like your computer or laptop.

·       Beware of phishing (e-mail), vishing (phone), and smishing (SMS) attempts from scammers who want to obtain passwords or financial information. Always maintain a healthy dose of skepticism.

·       Be cautious if you receive a link or attachment in your email or via social media. Don’t click on it until you verify it's legitimate.

·       Warnings of overdue invoices, failed delivery attempts, and order confirmations in e-mails and texts look surprisingly genuine these days. Overseas scammers are now adept at using spelling and grammar checkers, so those old tell-tale signs may no longer exist.

·       Leave unsolicited/unknown phone calls to voicemail and double-check phone numbers, even if they appear familiar or appear to originate from a company you usually do business with. Cloning and spoofing of known and “safe” caller ID information is commonplace, so you can’t always trust it.

·       With artificial intelligence, voice replication software, and deep fakes, you can’t always trust what you hear or see. A tiny snippet of your voice, picture, or video on the web (or from a phone call) can be exploited to allow imposters to create near-perfect replicas of your voice, your loved ones’ voice, or video images and trick you into acting quickly out of fear.

·       Beware of humans or robocalls looking for a simple “yes” or “no” answer to a seemingly innocent question. They may attempt to steal your voice “print” to use in future scams they have planned.

Human Controls & Constant Vigilance

Be aware that after a significant data breach, scammers may step up impersonation attempts, even if they don't have access to stolen data. That might be an impersonation of a loved one in distress (or perhaps hurt) or a government official.

In all cases, they prey upon your fear and your natural inclination to act irrationally while you’re fearful. They may demand you to send money or gift cards, or they’ll share your personal information on the dark web. Chances are, if they have it, it’s already on the web, and they’ll probably share it with others even if you pay up.

For example, someone allegedly from the Social Security Administration or IRS might contact you and ask you to verify your Social Security number or provide or update your personal information. However, government agencies will never email you or call you to ask for this information. Don't respond, and promptly contact the appropriate government agency to report an identity theft attempt.

Whenever a stranger contacts you with a request for money, make it a personal practice to allow yourself 5-10 minutes to think about what’s happening before acting. Be especially skeptical if they advise you not to discuss the matter with a spouse or loved one.

If your data has been compromised or your computer has been hacked, they may offer to help you avoid or recover from identity theft or help secure your computer. They’ll do neither and only try to get you to pay up. Never believe or accept their offers of help, even if they say they’re from Norton Security, Microsoft, or Apple. By dangling information about you that few people know (harvested perhaps by hacking into your e-mail account), they convince you they’re legitimate (they’re not) and scare you into acting or paying up.

Hang up or shut down your computer immediately, and take the time to think about your next steps. Contact your closest tech geek to help you determine if your computer or e-mail account has been compromised and to sweep it for possible malware. Change your e-mail password immediately and turn on multi-factor authentication.

If you believe a loved one is in trouble, call them directly before doing anything (like sending money or even answering seemingly innocent questions) to confirm if they’re OK independently. Setting up a safe word or phrase with loved ones in advance can save you from heartache and a lighter wallet.

For more information about how to report and recover from identity theft, visit the Federal Trade Commission's website IdentityTheft.gov.

If you suspect fraud, you can file a complaint with the Federal Trade Commission at reportfraud.ftc.gov.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

(1) National Public Data, August 2024

 (2) KrebsonSecurity.com, August 15, 2024

(3) Identity Theft Resource Center, 2024

What’s Going on in the Markets August 6, 2024

With the lazy, hazy days of summer come the doldrums in the stock markets—or so everyone thought.

July went out with a bang as the market rally broadened significantly to include small-caps and mid-caps, while the red-hot technology stocks took a breather. Sure, the S&P 500 index was only up 1%, but the small caps were up 11%, the mid-caps were up 7%, and even the bonds were up 3%.

But since then, if July was the lion, August has been the bear. The S&P 500 index is down 5% in just three August trading days, the small caps have given back almost 10%, and the tech-heavy NASDAQ 100 has slid 7.5%. In the digital age, markets move fast.

Now, mind you, the S&P 500 is still up about 15% over the last 12 months (and up 9.5% year-to-date), but every 10-12 months, we should expect a 5%- 9% pullback in the markets. We had a 5.3% pullback in April, but the last time we saw a pullback of this size ended last October. The markets have been remarkably calm over the past year, and we went 356 trading days without a 2% daily pullback in the S&P 500 index. That may be why this pullback feels so jarring.

Pundits and the media will posit several reasons for the pullback, such as:

·       The Federal Reserve is on the cusp of making a policy mistake by keeping interest rates higher for longer and is pushing the country into a recession.

·       The July monthly jobs report, which was out on Friday, spooked traders and investors as it came in much lighter than expected, and the unemployment rate ticked up. This fanned the fears that a recession was on the way (there’s always a recession on the way; the trick is knowing when we’re in one.)

·       Over the weekend, news broke that legendary investor Warren Buffet sold half of his stake in Apple during the past quarter and is stockpiling cash.

·       The possibility of a bigger, more freely spending government—regardless of party—is giving traders fits. The markets crave certainty, and summertime offers little of it in election years.

·       Escalating tensions in the Middle East.

·       The unwinding of a long-running Japanese Yen carry trade, in which traders sold the Yen and invested it in higher-paying countries and other opportunities for months if not years. Now, that trade is unwinding and directly affects the world’s stock markets.

You can cite any of the above reasons for the selloff, but the selling will stop when the fear that’s getting the better of so many traders and investors goes away. But certainty about the election is about three months away. Absent a market crash, any possibility of a short-term interest rate cut is about 45 days away. So, buckle up, meanwhile.

In our client portfolios, we’ve been getting defensive by taking some money off the table for weeks now. We are hedged with money market cash earning 5%, Treasury Bills, bonds, inverse funds, and options sold against our positions. We’re prepared to get more defensive if things get worse, but this is a time to look for quality stocks and funds that were too expensive about a week ago. We did some shopping for some clients last week.

We’ve had a fantastic start to the year, and historically, an election year tends to be volatile from the summer into September/October. Once the overhang from the election uncertainty is gone, the market should resume its uptrend by the end of the year.

In short, as I’ve repeated before, the secret to success in accumulating wealth is not to get scared out of your positions. It’s never about completely avoiding risk in the markets but reducing risk. If you’re losing sleep over your investments, consider reducing your exposure or contact us to help determine if you’re overly invested.

Meanwhile, try and stay cool!

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

Real Estate Commission Changes Coming

For decades, it’s been a well-known and accepted truism. Anytime you plan to sell your home with the help of a real estate agent, you are expected to pay a 6% commission on the sale. Sure, there have been discount brokers and ways to get your home listed on the Multiple Listing Services (MLS) on the cheap, but deep down, you knew that if you didn’t pay at or near 6%, your property might not get the same attention as others who did.

That’s about to change.

In March 2024, the National Association of Realtors (NAR) reached a landmark $418 million settlement after losing an antitrust lawsuit filed by a group of home sellers. As many as 50 million people who paid commissions on homes sold in recent years could receive a small amount from the class-action settlement. The powerful industry group also agreed to change long-standing practices related to sales commissions. (1)

Background

For decades, many real estate agents have had little choice but to join NAR and follow its rules regarding local MLS — the databases most brokers use to list information about properties for sale. Listing brokers typically cooperated with buyer's agents and split the commission paid by the seller, with the amounts communicated via the MLS in data fields that were only visible to agents.

Plaintiffs claimed that NAR (and brokers that require agents to be NAR members) conspired to artificially inflate commissions through an industry-wide practice requiring the seller to pay commissions to brokers on both sides of the transaction. They believed this helped to uphold a nationwide standard of five to six percent of the sales price, which is significantly higher than the commissions paid in many other countries. (2)

Practice Changes

Effective August 17, 2024, NAR will implement the following new policies related to how real estate brokers are compensated to handle transactions. (3)

1. Commission offers for buyer's agents can no longer be required to appear in the MLS, though they are still permitted. Listing agents can advertise specific commission offers on brokerage websites and over the phone, text message, or email. Home sellers and their agents will negotiate directly with buyers and their agents regarding compensation.

2. Buyers must discuss and set compensation directly with their agents before touring homes, as sellers do with listing agents. They will be asked to sign written representation agreements that outline the agents' services (e.g., showing property, negotiating offers, transaction management) and how much they charge. This is to help ensure that buyers are fully aware of the costs they could be responsible for paying.

Implications for Buyers and Sellers

These changes are intended to allow more room for negotiation and spur competition, which could help lower sellers' costs. Commissions have always been baked into transaction prices, so home prices would likely be reduced in markets where sellers' costs fall.

Some economists believe commissions could drop as much as 30% if buyer's agents face pressure from potential clients to discount their fees, but savings of this magnitude aren't guaranteed. (4) The impact on real estate commissions will ultimately depend on market conditions, which can vary greatly by location and how sellers, buyers, and agents respond to the new practices.

Like other businesses, brokerages have overhead that includes rent, liability insurance, marketing, and other operating costs. Most individual agents must split sales commissions with their brokers (from about 60/40 up to 80/20 for the most productive agents) or pay fees to the company.

A buyer's agent sometimes shows property to clients over days to months and may write numerous offers for deals that never come together. Many experienced buyer's agents — long accustomed to receiving the same commission as the listing agent — may be reluctant to work for less, even if they must justify their value more regularly.

Buyers will determine the commission for their agents, but the money may or may not come from their pockets. For example, an offer could be made contingent on the seller paying the buyer's share of the commission or include a request for a general credit toward closing costs in the amount needed to pay the buyer's agent. Current lending guidelines and regulations prevent most buyers from adding commission costs to their mortgages. A rule pertaining to Veterans’ Administration (VA) loans, which specifically prohibited borrowers from paying agent commissions, has been temporarily suspended. (5)

In some cases, sellers might agree to cover buyers' commissions, as it has long been customary and could still be in their best interests. Nationwide, home prices have risen more than 50% since 2019, and high interest rates have made mortgage payments much less affordable. (6) This means sellers with equity tend to be in a better position to pay commissions than potential buyers, many of whom may struggle to come up with enough cash for the down payment. For these reasons, a seller willing to pay all or some of the buyer's commission may receive more offers and a higher final price than one who refuses to do so. This assumes, of course, the current cooling of the housing market continues.

Online sites have made it easier to shop for a home without using an agent, so more buyers might brave the market on their own if they think they can pocket the savings. Yet buying a home is the biggest financial transaction many people will make in their lifetimes, and the issues that arise during the process can be unexpected. There are many situations in which buyers could benefit from having their own representation, especially if they are inexperienced or unfamiliar with the local market.

First-time buyers, responsible for 31% of existing home sales in May 2024, may have more confidence and make more informed decisions if they work with a trusted professional. (7) However, many will need help from sellers to pay their agents' fees, putting them at a bigger disadvantage than ever against buyers with more access to cash in competitive markets.

Negotiating commissions among all parties is likely to make it harder to strike deals in general, so buyers may have to search longer and write more offers before they are successful. It's also possible that sellers will see little change in commission costs in the coming months while the market is in flux. But in time, the new rules could spark innovation that creates new business models and expands lower-cost options.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

1) The Wall Street Journal, March 15, 2024

2, 4) The New York Times, May 10, 2024

3, 5, 7) National Association of Realtors, 2024

6) The Wall Street Journal, June 27, 2024

The Impact of Higher Interest Rates on Real Estate

At the beginning of March 2022, the U.S. 10-year Treasury Bill interest rate hovered around 1.8%. By January 2024, that same 10-year rate hovered around 4%, more than doubling in less than two years.

As a result, U.S. commercial real estate prices fell more than 11% between March 2022, when the Federal Reserve started hiking interest rates, and January 2024. The potential for steeper losses has chilled the market and still poses potentially significant risks to some property owners and lenders. (1)

On the residential side of the real estate market, the national median price of an existing home rose 5.7% over the year that ended in April 2024 to reach $407,600, a record high for April. (2) Despite sky-high borrowing costs, buyer demand (driven by younger generations forming new households) has exceeded the supply of homes for sale.

Here are some factors affecting these distinct markets and the broader economy.

Slow-motion Commercial Meltdown

The expansion of remote work and e-commerce (two byproducts of the pandemic) drastically reduced demand for office and retail space, especially in major metro areas. An estimated $1.2 trillion in commercial loans are maturing in 2024 and 2025, but depressed property values, high financing costs, and vacancy rates could make it difficult for owners to keep up with their debt. (3) In April 2024, an estimated $38 billion of office buildings were threatened by default, foreclosure, or distress, the highest amount since 2012. (4)

In a televised interview on CBS’ 60 Minutes in February, Federal Reserve Chairman Jerome Powell said the mounting losses in commercial real estate are a "sizable problem" that could take years to resolve, but the risks to the financial system appear to be manageable. (5)

Locked-up Housing Market

The average rate for a 30-year fixed interest rate mortgage climbed from around 3.2% in the beginning of 2022 to a 23-year high of nearly 8% in October 2023. Mortgage rates have dropped since then, but not as much as many hoped. In May 2024, the average rate hovered around 7%. (6)

The inventory of homes for sale has been extremely low since the pandemic, but a nationwide housing shortage has been in the works for decades. The 2005-2007 housing crash devastated the construction industry, and labor shortages, limited land, higher material costs, and local building restrictions have all been blamed for a long-term decline in new single-family home construction.  The Federal Home Loan Mortgage Corporation, better known as Freddie Mac, estimated the housing shortfall was 3.8 million units in 2021 (most recent data). (7)

Many homeowners have mortgages with ultra-low rates, making them reluctant to sell because they would have to finance their next homes at much higher rates. This "lock-in effect" has worsened the inventory shortage and cut deep into existing home sales. At the same time, the combination of higher mortgage rates and home prices has taken a serious toll on affordability and locked many aspiring first-time buyers out of homeownership.

In April 2024, home inventories were up 16% over the previous year, but there was still just a 3.5-month supply at the current sales pace (a market with a six-month supply is viewed as balanced between buyers and sellers, but see the Latest Housing Data below.) The supply of homes priced at more than $1 million was up 34% over the previous year, which may help affluent buyers but won't do much to improve the affordability of entry-level homes. (8)

New Construction Kicking In

Newly built homes accounted for 33.4% of homes for sale in the first quarter of 2024, down from a peak of 34.5% in 2022 but still about double the pre-pandemic share. The growth in market share for new homes was mostly due to the lack of existing homes for sale. (9)

April 2024 was the second-highest month for total housing completions in 15 years, with 1.62 million units (measured annually), including single-family and multi-family homes. (10) This may cause apartment vacancies to trend higher, help slow rent growth, and allow more families to purchase brand-new homes in the next few months.

Renters are seeing some relief thanks to a glut of multi-family apartment projects that were started in 2021 and 2022 — back when interest rates were low — and are gradually becoming available. In the 1^st quarter of 2024, the average apartment rent fell to $1,731, 1.8% below the peak in the summer of 2023. (11)

We don’t want to see a dramatic decline in the number of new multi-family housing projects just as rents are starting to ease. Reducing housing inflation is essential to paving a path toward lower interest rates, but rents could rise again if the new supply drops significantly.

Effects Weave Through the Economy

By one estimate, the construction and management of commercial buildings contributed $2.5 trillion to U.S. gross domestic product (GDP), generated $881.4 billion in personal earnings, and supported 15 million jobs in 2023. (12) According to the National Association of Realtors, residential real estate contributed an estimated $4.9 trillion (or 18%) to U.S. GDP in 2023, with each median-priced home sale generating about $125,000. When a home is purchased (new or existing), it tends to increase housing-related expenditures such as appliances, furniture, home improvement, and landscaping. (13)

Both real estate industries employ many types of professionals, and developing new homes and buildings stimulates local economies by creating well-paying construction jobs and boosting property tax receipts. The development benefits other businesses (locally and nationally) by increasing production and employment in industries that provide raw materials like lumber or that manufacture or sell building tools, equipment, and components.

Shifts in real estate values, up or down, can influence consumer and business finances, confidence, and spending. And when buying a home seems unattainable, some younger consumers might give up on that goal and spend their money on other things.

If interest rates stay high for too long, they could accelerate commercial loan defaults, losses, and bank failures, continue to constrain home sales, or eventually push down home values—and any of these outcomes would have the potential to cut into economic growth. When the Federal Reserve finally begins to cut interest rates, borrowing costs should follow, but that's not likely to happen until inflation is no longer viewed as the larger threat.

Latest Housing Data

The latest housing data shows we may have seen a cyclical high for the housing market.

For April, the S&P Case-Shiller 20-City House Price Index was up again, increasing by 0.4% on a seasonally adjusted basis, but below forecasts. While the Index is rising to new highs, home price growth is slowing.

May New Home Sales fell 11.3% from the previous month, and prices are now 9% below their October 2022 peak. The number of months’ supply of new homes for sale jumped, rising to 9.3 months, reflecting inventory levels only seen in some of the worst housing recessions of the last 50 years.

The housing market is starting to come back to earth. It is a major unknown how long it will take to normalize or how swift its fall. If new home sales data worsens and existing home supply increases further, prices will inevitably come down. We don’t want to see mounting evidence of a housing market plunge, which would majorly affect the broader economy.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

1, 3) International Monetary Fund, January 18, 2024

2, 8, 10, 13) National Association of Realtors, 2024

4) The Wall Street Journal, April 30, 2024

5) CBS News, February 4, 2024

6–7) Freddie Mac, 2022–2024

9) Redfin, May 20, 2024

11) Moody's, April 1, 2024

The Outlook for Social Security and Medicare

In a recent survey, 87% of Americans said that Congress should act now to shore up the Social Security program, rather than waiting 10 years to find a solution. The sooner they do, the better.

Each year, the Social Security and Medicare trust fund Trustees provide detailed reports to Congress that track the programs' current financial condition and projected financial outlook. These reports have warned for years that the trust funds would be depleted in the not-too-distant future, and the most recent reports, released on May 6, 2024, show that Social Security and Medicare continue to face significant financial challenges.

The Trustees of both programs continue to urge Congress to address these financial shortfalls soon so that solutions will be less drastic and may be implemented gradually.

Despite the challenges, it's important to remember that neither of these programs is in danger of collapsing completely. The question is what changes will be required to rescue them.

More Retirees and Fewer Workers

The fundamental problem facing both programs is the aging of the American population. Today's workers pay taxes to fund benefits received by retirees, and with lower birth rates and longer life spans, fewer workers pay into the programs, and more retirees receive benefits for a longer period. In 1960, there were 5.1 workers for each Social Security beneficiary; in 2024, there were 2.7, projected to drop steadily to 2.3 by 2040.

Dwindling Trust Funds

Payroll taxes from today's workers and income taxes on Social Security benefits go into interest-bearing trust funds. During times when payroll taxes and other income exceeded benefit payments, these funds built up reserve assets. But now, the reserves are being depleted as they supplement payroll taxes and other income to meet scheduled benefit payments.

Social Security Outlook

Social Security consists of two programs, each with its own trust fund. Retired workers, their families, and survivors receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program, and disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program.

The OASI Trust Fund reserves are projected to be depleted in 2033, unchanged from last year's report. At that time, incoming revenue would pay only 79% of scheduled benefits. Reserves in the much smaller DI Trust Fund, which is on stronger footing, are not projected to be depleted during the 75 years ending in 2098.

Under current law, these two trust funds cannot be combined, but the Trustees also provide an estimate for the hypothetical combined program, referred to as OASDI. This would extend full benefits to 2035, a year later than last year's report, at which time, incoming revenue would pay only 83% of scheduled benefits.

Medicare Outlook

Medicare also has two trust funds. The Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care under Medicare Part A. The Supplementary Medical Insurance (SMI) Trust Fund comprises two accounts: one for Medicare Part B physician and outpatient costs and the other for Medicare Part D prescription drug costs.

The HI Trust Fund will contain surplus income through 2029 but is projected to be depleted in 2036, five years later than last year's report. At that time, revenue would pay only 89% of the program's costs. Overall, projections of Medicare costs are highly uncertain.

The SMI Trust Fund accounts for Medicare Parts B and D are expected to have sufficient funding because they are automatically balanced through premiums and revenue from the federal government's general fund. Still, financing must increase faster than the economy to cover expected expenditure growth.

Possible Fixes

Based on this year's report, if Congress does not take action, Social Security beneficiaries might face a benefit cut after the trust funds are depleted. Any permanent fix to Social Security would likely require a combination of changes, including:

• Raise the Social Security payroll tax rate (currently 12.4%, half paid by the employee and half by the employer). An immediate and permanent payroll tax increase to 15.73% would be necessary to address the long-range revenue shortfall (or 16.42% if the increase starts in 2035).

• Raise the ceiling on wages subject to Social Security payroll taxes ($168,600 in 2024).

• Raise the full retirement age (currently 67 for anyone born in 1960 or later).

• Change the benefit calculation formula.

• Use a different index to calculate the annual cost-of-living adjustment.

• Tax a higher percentage of benefits for higher-income beneficiaries.

Addressing the Medicare shortfall might necessitate spending cuts, tax increases, and cost-cutting through program modifications.

Based on past changes to these programs, any future changes are likely to primarily affect future beneficiaries and have a relatively small effect on those already receiving benefits. While neither Social Security nor Medicare is in danger of disappearing, it would be wise to maintain a strong retirement savings strategy to prepare for potential changes that may affect you in the future.

Many people believe the social security system will not be around when it’s their turn to collect benefits. I don’t believe that to be the case. Based on everything I’ve studied, I believe Congress will act, but not any sooner than they have to, or perhaps when it becomes a crisis. And when they do, a combination of some or all of the above techniques will extend the social security fund and medicare benefits for many more decades. There’s no rush, in my opinion, to collect benefits as soon as possible out of fear of the system running out of money.

You can view a summary of the 2024 Social Security and Medicare Trustees Reports and a full copy of the Social Security report at ssa.gov. You can find the full Medicare report at cms.gov.

All projections are based on current conditions, subject to change, and may not come to pass.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.