The Social Security Trust Fund’s Bleak Outlook – The Social Security Administration released a report last week detailing the trust fund’s financial outlook, and it wasn’t great. According to estimates, by 2034 Social Security won’t have enough money to pay beneficiaries full benefits, unless Congress takes action to support the program. A few factors are at work in reducing the size of the Social Security trust fund. For one, the ratio of workers to beneficiaries has declined over the last decade and is expected to continue declining. From 1974 to 2008, there were 3 workers for every beneficiary, a figure that dropped to 2.8 in 2022 and is expected to decline further to 2.3 by 2035. A wave of retirements from the baby boomer generation sharply raised the number of beneficiaries and benefit payments at a faster pace than the labor force and tax receipts for the program grew. In any given year, the tax and interest income for Social Security is used to pay benefits, with any surplus being deposited in the trust fund. But over the past few decades, benefits have grown faster than income. A second factor driving the shortfall was a marked increase in benefit payments in 2023, which are 8.7% higher than last year due to a cost-of-living adjustment (a product of high inflation). The adjustment should decrease in 2024 as inflation comes down. Solutions for boosting Social Security’s long-term finances present two largely undesirable choices: Congress can either raise taxes, cut benefits, or both. The Social Security trustees’ report found that raising the current 12.4% Social Security tax rate to 15.84% would make the program solvent for 75 years, or cutting benefits by 21.3% would also do the trick. Neither outcome would be popular. The third option is that a surge in economic growth and productivity results in a jump in tax revenue for the program, but such long-term outcome is hard to forecast.1
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OPEC Announces Oil Production Cuts, Sending Prices Higher – In a surprise move last week, OPEC, led by Saudi Arabia, announced oil production cuts of 2 million barrels a day starting next month. All told, this cut would remove about 3% of the world’s oil off the market this year, which immediately put upward pressure on the price of a barrel of crude. Before the announcement, the oil markets were largely viewed as being tightly balanced between supply and demand, which signals that the motivation behind the decision was likely more for short-term economic interests of member countries. Indeed, the decision was mostly negotiated between Saudi Arabia and Russia, who are respectively pursuing a bold domestic economic growth agenda and trying to shore up depleted state finances from the war.3
China’s Economic Recovery Continues – Now a few months into the end of “zero-Covid,” China’s economy is showing continued signs of expansion. Consumers have returned to restaurants and stores and the beleaguered real estate market has posted consecutive months of rising activity. China’s official PMI for services and construction rose from 56.3 in February to 58.2 in March, the highest reading since May 2011. An index just focused on services jumped to 56.9, the highest reading since March 2012. Given China’s increasing emphasis on making the shift from a manufacturing economy to a services- and consumption-based economy, these index readings mark positive progress. Much like we saw in the U.S. coming out of lockdowns, consumers are armed with pent-up savings which are driving the surge in activity. But China’s labor market is not as strong as the U.S.’s, which raises the question of whether sluggish income growth will ultimately become a drag down the road. What’s more, private businesses in China have been reluctant so far in the new to invest in new machinery, buildings, and other fixed assets, with just 0.8% growth in January and February compared to last year.4
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