Personal Finance

What may happen to Social Security in 2033 if trust funds aren’t fixed

Published

5 months ago

October 22, 2024

Social Security may not be able to pay full Social Security retirement benefits as soon as 2033, based on current projections from the program’s trustees.

If Congress doesn’t move to fix the situation by that date, the general expectation is that millions of retirees could see a 21% across-the-board benefit cut.

The effects of that lost income could be enough to prompt a retirement crisis, since it would double the elderly poverty rate and reduce median senior household income by nearly 14%, according to new research titled, “A Simple Plan to Address Social Security Insolvency.”

Yet those broad benefit cuts would not necessarily have to happen, as the worst effects of insolvency could be prevented by executive action, according to the report by Andrew Biggs, a senior fellow at the American Enterprise Institute, and Kristin Shapiro, counsel at BakerHostetler.

Instead of across-the-board benefit cuts, benefits could be reallocated to avoid increases in poverty for low earners while having just a small effect on the middle class, according to Biggs.

“It means big cuts on very rich people, but it avoids what you might think of as a retirement crisis, where everything is thrown into upheaval,” Biggs said.

Why Social Security’s trust funds face depletion dates

Social Security draws from multiple sources to pay benefits — ongoing revenue from payroll taxes and income taxes, as well as trust funds that are used to supplement the monthly checks beneficiaries receive.

Yet as more people collect Social Security retirement benefits, the trust fund used to pay those benefits is running low. The depletion date — currently 2033 — represents the point at which the fund will be exhausted.

At that point, it is expected that 79% of those benefits will be payable.

Social Security has more than one trust fund, including one that pays retired workers, their families and survivors, and a second that pays disability benefits.

Together, those trust funds have a projected depletion date of 2035, when 83% of benefits would be payable. While merging the funds could provide additional financial runway, doing so it not allowed under current law, according to Biggs’ and Shapiro’s research.

How broad benefit cuts could be avoided

As the November election approaches, experts generally hope a new president and new Congress will address Social Security’s solvency.

“We far prefer for Congress to enact comprehensive Social Security reforms before 2033,” Biggs’ and Shapiro’s research states.

The sooner Congress acts, the better it will be for all beneficiaries involved, to give them more certainty, said Shai Akabas, executive director of the Bipartisan Policy Center’s Economic Policy Program. A recent survey from Nationwide Retirement Institute found 72% of adults worry Social Security will run out of funding in their lifetimes.

The roughly 21% across-the-board benefit cut is “untenable and unsustainable, both politically and financially from a household perspective,” Akabas said.

However, if lawmakers fail to come to an agreement by the depletion date, the president could move to protect beneficiaries from the worst effects of the ensuing cuts, according to Biggs and Shapiro.

Social Security Administration Commissioner: Congress needs to act in order to avoid the shortfall

Once the depletion date arrives — whether it remains 2033 or shifts to another year — the president at the time could move to cap monthly benefits at about $2,050, the research proposes.

That change would reduce payments to beneficiaries who receive more than that amount and make Social Security solvent without adding new debt or increasing taxes.

At the same time, about half of all retirees and survivors would still receive their full benefit payments. Notably, no retiree would be pushed into poverty, according to the research.

To be sure, if the fund depletion date were crossed, lawmakers would face an unprecedented situation.

What happens next would depend on the interpretation of Constitutional law. That could prompt litigation, the research notes, including from beneficiaries who may not receive the benefits they were promised.

Personal Finance

Amid tariff sell-off, avoid ‘dangerous’ investment instincts, experts say

Published

23 minutes ago

April 4, 2025

Business Finance News

Jamie Grill | Getty Images

As U.S. markets continue to suffer steep declines in the wake of the Trump administration’s new tariff policies, you may be wondering what the next best move is when it comes to your retirement portfolio and other investments.

Behavioral finance experts warn now is the worst time to make any drastic moves.

“It is dangerous for you — unless you can read what is going to happen next in the political world, in the economic world — to make a decision,” said Meir Statman, a professor of finance at Santa Clara University.

“It is more likely to be driven by emotion and, in this case, emotion that is going to act against you rather than for you,” said Statman, who is author of the book, “A Wealth of Well-Being: A Holistic Approach to Behavioral Finance.”

That may sound easier said than done when headlines show stocks are sliding into bear market territory while J.P. Morgan is raising the chances of a recession this year to 60% from 40%.

“When the market drops, we have sort of a herd instinct,” said Bradley Klontz, a psychologist, certified financial planner and managing principal of YMW Advisors in Boulder, Colorado. Klontz is also a member of the CNBC FA Council.

That survival instinct to run towards safety and away from danger dates back to humans’ hunter gatherer days, Klontz said. Back then, following those cues was necessary for survival.

But when it comes to investing, those impulses can backfire, he said.

“It’s an internal panic, and we’re just sort of wired to sell at the absolute worst times,” Klontz said.

‘Never trust your instincts when it comes to investing’

When conditions are stressful, our frame of reference narrows to today, tomorrow and what’s going to happen, Klontz said.

It may be tempting to come up with a story for why taking action now makes sense, Klontz said.

“Never trust your instincts when it comes to investing,” said Klontz, particularly when you’re excited or scared.

Why investors should hold despite market sell-off

Meanwhile, many investors are likely in a fight or flight response mode now, said Danielle Labotka, behavioral scientist at Morningstar.

“The problem with that, in acting right away, is that we’re going to be relying on what we call fast thinking,” Labotka said.

Instead, investors would be wise to slow down, she said.

Just as grief requires moving through emotional stages in order to eventually feel good, it’s impossible to jump to a good investing decision, Labotka said.

Good investment decisions take time, she said.

What should be guiding your decisions now

Many investors have experienced market drops before, whether it be during the Covid pandemic, the financial crisis of 2008 or the dot-com bust.

Even though we’ve experienced volatility before, it feels different every time, Labotka said.

That can make it difficult to heed to the advice to stay the course, she said.

Investors would be wise to ask themselves whether their reasons for investing and the goals they’re trying to achieve have changed, experts say.

“Even though the markets have changed, why you’re invested, your values and your goals probably haven’t,” Labotka said. “These are the things that should be guiding your investments.”

While there is the notion that life well-being is based on financial well-being, it helps to take a broader view, Statman said.

At any moment, no one has everything perfect when it comes to their finances, family and health. In life, as in an investment portfolio, all stocks don’t necessarily go up, and it’s helpful to learn to live with the good and the bad, he said.

“Things are never perfect for anyone,” Statman said.

Personal Finance

20 items and goods most exposed to price shocks

Published

55 minutes ago

April 4, 2025

Business Finance News

Employees at a clothing factory in Vo Cuong, Bac Ninh province, in Vietnam.

SeongJoon Cho/Bloomberg via Getty Images

The Trump administration’s plan to slap steep tariffs on goods from dozens of countries is expected to spike prices for consumers. Some items, like leather goods, will see a bigger jump than others.

The overall impact on households will vary based on their purchasing habits. But most families — especially lower earners — are likely to feel the pain to some degree, economists said.

According to an analysis by the Budget Lab at Yale University, the average household will lose $3,800 of purchasing power per year as a result of all President Donald Trump‘s tariff policies — and retaliatory trade actions by other nations — announced as of Wednesday.

That’s a “meaningful amount,” said Ernie Tedeschi, the lab’s director of economics and former chief economist at the White House Council of Economic Advisers during the Biden administration.

The analysis doesn’t include the 34% retaliatory tariff China announced Friday on all U.S. exports, set to take effect April 10. The U.S. exported nearly $144 billion worth of goods to China in 2024, the third-largest market for U.S. goods behind Canada and Mexico, according to the Census Bureau.

Clothing prices poised to spike

The garment industry is among the most susceptible to tariff-related price shocks.

Prices for clothing and shoes, gloves and handbags, and wool and silk products will all increase by between 10% and 20% due to the tariffs Trump has so far imposed, according to the Yale Budget Lab analysis. Tedeschi noted that some of these price increases could take 5 years or more to unfold.

Srdjanpav | E+ | Getty Images

The bulk of apparel and shoes sold in the U.S. is manufactured in China, Vietnam, Sri Lanka and Bangladesh, said Denise Green, an associate professor at Cornell University and director of the Cornell Fashion + Textile Collection.

Under the “reciprocal tariffs” Trump announced Wednesday, Chinese imports will face a 34% duty. Goods from Vietnam, Sri Lanka and Bangladesh face tariffs of 46%, 44% and 37%, respectively.

Taking into account the pre-existing tariffs on China totaling 20%, Beijing now faces an effective tariff rate of at least 54%.

“The tariffs are disastrous for the apparel industry worldwide, but especially for smaller countries with highly specialized garment manufacturing,” Green said.

A lot of clothing production has moved overseas over the last 50 years, Tedeschi said, but it’s “very unlikely” clothing and textile manufacturing will return to the U.S. from Asia in the wake of the new tariffs.

“People will still import clothing to a large extent, and they’ll have to eat the price increase,” he said.

Car prices are another pain point

Various Mercedes-Benz vehicles assembled in the “Factory 56” production hall.

Picture Alliance | Picture Alliance | Getty Images

The duties announced Wednesday are on top of other tariffs Trump has imposed since his second inauguration, including duties on automobiles and car parts; copper, steel and aluminum; and certain imports from Canada and Mexico.

The cost of motor vehicles and car parts could swell by over 8% according to the Yale Budget Lab analysis.

Bank of America estimated that new vehicle prices could increase as much as $10,000 if automakers pass the full impact of tariffs on to consumers.

“Rising car prices are already a major pain point for the vast majority of Americans who live in an area where they need a car to get to work, school, their kids’ activities, and medical appointments,” said Erin Witte, director of consumer protection for the Consumer Federation of America.

“These tariffs will make it much worse, and will significantly reduce Americans’ choices about what car they want to buy,” she said.

Tariffs on specific commodities like aluminum and steel affect consumers indirectly, since the materials are used to manufacture a swath of consumer goods.

White House spokesman Kush Desai pushed back on analyses that prices will spike because of Trump’s tariff policy.

“Chicken Little ‘expert’ predictions didn’t quite pan out during President Trump’s first term, and they’re not going to pan out during his second term when President Trump again restores American Greatness from Main Street to Wall Street,” Desai said in an e-mailed statement.

Trump’s second-term tariffs are orders of magnitude larger than his first term, however.

The first Trump administration put tariffs on about $380 billion worth of goods in 2018 and 2019, according to the Tax Foundation. The tariffs so far imposed in Trump’s second term affect more than $2.5 trillion of U.S. imports, it said.

There’s also evidence that the first-term tariffs raised prices for some consumers.

Retail prices for the typical washing machine and clothing dryer rose by about 12% each — about $86 and $92 per unit, respectively — due to 2018 tariffs on imports of washing machines, according to a study by economists at the Federal Reserve Board and University of Chicago. The increased cost to consumers totaled $1.5 billion a year, the study found.

Tariffs are expected to raise the U.S. inflation rate

Economists also expect the overall U.S. inflation rate to jump due to tariffs.

American businesses that import goods from abroad will be the ones on the hook for paying the cost of tariffs, and economists anticipate that companies will pass at least some of those costs on to consumers.

The tariffs are disastrous for the apparel industry worldwide, but especially for smaller countries with highly specialized garment manufacturing.

Denise Green

director of the Cornell Fashion + Textile Collection

An environment of rising prices for foreign goods may give U.S. businesses cover to somewhat raise their prices, too.

As a result, the consumer price index could jump to 4.5% later in 2025, Capital Economics estimated Thursday. That’s up from 2.8% in February, and roughly double the Federal Reserve’s long-term inflation target.

Personal Finance

What to know before trying to ‘buy the dip’ amid tariff sell-off

Published

1 hour ago

April 4, 2025

Business Finance News

Anchiy | E+ | Getty Images

As the stock market continues to fall, some investors are eager to “buy the dip,” or purchase assets at temporarily lower prices. Financial advisors, however, urge clients to stick with long-term investing plans amid the latest volatility.

U.S. stocks plunged on Thursday after President Donald Trump issued sweeping tariffs on more than 180 countries and territories. The sell-off continued Friday after China unveiled plans to impose a 34% retaliatory tariff on all goods imported from the U.S.

As of Friday afternoon, the Dow Jones Industrial Average was down more than 1,700 points following a 1,679.39 drop on Thursday. Meanwhile, the S&P 500 was off 4.8% after losing 4.84% the previous day. The tech-heavy Nasdaq Composite slid by 4.9% after plummeting 5.97% on Thursday.

If you’re looking for buying opportunities while assets are down, here are some things to consider, according to financial advisors.

Timing the market is ‘impossible’

When asset values fall, there’s often chatter in online communities like Reddit about whether to “buy the dip.” Typically, investors aim to buy at a discount and expect an eventual recovery, which could lead to future gains.

While buying cheaper investments isn’t a bad idea, the strategy can be tricky to execute since, of course, no one can predict stock market moves, experts say.

“We never recommend timing the market, mostly because it is impossible to do without simply getting lucky,” said certified financial planner Eric Roberge, CEO of Beyond Your Hammock in Boston.

Instead, you should “stick to a thoughtful, rules-based investment strategy designed to get you through to your long-term goals,” he said.

Keep a ‘disciplined approach’

When buying assets during a market downturn, you need a “disciplined approach,” according to CFP Jay Spector, co-chief executive officer of EverVest Financial in Scottsdale, Arizona.

For example, some investors linger in cash while waiting for rock-bottom prices. But no one can predict the bottom of the market, experts say.

Waiting on the sidelines can be costly because the best returns can follow the biggest dips, according to research from Bank of America.

Rather than trying to time the bottom, you should consider “dollar-cost averaging,” which systematically invests your money at set intervals, Spector said. The strategy can capture lower prices while reducing risk, he said.