The 2016 Retirement Landscape: 5 Predictions

Flat COLAs are rare, and this one created a potentially big problem for some seniors on Medicare. A “hold harmless” provision in federal law requires that no premium increase for Part B produce a net reduction in Social Security benefits. That means anyone already enrolled in Social Security this year (roughly 70% of Medicare beneficiaries) were protected from a large projected premium hike, leaving the remaining enrollees to shoulder the entire burden of rising program costs–a 52% Part B hike. Thankfully, that outcome was prevented by a Congressional fix.

Will inflation actually pick up in 2016? The Federal Reserve thinks so, and so does Morningstar. But oil prices have continued to fallacc as the new year got underway. The Social Security Trustees Report issued last summer forecasts a 3.1% COLA for 2017.
Rate Increases Will Benefit Retirees

Retirees will begin to see light at the end of the tunnel on stubbornly low interest rates by year-end. They have been suffering through a near-zero-rate environment ever since the onset of the Great Recession–and returns have often been negative after inflation. But relief should be in sight by year-end–assuming the forecast of higher inflation holds up.

The Federal Reserve’s decision last month to lift the federal-funds rate by 0.25% marks a significant turning point for retirees relying on fixed-income investments. The quarter-percent move alone won’t bring relief; but if the inflation numbers head north, the Fed is likely to keep moving in the direction it has outlined–raising rates by about 100 basis points in the next year. At that point, retirees could start earning interest that would at least keep up with inflation. Over time, higher rates would also have a positive impact on the pricing of long-term-care insurance policies and perhaps income annuities.

A rising-rate environment will create challenges for bond investors, and target-date funds (TDFs), in particular, bear watching. TDFs have become the 800-pound gorilla of 401(k) investing, and they have higher bond exposure than at any time in recent memory, according to Morningstar data. The prospect of simultaneous stock market volatility and declining bond-fund values could make for a rocky year in TDF performance.

No Social Security Reform, Just Blather

We won’t see a serious policy debate about Social Security reform in a presidential election year. But we will get a high dose of blather from candidates about cutting Social Security benefits or even privatizing the program. The campaign season is young (hard to believe, isn’t it?), but already we’ve heard some Republican contenders endorse higher retirement ages and means-testing. Others are calling for maintaining benefits for today’s seniors but cutting them for young people.

All of these ideas would take us in exactly the wrong direction on Social Security.

Raising Social Security’s full retirement age (FRA) sounds reasonable since we’re all living longer. But it would be a de facto benefit cut, since a higher age lifts the bar for reaching full retirement age. (If you doubt this, ask why this move would count as a Social Security reform if it doesn’t save the program money?) Moreover, a higher FRA would apply cuts in an uneven, unfair way. That’s because longevity is rising mainly among affluent, better-educated Americans, so the benefit cuts would hit lower-income retirees hardest.

In addition, means-testing Social Security is a fuzzy concept. Benefits are determined by your lifetime earning history, so introducing an income test at retirement would be at odds with that structure. And Social Security already is means-tested through the bend points that determine benefit payouts. It is possible to adjust bend points further to target benefits for lower-income retirees. But if that is done at all, it should be done in the context of an overall expansion of Social Security benefits.

We can afford that easily by gradually raising payroll tax rates and lifting the cap on wages subject to taxation.

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