The Economic Issues and Some Defensive Strategies and Ideas
According to the WESP World Economic Situation and Prospects Report from the United Nations, the US and global economy is in a rut and having extreme difficulty moving forward. The report recommends that governments must be innovative and think of new strategies to cooperate with business and the workers to stimulate the economy.

As per the United Nations Report, the US economy still remains weak and without direction. The report states that, “In the United States, despite recent improvements, the unemployment rate remains well above pre-crisis levels, at over 8 per cent. In the euro area, it increased to a historic high of 10.9 per cent in March 2012. It reached alarming heights in the debt-ridden euro area countries: in Spain it had jumped to 24.1 per cent in March 2012 (up 8.6 in 2007), 21.7 per cent in Greece (up from 8), 13.5 in Portugal (up from 8.5), and 14.5 per cent in Ireland (up from 5). In developing countries, in contrast, employment rebounded more strongly.”

USA Economic Woes – The Highlights
1. In a May 9th ABC news report, the number of highly educated professionals or PhDs on public aid or welfare has tripled in recent months.
2. In total, 44 million people were on food stamps in the US on a monthly basis in 2011, compared with 17 million in 2000, according to the U.S. Department of Agriculture. – Source ABC News
3. Moreover, Business Week reported on May 31st that The number of Americans on Social Security disability has jumped 23 percent since 2007.
4. Presently, The level of employment is about five million jobs lower than where it was in 2008, when the economy slipped into recession.
5. A record 5.4 million workers with their dependents have signed up to collect federal disability checks since President Obama took office.
6. CNN now reports this May that 12.7 million are unemployed in the United States not including the 4 million who have may have given up looking for work.
7. Economists forecasts and estimates reveal that about another 4 million workers have simply stopped looking for work, and so do not show up in the Dept. of Labor tally used for the unemployment rate
8. Japan’s stock markets fell again with the broader Topix index hitting a 28-year low.
9. To make things worse in 2012, Wall Street Stocks ended down a whopping 2 percent, extending May’s rout. The DJI Dow Jones industrial average also dipped into negative territory for the year which is the biggest insult to injury to a potential recovery and to workers’ 401K Plans.
The United Nations States that there are Four major weaknesses continue to conspire against economic recovery:
1. Deleveraging by banks, firms and households, which continues to restrain normal credit flows and consumer and investment demand;
2. Unemployment remains high, a condition that is both cause and effect in preventing economic recovery;
3. Fiscal austerity responses to rising public debts deter economic growth and make a return to debt sustainability all the more difficult; and
4. Bank exposures to sovereign debt perpetuate fragility in the financial sector, which in turn spurs continued deleveraging.

The UNs Ban Ki-Moon said, “Worldwide, more than 400 million new jobs will be needed over the next decade. That means that policy-makers must get serious, now, about generating decent employment,” said Secretary-General Ban Ki-moon at the high-level thematic debate on The State of the World Economy and Finance and its Impact on Development, held on 17 May. “It is time to recognize that human capital and natural capital are every bit as important as financial capital,”

In conclusion, there needs to be new, bold, and efficient ways to stimulate hiring, employment and consumer spending. Governments should begin to look at ways to treat the working professional and the employers as the customer and determine what types of simple benefits and tax reform could be imparted upon the hardest working and the most steadfast contributors.

There needs to be greater incentives to: compete, to create, to invest, and to participate. If the cash, food, and health benefits of “not working” outweigh the rewards of: hard work, risk and job stress, then the entire system is totally broken. In sum, because the markets and investment yields are not advancing in recent years, the pensions and government obligations grow larger while the available money gets smaller. In the end, the state, federal and city governments are not using sustainable business practices or budgeting, and if costs are not constrained, then debts will become unmanageable and insurmountable.

Defensive Market Tips: Some Stock Sectors that were resilient this week were: Verizon VZ, WalMart WMT, AT&T Symbol T, Sara Lee SLE, AmerisourceBergen ABC, Johnson and Johnson JNJ, Pfizer PFE, ristol-Myers Squibb, Wellpoint WLP, or you can find ETFs that are defensive in nature that own gold, silver, or other commodities Gold/DGP or Silver/SLV
Other Typical Defensive Stocks may include: Microsoft MFST, Mastercard MA, Monsanto MON, Walgreens WAG, Merck MRK, VISA symbol V, Chevron CVX, Exxon XOM, Lowes LOW

George Mentz is a world recognized wealth management commentator who has authored several revolutionary books. Dr. Mentz, an international attorney, has been a keynote speaker globally in Asia, Arabia, USA, Mexico, Switzerland, and in the West Indies. Mentz can be contacted at www.gmentz.com

References & Citations:

http://www.un.org/en/development/desa/newsletter/desanews/feature/2012/06/index.html#3974

http://abcnews.go.com/Business/growing-number-americans-phds-receiving-food-stamps-aid/story?id=16310858

http://www.businessweek.com/articles/2012-05-31/federal-disability-insurance-nears-collapse

http://finance.yahoo.com/news/job-growth-falters-may-123604088.html

http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/

http://news.investors.com/article/608418/201204200802/ssdi-disability-rolls-skyrocket-under-obama.htm?p=full

http://money.cnn.com/2012/06/01/news/economy/europe-unemployment-jobs/index.htm

http://online.wsj.com/article/SB10001424052702304065704577424492946765620.html

http://www.reuters.com/article/2012/06/04/markets-japan-stocks-idUSL3E8H42LZ20120604

*No tax or investment advice is implied herein. Before making any important investment, tax, or legal decision, please speak to a licensed professional in your jurisdiction.

Want some free marketing material for your annuities business? Look no further than the U.S. Government Accountability Office (GAO), which recently released a report touting annuities for their ability to provide retirement income sufficiency in an increasingly uncertain environment.

The GAO recommends that retirees delay their receipt of Social Security Benefits and either draw down savings and purchase an annuity or select annuity options from their defined benefit (DB) plan instead of electing to receive their benefits in a lump sum.

According to the GAO, the shift from defined benefit pension plans to defined contribution (DC) plans like 401(k)s necessitates a heightened focus on annuities and other options for guaranteeing income during retirement . And even if workers are saving more for retirement through their DC plans, they are still at greater risk than employees with DB pensions.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of annuities in Advisor’s Journal, see How Much to Allocate to Annuities: A Critical Analysis (CC 11-109) & Drama Over the “Drawbacks” of Annuities (CC 11-62).

For in-depth analysis of the taxation of annuities, see Advisor’s Main Library: A—Amounts Received As An Annuity & B—Amounts NOT Received As Annuities.

A proposal to impose a “20/20 cap”—the lower of 20% of income or $20,000—on contributions to 401(k)s and other defined contribution plans is making rounds in Washington. Most Americans appreciate the need for Congress to pull out the stops to bridge the budget gap; but do we really want to discourage retirement savings as Social Security continues its inexorable slide toward insolvency?

The National Commission on Fiscal Responsibility and Reform—charged by President Obama with “identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run”—is calling for the 20/20 cap to replace the current dollar limit imposed on contributions to most accounts. The Commission’s proposal would cap aggregate contributions to defined contribution plans to the lower of $20,000 or 20% of income—employer and employee contributions combined.

The proposal also would collapse all defined contribution plans into a single investment vehicle for all employers.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of 401(k)s in Advisor’s Journal, see The Department of Labor Releases Final 401(k) Disclosure Rules (CC 10-82).

For in-depth analysis of qualified plans, see Advisor’s Main Library: Qualified Retirement Plans.

Author: George Mentz

“Education, health, and retirement costs are increasing. Lifespans are lengthening. The pension and Social Security safety nets are fraying.” [1]

The role of the personal financial planner or financial advisor “has exploded as baby boomers reach retirement age and seek advice on making their nest-eggs last.” [2] In addition, “younger folks are seeking guidance on managing savings and retirement accounts in lieu of a company pension plan.” [3] However, new products and services in the financial world such as ETFs, may eliminate the need for traditional financial planning investment advice but increase the need for other guidance on other complex wealth management issues. [4] Since ETFs are freely exchange traded while representing a stock holding various securities, ETFs should facilitate diversity while also limiting fees and sell restrictions. [5]

More and more individuals are moving toward planning their own personal financial future.   [6] This is the first time in American history that traditional workers been required to personally assume this much responsibility for their retirement investing. [7]

Moreover, in a 2008 report it was indicated that wealth management firms will sharply increase hiring from 2010 to 2020 because of the impending retirement. [8] In addition, over the coming decade, wealth management firms will have substantially more client opportunities because the pool of high-net-worth individuals (HNWI) globally.[9]

According to another study only 50% of HNWI High Net Worth Individual assets are currently managed by professionals.  An unprecedented amount of retiring boomers who had not previously used a wealth manager now require one to transition their asset portfolios to income ones, plan succession, and balance potential medical care needs. Wealth management firms therefore have a pool of approximately five million (and expanding) new client opportunities. [10]

Overall, qualified wealth management professionals should have the relevant licenses from FINRA or the Insurance Authority, but  also should have completed accredited program exams and education. This is why when you hire a professional; they should have a credential that requires accredited program education and exams.   Examples of such credentials that require accredited program exams or state exams include: MBA, CPA, JD, MSc, LLM, Attorney License, or CWM Chartered Wealth Manager Certification. [11] [12] [13]

A great start to finding a career in banking and finance would be searching online with  www.AAFM.eFinancialCareers.com This career portal shows available jobs around the world in finance, banking, investments, hedge funds, risk management, insurance, compliance and more.  [14]

A excellent opportunity to take courses in tax, finance, estates, asset management, wealth management and compliance is to apply to the online graduate program at: http://llmprogram.tjsl.edu

The study reports that the new generation of HNWIs is predominantly 70% self-generated wealth; through entrepreneurship or executive compensation. These HNWIs consider it normal business practice to seek outside expertise and are more likely to consult with financial advisors. [15]

We invite your opinions and comments by posting them below, or by calling the Panel of Experts including:

George Mentz, JD, MBA –  an international lawyer, editor, author and contributor in the areas of personal finance, securities law, and wealth management.  Prof. Mentz continues to consult  with the US Government and United Nations on issues related to careers and education. Dr. Mentz is the first person in the US to obtain quad credentialing as a lawyer, Double Accredited MBA, Juris Doctorate Degree, financial consultant certification, and qualified financial planner.  Mentz and his educational & professional development firms have worked with thousands of executives in over 150 countries. Dr. Mentz has taught over 200 business and law courses at various accredited institutions, and he is the founder of the Mentz Consumer Protection, Class Action,  and Securities Law Firm http://securitieslawyers.us Mentz has served on the advisory boards of the: The African Economists Association, The Royal Society of Fellows, The Arab Academy of Banking & Finance, The China Wealth Council, The GFF Global Finance Forum in Switzerland, and the Indian Academy of Financial Management.    Mentz is the winner of several faculty awards and a meritorious award for charitable service.   Mentz has been a pioneer in promoting  accredited program courses, exams and standards as a government recognized  path to professional certification.

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[1] Dan Olsen. “Personal Financial Planning: Making the Transition”. The Finance Professionals Post. New York Society of Security Analysts.” 2/24/2011. http://post.nyssa.org/nyssa-news/2011/02/personal-finance-planning-making-the-transition.html. Last Accessed 5/25/2011.

[2] CNN Money. “Most Job Growth-Personal Financial Advisor”. 2009. http://money.cnn.com/galleries/2009/moneymag/0910/gallery.bestjobs_jobgrowth.moneymag/3.html. Last Accessed 5/24/2011.

[3] Ibid.

[4] D. Armstrong.  Why ETF Investors Need to Do their Homework http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2011/02/11/why-etf-investors-need-to-do-their-homework

[5] SEC Article on ETF Exchange Traded Funds http://www.sec.gov/answers/etf.htm

[6] CNN Money. “Most Job Growth-Personal Financial Advisor”.

[7] Ibid.

[8] See Advisorfyi.com-Summit Business Media/The National Underwriter Company. “Wealth Management Employment in the Coming Decade.” Posted October 11th, 2010. http://www.advisorfyi.com/2010/10/wealth-management-employment-in-the-coming-decade/. Last Accessed 5/25/2011. Citing Cap Gemini.

[9] Ibid.

[10] Ibid.

[11] United States Government  Department of Labor, Bureau of Labor and Statistics, Financial Analysts and Personal Financial Advisors. Occupational Outlook Handbook, 2010-11 Edition.”  http://www.bls.gov/oco/ocos301.htm

[12] FINRA Financial Industry Regulatory Authority –  Understanding Professional Designations – http://apps.finra.org/DataDirectory/1/prodesignations.aspx

[13] Wealth Management Certifications Wall Street Journal – http://online.wsj.com/article/SB109883075169856486.html

[14] eFinancialCareers.com www.AAFM.eFinancialCareers.com

[15] Ibid., citing Oliver Wyman.

A new academic study on the effect of increased life-spans on savings rates confirms old suspicions and raises some interesting new questions.

The conclusions reached by Optimal Retirement and Saving with Increasing Longevity, by David E. Bloom, David Canning, and Michael Moore are simple enough but need some unpacking: “[A] higher level of wages leads to earlier retirement and increasing savings rates. On the other hand an increase in life expectancy leads to an increase [in] the retirement age, but less than proportionately, while reducing savings rates.”

This result emphasizes the importance of planning for middle-income families. Without a solid plan, many will be stuck working many more years than they hoped or planned.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of retirement values in Advisor’s Journal, see Appealing to Your Affluent Clients’ Retirement Planning Values (CC-11-42).

For in-depth analysis of investment planning for affluent clients, see Advisor’s Main Library: Investment Planning.

Why is this Topic Important to Wealth Managers? Today concludes chapter one of our series on “Wealth Management in Today’s Economic Environment”. The series has been designed to address the specific question many wealth managers are currently asking: “what are the best investment, retirement and financial planning tools given the current global financial position?” We have so far explored alternatives from “safe” to “risky” from “traditional” to “emerging” for the purpose of discovering and discussing the most relevant wealth management tools and techniques available today. We have so far enjoyed presenting this discussion and think you will find the information quite valuable. Please note that this series is presented in continuation starting with last week’s entries. That being said each blogticle resumes discussion from the previous day.

The economy has presented a number of issues for individual investors. Retirement savings were exhausted to a great extent in many cases caused by the financial crisis. Others lost large sums of investment capital. This series has explored a number of options available to clients and wealth managers with regards to investing in today’s economy. Today we present one option that many wealth managers are most likely aware of and can take advantage of starting immediately.  As one commentator has noted, “[o]ver the past two years, investors have been taken for a wild ride. Annuities offer a way off the roller coaster.” [1]

We discussed last month the use of annuities as a substitute/addition to traditional government retirement plans. In sum, the financial condition of Social Security is far from great. Projected long-run program costs for Social Security are generally not sustainable under currently scheduled financing. Thus, we explained, the expected shortfall of federal funds available for retirement has presented a compelling reason to provide clients with fixed income retirement products.

Moreover, as we have previously mentioned earlier in the series, the baby boom generation continues to age and the American economy continues to undergo structural change. Two factors will continue to push investors to become more responsible for their personal planning. First, defined benefit plans are becoming obsolete as the retirement plan of choice for employers. Secondly, defined contribution plans likely won’t provide enough for baby boomers to retire comfortably. One study showed the average amount for retirement available in 401(k)s was only around $64,000.[2]

What are some general considerations that should addressed by wealth managers with regards to annuities providing for retirement income to clients?

• Tax characteristics: as almost all wealth managers are aware the investment income from an annuity grows tax free. The return of capital also will not cause a taxable gain.
• Income stream: perhaps the most salient selling point of annuities is that they provide the annuitant with a guaranteed stream of income for life. The key here is to find a company that clients trust will provide safety and security so that they may rely on the company’s ability to continue to make payments.
• Timing: wealth managers and clients should almost always consider retirement age and projections when using annuity products for retirement income purposes.
• Fixed v. Variable: the client should consider the risk and reward functions available in different products. Many companies offer very advanced products these days and most advisors should be able to find something that fits well with overall planning goals.

Finally, indexed products may provide for the best of both worlds. We discussed earlier in the series the potential benefit of following stock indexes with regards to planning in today’s economy. Indexed annuities provide even further benefit to those planning for retirement as the gains in the market can be leveraged into regular payments.

We will continue this series throughout the summer. Please check back for more analysis and information regarding financial planning in today’s economy.

Next week’s blogticles will discuss tax and market issues relating to wealth management.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Series Author: Benjamin Terner

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[1] Ben Steverman. Annuities Offer Steady Income, Big Drawbacks. March 15, 2010. http://www.businessweek.com/investor/content/mar2010/pi20100312_316911.htm. Last Accessed 6/8/2011.

[2] AdivosrFX Advisor’s Journal. “Are Annuities Right for Your Clients?” http://advisorfx.com/articles/default.aspx?documentID=816&filename=fc060110-d.htm&action=24. Last Accessed 6/8/2011. Citing, Fidelity Investments Survey Feb. 2010.

Why is this Topic Important to Wealth Managers? The subject presented today provides wealth managers with valuable information to provide to clients interested in self-funding their retirement. The current projections of the Social Security and Medicare programs actually opens the door to present annuities and other insurance products as one means to that end. Astute wealth managers will realize this opportunity.

Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. The 2011 report was recently released.

The 2011 report shows the financial conditions of the Social Security and Medicare programs are far from great. Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and would require program modifications if disruptive consequences for beneficiaries and taxpayers are to be avoided.

Both Social Security and Medicare, the two largest federal programs, face substantial cost growth in the upcoming decades due to factors that include population aging as well as the growth in expenditures per beneficiary. Through the mid-2030s, due to the large baby-boom generation entering retirement and lower-birth-rate generations entering employment, population aging is the largest single factor contributing to cost growth in the two programs.

In only 25 years by 2036, one year earlier than was projected in last year’s report, the Social Security Trust Fund will have completely exhausted its assets and projected incoming revenues will be insufficient to maintain payment of full benefits. In only 13 years, by 2024, Medicare’s Hospital Insurance Trust Fund is projected to exhaust its assets, five years earlier than was projected in last year’s report.

Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The fund experienced a $49 billion deficit last year (excluding interest income) and $46 billion is the projected deficit in 2011. This deficit is expected in the long run to increase as the retirement of the baby boom generation swells the beneficiary population.  It is projected that tax and interest income will be sufficient to pay benefits through 2022, after which the Trust Fund will be drawn down until depleted in 2036.

Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable wages will grow rapidly from 11-1/2 percent in 2007, to roughly 17 percent in 2035. Costs display a slightly different pattern when expressed as a share of GDP. Program costs equaled roughly 4.2 percent of GDP in 2007, and are also projected to increase around 50% to 6.2 percent of GDP in 2035.

The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 2.22 percent of taxable payroll, up from 1.92 percent projected in last year’s report. This deficit amounts to 17 percent of tax receipts, and 14 percent of program outlays.

Relative to Social Security’s combined Trust Funds, Medicare’s Hospital Insurance (HI) Trust Fund faces a more immediate funding shortfall. HI has run cash deficits since 2008 and under current projections will continue to do so until Trust Fund assets are exhausted in 2024, at which time dedicated revenues would be sufficient to pay 90 percent of HI costs. The share of HI expenditures that can be financed with HI dedicated revenues is nevertheless projected to decline slowly to 75 percent in 2045.

Finally, Medicare costs are projected to grow substantially from approximately 3.6 percent of GDP in 2010 to 5.5 percent of GDP by 2035.

As was mentioned earlier, the shortfall of federal funds available for retirement has presented a compelling reason to provide clients with annuity and other retirement products.

Tomorrow blogticle will continue to address issues surrounding the private wealth management practice.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? This blogticle presents discussion on the state of affairs of the country’s preparedness for retirement. The low confidence that is reflected in the responses indicates a direct opportunity for wealth managers to assist more individuals.

A recent 2011 annual survey found that the number of investors who are “not at all confident” about having enough money for retirement reached its highest levels in 21 years, representing twenty seven percent of the survey population. [1] At the same time those who were “very confident” about having enough money for retirement was found to be only thirteen percent. Thus, wealth managers have an opportunity to help those who are not in the thirteenth percentile, or eighty seven percent of investors.

These low responses are surprising given the fact that the report also found sixty eight percent of workers have saved for retirement. In addition, fifty nine percent say they and/or their family are currently saving.

Nevertheless, the report found twenty nine percent of workers report savings levels below $1,000. Moreover, fifty six percent of workers report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000.

Good news for wealth managers though, the report also found “many workers think they could save more than they are currently saving for retirement.” Around sixty eight percent of all savers and forty eight percent of non-savers believe it is “reasonably possible” for them to start saving more.

Furthermore, the report found “many workers continue to be unaware of how much they need to save for retirement.” An astounding figure, only forty two percent reported they have tried to calculate how much money they will need to save for a comfortable retirement.

The report also found the likelihood of retirement planning calculation increases with household income, education, and other non-savings financial assets.  Even for those who make calculations about retirement, the report found amazingly “workers often guess at how much they will need to accumulate.” Forty two percent of workers reported they guessed at the amount they need to save.

Only twenty one percent reported to have asked a financial advisor and an additional twenty one percent reported doing their own estimate.  Some rely solely on the scuttlebutt; nine percent reported they rely only what they read or hear is needed. Only five percent reported to fill out a worksheet or form in doing retirement calculations.

The report notes that one possible explanation for the continuing decrease in overall retirement confidence can be attributable to the fact that workers, investor, savors and others “are becoming more realistic about their prospects for a financially comfortable retirement given their current level of retirement preparations.”  This realization appears to be consistent across all age levels, not just those nearing retirement. For example, workers in lower age brackets “are statistically no more likely than older workers to state they are not at all confident. “ The report notes, “[t]his might seem counter-intuitive given the positive relationship between age and accumulated savings, but it is likely due to the sizable minority of older workers who have very little savings.”

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[1] See Employee Benefit Research Institute. “The 2011 Retirement Confidence Survey: Confidence Drops to Record Lows, Reflecting ‘the New Normal’”. March 2011. EBRI Issue Brief #355. http://ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4772. Last Accessed 3/28/2011.

Why is this Topic Important to Wealth Managers? This blog presents an interesting perspective of the relationship between earnings and life expectancies. As applied to clients, wealth managers may consider the data presented herein to discuss the weight that may be applied to life spans in consideration of client earnings with regards to retirement planning.  If wealthy clients have longer life expectancy, correspondingly wealthy clients are more likely to face the question: What if I outlive my retirement planning?

A topic that is now of recent relevancy is the correlation between lifetime income earnings and life expectancies as the Nation’s ability to cover Social Security costs teeters on the edge. Studies show that there is actually a correlation between earnings and how long someone lives. [1]

Nevertheless, it is generally the case that the calculation of initial benefits in the U. S. Social Security system makes no attempt to reflect systematic differences across the population in mortality risk. Individuals of the same age with identical lifetime earnings profiles, and therefore with identical contribution amounts, receive the same initial benefit at retirement irrespective of differences in expected length of life.    

However, many economists, sociologists, demographers, and health professionals have all studied the relationship between life expectancy and socioeconomic status, with the volume of literature growing dramatically since the oft-cited study of Kitagawa, E. and P. Hauser. [2] A common finding is that life expectancy is higher for higher income persons and some research reports that the gap in mortality risk has actually been growing. [3]

A Department of Treasury Study notes the effect of income (or socioeconomic status generally) on mortality cannot be determined a priori. Higher income may be associated with higher mortality if the consumption of some goods and services that adversely affect health (red meats or skydiving, for example) increases with income. On the other hand, higher income may lead to increased consumption of goods and services that support health and prolonged life, such as shelter, protective clothing and medical care. [4]  The relationship between income and mortality is complex, but the Study’s authors contend as a hypothesis, that they expected larger improvements in life expectancy to result from income increases at the lower end of the income distribution than at the upper end.

The Study was conducted by using data sources from the Social Security Administration’s 2002 Continuous Work History Sample and Master Beneficiary Record. The two data sources considered over three million current or former workers in covered employment spanning the period from 1937 to 2002. 

The Study found strong empirical support to a negative relationship between individual lifetime income and mortality.  In other words, for black and white males and females the difference in age of death between low and high lifetime income is on the order of two to three years.  Workers with positively-trended earnings over their work life may live an additional six to eighteen months relative to those with declining earnings. Further, the authors’ contention held true when they found income-related mortality differences between blacks and whites were the largest at low-income levels, particularly for males, and narrow substantially at higher income levels. [5]

The income-mortality relationship has implications for a wide range of Social Security program rules. For example, many reform proposals include a provision to raise the normal retirement age or to increase the early retirement age. Analyses of such proposals that do not account for the effect of income on life expectancy will misrepresent the differential effects of these proposals on those persons who currently retire early compared to those who retire at later age.

Does this mean those who earn more could be subject to higher Social Security taxes to pay for their longer lives? We’ll just have to wait and see.

Tomorrow’s blogticles will continue to discuss topics relating to financial planning.   

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] James E. Duggan ,  Robert Gillingham, John S. Greenlees. Research Paper No. 2007-01. “Mortality and Lifetime Income  Evidence from Social Security Records”.  December 2006. http://www.treasury.gov/resource-center/economic-policy/Documents/rp2007-01.pdf. Last Accessed 3/13/2011.

[2] See of Kitagawa, E. and P. Hauser.  “Differential Mortality in the U. S.: A Study of Socioeconomic Epidemiology”.  Cambridge: Harvard University Press. 1973.

[3] See Brown, J., “Differential Mortality and the Value of Individual Account Retirement Annuities,” in M. Feldstein and J. Liebman, eds., The Distributional Aspects of Social Security and Social Security Reform, Chicago: University of Chicago Press , 2002, pp. 401-440; Schalick, L. M., Hadden, W. C., Pamuk, E., Navarro, V., and Pappas, G. (2000), ‘The Widening Gap in Death Rates among Income Groups in the United States from 1967 to 1986’, International Journal of Health Services, 30/1: 13-26.

[4] Research Paper No. 2007-01.

[5] Research Paper No. 2007-01.

Why is this Topic Important to Wealth Managers? Clients will often ask for your “take” on the annual federal budget.   It is important to show the client a command of the the facts and figures before addressing the political perspective of spending and revenue.  Any producer can “mime” someone else’s perspective.  Distinguish yourself with a command of the underlying numbers.  Thus, this week Advanced Market Intelligence presents the facts and figures of the proposed federal budget for fiscal year 2012. 

The new 2012 Federal Budget was released today by the President.  Below is a summary of the inflows and outflows concerning next year’s proposed budget (in billions of dollars).

Outlays:

Appropriated (“discretionary”) programs:   Security $ 884/Non-security 456; Subtotal—appropriated programs: 1,340

Mandatory programs: Social Security $ 761, Medicare 485, Medicaid 269, Troubled Asset Relief Program (TARP) 13, Other mandatory programs 612; Subtotal, mandatory programs 2,140, Net interest 242, Disaster costs 8

Total outlays 3,819

Receipts:

Individual income taxes $ 1,141, Corporation income taxes 329

Social insurance and retirement receipts: Social Security payroll taxes 659,Medicare payroll taxes 201, Unemployment insurance 57, Other retirement 8, Excise taxes 103, Estate and gift taxes 14, Customs duties 30, Deposits of earnings, Federal Reserve System 66,Other miscellaneous receipts 20

Total receipts 2,627

2012 Deficit $ 1,101

Here are some noted observations of the current budget: 

• By 2020 individual income taxes will more than double from their 2012 levels of 1,141 to 2,439 billion. 
• The Proposed corporate tax rates increased from 2011 to 2012 to over 60% from 198 billion to over 329 billion (the budget notes that The President is calling on the Congress to work with the Administration on corporate tax reform that would simplify the system, eliminate these special interest loopholes, level the playing field, and use the savings to lower the corporate tax rate for the first time in 25 years—and do so without adding a dime to our deficit.)
• By 2020 the annual interest owed will balloon to over $729 billion, or an increase of over 300% from the 242 billion 2012 levels. 
• The cost of Medicaid will more than double by 2020 as compared to 2012 levels. 
• The estimated deficit for 2020 is 735, which means the overall national debt by year end 2020 is estimated to be over 21.5 trillion dollars. 

The Department of Defense and Department of Homeland Security together make up the largest spending area in the budget.  Here’s a list of some of the highlights the security spending provides for. 

• The allocated amount reflects the continued investment in national security priorities such as cybersecurity, satellites, and nuclear security.
• Maintains ready forces and continues efforts to rebalance military forces to focus on both today’s wars as well as potential future conflicts.
• Enhances the Administration’s commitment to maintaining a reliable nuclear deterrent by increasing investments in the nuclear weapons complex and in weapon delivery technologies, and to nonproliferation by preventing the spread of nuclear materials around the world.
• Refocuses funding for border surveillance on technologies that have proven to work, allowing for a tailored approach in different border regions instead of the previous one-size-fits-all approach.
• Safeguards the Nation’s transportation systems with an $82 million increase to support deployment of up to 1,275 Advanced Imaging Technology screening machines at airport checkpoints, with robust, built-in privacy safeguards.

Tomorrow’s blogticle will continue with discussion on the national budget. 

We invite your opinions and comments by posting them below, or by calling the Panel of Experts