Medicare Open Enrollment for 2022 Starts October 15
Medicare beneficiaries can make new choices and pick plans that work best for them during the annual Medicare Open Enrollment Period. Costs and coverage typically change annually. Changes in your healthcare needs over the past year also may have changed. The Open Enrollment Period — which begins on October 15 and runs through December 7 — is your opportunity to switch your current Medicare health and prescription drug plans to ones that better suit your needs.
During this period, you can:
- Switch from Original Medicare to a Medicare Advantage Plan
- Switch from a Medicare Advantage Plan to Original Medicare
- Change from one Medicare Advantage Plan to a different Medicare Advantage Plan
- Change from a Medicare Advantage Plan that offers prescription drug coverage to a Medicare Advantage Plan that doesn’t offer prescription drug coverage
- Switch from a Medicare Advantage Plan that doesn’t offer prescription drug coverage to a Medicare Advantage Plan that does offer prescription drug coverage
- Join a Medicare prescription drug plan (Part D)
- Switch from one Part D plan to another Part D plan
- Drop your Part D coverage altogether
Any changes made during Open Enrollment are effective as of January 1, 2022.
Review plan options
Now is a good time to review your current Medicare benefits to see if they’re still right for you. Are you satisfied with the coverage and level of care you’re receiving with your current plan? Are your premium costs or out-of-pocket expenses too high? Has your health changed? Do you anticipate needing medical care or treatment, or new or pricier prescription drugs?
If your current plan doesn’t meet your healthcare needs or fit your budget, you can switch to a new plan. If you find that you’re satisfied with your current Medicare plan and it’s still being offered, you don’t have to do anything. The coverage you have will continue.
Information on costs and benefits
The Centers for Medicare & Medicaid Services (CMS) has announced that the average monthly premium for Medicare Advantage plans will be $19, and the average monthly premium for Part D prescription drug coverage will be $33. CMS will announce 2022 premiums, deductibles, and coinsurance amounts for the Medicare Part A and Part B programs soon.
You can find more information on Medicare benefits in the Medicare & You 2022 Handbook on medicare.gov.
Social Security’s Uncertain Future: What You Should Know
Social Security is a pay-as-you-go system, which means today’s workers are paying taxes for the benefits received by today’s retirees. There are many factors that are causing long-run fiscal challenges. Factors causing long-run fiscal challenges, including demographic trends such as lower birth rates, higher retirement rates, and longer life spans. There are simply not enough U.S. workers to support the growing number of beneficiaries. See the discussion under “Pandemic Impact” below. Social Security is not in danger of collapsing, but the clock is ticking on the program’s ability to pay full benefits.
Annually, the Trustees of the Social Security Trust Funds provide a detailed report to Congress that tracks the program’s current financial condition and projected financial outlook. In the latest report, released in August 2021, the Trustees estimate that the retirement program will have funds to pay full benefits only until 2033, unless Congress acts to shore up the program. This day of reckoning is expected to come one year sooner than previously projected because of the economic fallout from the COVID-19 pandemic.
Report Highlights
Social Security consists of two programs, each with its own financial account (trust fund) that holds the payroll taxes that are collected to pay benefits. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI.
Combined OASDI costs are projected to exceed total income (including interest) in 2021, and the Treasury will withdraw reserves to help pay benefits. The Trustees project that the combined reserves will be depleted in 2034. After that, payroll tax revenue alone should be sufficient to pay about 78% of scheduled benefits. OASDI projections are hypothetical, because the OASI and DI Trusts are separate, and generally one program’s taxes and reserves cannot be used to fund the other program.
The OASI Trust Fund, considered separately, is projected to be depleted in 2033. Payroll tax revenue alone would then be sufficient to pay 76% of scheduled OASI benefits.
The DI Trust Fund is projected to be depleted in 2057, eight years sooner than estimated in last year’s report. Once the trust fund is depleted, payroll tax revenue alone would be sufficient to pay 91% of scheduled benefits.
All projections are based on current conditions, subject to change, and may not happen.
Proposed Fixes
The Trustees continue to urge Congress to address the financial challenges facing these programs soon, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Combining some of the following solutions may also help soften the impact of any one solution.
- Raising the current Social Security payroll tax rate (currently 12.4%). Half is paid by the employee and half by the employer (self-employed individuals pay the full 12.4%). An immediate and permanent payroll tax increase of 3.36 percentage points to 15.76% would be needed to cover the long-range revenue shortfall (4.20 percentage points to 16.60% if the increase started in 2034).
- Raising or eliminating the ceiling on wages subject to Social Security payroll taxes ($142,800 in 2021).
- Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
- Reducing future benefits. To address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 21% for all current and future beneficiaries, or by about 25% if reductions were applied only to those who initially become eligible for benefits in 2021 or later.
- Changing the benefit formula that is used to calculate benefits.
- Calculating the annual cost-of-living adjustment for benefits differently.
Pandemic Impact
The 2021 Trustees Report states that Social Security’s short-term finances were “significantly affected” by the pandemic and the severe but short-lived recession in 2020. “Employment, earnings, interest rates, and GDP [gross domestic product] dropped substantially in the second calendar quarter of 2020 and are assumed to rise gradually thereafter toward recovery by 2023, with the level of worker productivity and thus GDP assumed to be permanently lowered by 1%.” The projections also accounted for elevated mortality rates over the period 2020 through 2023 and delays in births and immigration. Because payroll tax revenues are rebounding quickly, the damage to the program was not as great as many feared.
Sharp increases in consumer prices in July and August suggest that beneficiaries might receive the highest annual benefit increase since 1983 starting in January 2022. The Social Security Administration’s chief actuary has estimated that the 2022 cost-of-living adjustment (COLA) will be close to 6.0%.1(The official COLA had not been announced at the time of this writing.)
What’s at Stake for You?
The Census Bureau has estimated that 2.8 million Americans ages 55 and older filed for Social Security benefits earlier than they had anticipated because of COVID-19.2 Many older workers may have been pushed into retirement after losing their jobs or because they had health concerns.
If you regret starting your Social Security benefits earlier than planned, you can withdraw your application within 12 months of your original claim and reapply later. But you can do this only once, and you must repay all the benefits you received. Otherwise, if you’ve reached full retirement age, you may voluntarily suspend benefits and restart them later. Either of these moves would result in a higher future benefit.
Even if you won’t depend on Social Security to survive, the benefits could amount to a meaningful portion of your retirement income. An estimate of your monthly retirement benefit can be found on your Social Security Statement, which can be accessed when you sign up for my Social Security account on SSA.gov. If you aren’t receiving benefits and haven’t registered for an online account, you should receive an annual statement in the mail starting at age 60.
No matter what the future holds for Social Security, your retirement destiny is still in your hands. But it may be more important than ever to save as much as possible for retirement while you are working. Don’t wait until you have one foot out the door to consider your retirement income strategy.
All information is from the 2021 Social Security Trustees Report, except for:
1) AARP, September 15, 2021
2) U.S. Census Bureau, 2021
Advancing Tax Proposals Put Corporations and High-Income Individuals in Spotlight
The House Budget Committee voted Saturday, September 25, 2021, to advance a $3.5 trillion spending package to the House floor for debate. Summaries of proposed tax changes intended to help fund the spending package was previously released by The House Ways and Means Committee and the Joint Committee on Taxation. Many of these provisions focus specifically on businesses and high-income households. There is a high probability that changes will be made as the process continues.
Below are some highlights from the proposed provisions.
Corporate Income Tax Rate Increase
Corporations would be subject to a graduated tax rate structure, with a higher top rate.
Currently, a flat 21% rate applies to corporate taxable income. The proposed legislation would impose a top tax rate of 26.5% on corporate taxable income above $5 million. Specifically:
- A 16% rate would apply to the first $400,000 of corporate taxable income
- A 21% rate on remaining taxable income up to $5 million
- The 26.5% rate would apply to taxable income over $5 million, and corporations making more than $10 million in taxable income would have the benefit of the lower tax rates phased out.
Personal service corporations would pay tax on their entire taxable income at 26.5%.
Tax Increases for High-Income Individuals
Top individual income tax rate. The proposed legislation would increase the existing top marginal income tax rate of 37% to 39.6% effective in tax years starting on or after January 1, 2022 and apply it to taxable income over $450,000 for married individuals filing jointly, $425,000 for heads of households, $400,000 for single taxpayers, and $225,000 for married individuals filing separate returns. (These income thresholds are lower than the current top rate thresholds.)
Top capital gains tax rate. The top long-term capital gains tax rate would be raised from 20% to 25% under the proposed legislation; this increased tax rate would generally be effective for sales after September 13, 2021. In addition, the taxable income thresholds for the 25% capital gains tax bracket would be made the same as for the 39.6% regular income tax bracket (see above) starting in 2022.
New 3% surtax on income. A new 3% surtax is proposed on modified adjusted gross income over $5 million ($2.5 million for a married individual filing separately).
3.8% net investment income tax expanded. Currently, there is a 3.8% net investment income tax on high-income individuals. This tax would be expanded to cover certain other income derived in the ordinary course of a trade or business for single taxpayers with taxable income greater than $400,000 ($500,000 for joint filers). This would generally affect certain income of S corporation shareholders, partners, and limited liability company (LLC) members that is currently not subject to the net investment income tax.
New qualified business income deduction limit. A deduction is currently available for up to 20% of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20% of aggregate qualified real estate investment trust dividends and qualified publicly traded partnership income. The proposed legislation would limit the maximum allowable deduction at $500,000 for a joint return, $400,000 for a single return, and $250,000 for a separate return.
Retirement Plans Provisions Affecting High-Income Individuals
New limit on contributions to Roth and traditional IRAs. The proposed legislation would prohibit those with total IRA and defined contribution retirement plan accounts exceeding $10 million from making any additional contributions to Roth and traditional IRAs. The limit would apply to single taxpayers and married taxpayers filing separately with taxable income over $400,000, $450,000 for married taxpayers filing jointly, and $425,000 for heads of household.
New required minimum distributions for large aggregate retirement accounts.
- These rules would apply to high-income individuals (same income limits as described above), regardless of age.
- The proposed legislation would require that individuals with total retirement account balances (traditional IRAs, Roth IRAs, employer-sponsored retirement plans) exceeding $20 million distribute funds from Roth accounts (100% of Roth retirement funds or, if less, by the amount total retirement account balances exceed $20 million).
- To the extent that the combined balance in traditional IRAs, Roth IRAs, and defined contribution plans exceeds $10 million, distributions equal to 50% of the excess must be made.
- The 10% early-distribution penalty tax would not apply to distributions required because of the $10 million or $20 million limits.
Roth conversions limited. In general, taxpayers can currently convert all or a portion of a non-Roth IRA or defined contribution plan account into a Roth IRA or account without regard to the amount of their taxable income. The proposed legislation would prohibit Roth conversions for single taxpayers and married taxpayers filing separately with taxable income over $400,000, $450,000 for married taxpayers filing jointly, and $425,000 for heads of household. [It appears that this proposal would not be effective until 2032.]
Roth conversions not allowed for distributions that include nondeductible contributions. Taxpayers who are unable to make contributions to a Roth IRA can currently make “back-door” contributions by making nondeductible contributions to a traditional IRA and then shortly afterward convert the nondeductible contribution from the traditional IRA to a Roth IRA. It is proposed that amounts held in a non-Roth IRA or defined contribution account cannot be converted to a Roth IRA or designated Roth account if any portion of the distribution being converted consists of after-tax or nondeductible contributions.
Estates and Trusts
- For estate and gift taxes (and the generation-skipping transfer tax), the current basic exclusion amount (and GST tax exemption) of $11.7 million would be cut by about one-half under the proposal.
- The proposal would generally include grantor trusts in the grantor’s estate for estate tax purposes; tax rules relating to the sale of appreciated property to a grantor trust would also be modified to provide for taxation of gain.
- Current valuation rules that generally allow substantial discounts for transfer tax purposes for an interest in a closely held business entity, such as an interest in a family limited partnership, would be modified to disallow any such discount for transfers of nonbusiness assets.
2022-2023 School Year Opens on October 1 for FAFSA
Financial aid kickoff season begins in October. Incoming and returning college students can start filing the Free Application for Federal Student Aid, or FAFSA, for the next academic year. The FAFSA is a prerequisite for federal student loans, grants, and work-study, and may be required by colleges before they distribute their own institutional aid to students.
How do I submit the FAFSA?
The FAFSA for the 2022-2023 school year opens on October 1, 2021. Here are some tips for filing it.
- The fastest and easiest way to submit the FAFSA is online at studentaid.gov. The site contains resources and tools to help you complete the form, including a list of the documents and information you’ll need to file it. The online FAFSA allows your tax data to be directly imported from the IRS, which speeds up the overall process and reduces errors.
- Before you file the FAFSA online, you and your child will each need to obtain an FSA ID (federal student aid ID), which you can also do online by following the instructions. (Once you have an FSA ID, you can use the same one each year.)
- The FAFSA can also be filed in paper form. But it will take much longer for the government to process it.
- You don’t need to complete the FAFSA by October 1. But it’s a promising idea to file it as early as possible in the fall because some federal aid programs operate on a first-come, first-served basis. Colleges typically have a priority filing date for both incoming and returning students; the priority filing date can be found in the financial aid section of a college’s website. You should submit the FAFSA before that date.
- Students must submit the FAFSA every year to be eligible for financial aid (along with any other college-specific financial aid form that may be required, such as the CSS Profile). Any colleges you list on the FAFSA will also get a copy of the report.
- There is no cost to submit the FAFSA.
How does the FAFSA calculate financial need?
The FAFSA looks at a family’s income, assets, and household information (for example, family size) to calculate what a family can afford to pay. This figure is known as the EFC or expected family contribution. All financial aid packages are built around this number.
Tip: Starting with the 2023-2024 FAFSA (which will be available next year starting October 1, 2022), the EFC will be renamed the SAI, or student aid index.
When counting income, the FAFSA uses information in your tax return from two years earlier. This year is often referred to as the “base year” or the “prior-prior year.” For example, the 2022-2023 FAFSA will use income information in your 2020 tax return, so 2020 would be the base year or prior-prior year.
When counting assets, the FAFSA uses the current value of your and your child’s assets. Some assets are not counted and do not need to be listed on the FAFSA. These include home equity in a primary residence, retirement accounts (e.g., 401k, IRA), annuities, and cash-value life insurance. Student assets are weighted more heavily than parent assets; students must contribute 20% of their assets vs. 5.6% for parents.
Your EFC remains constant, no matter which college your child attends. The difference between your EFC and a college’s cost of attendance equals your child’s financial need. Your child’s financial need will be different at every school.
After your EFC is calculated, the financial aid administrator at your child’s school will attempt to craft an aid package to meet your child’s financial need by offering a combination of loans, grants, scholarships, and work-study. Keep in mind that colleges are not obligated to meet 100% of your child’s financial need. If they don’t, you are responsible for paying the difference. Colleges often advertise on their website and brochures whether they meet “100% of demonstrated need.”
Should I file the FAFSA even if my child is unlikely to qualify for aid?
Yes, probably. There are two good reasons to submit the FAFSA even if you don’t expect your child to qualify for need-based aid.
First, all students attending college at least half-time are eligible for unsubsidized federal student loans, regardless of financial need or income level. (“Unsubsidized” means the borrower, rather than the federal government, pays the interest that accrues during school and during the grace period and any deferment periods after graduation.) If you want your child to be eligible for this federal loan, you’ll need to submit the FAFSA. But don’t worry, your child won’t be locked in to taking out the loan. If you submit the FAFSA and then decide your child doesn’t need the student loan, your child can decline it through the college’s financial aid portal before the start of the school year.
Second, colleges typically require the FAFSA when distributing their own need-based aid, and in some cases as a prerequisite for merit aid. So, filing the FAFSA can give your child the broadest opportunity to be eligible for college-based aid. Similarly, many private scholarship sources may want to see the results of the FAFSA.
Too Hot to Handle: What’s Ahead for the U.S. Housing Market?
The U.S. housing market, already strong before the pandemic, has heated up to record levels in 2021. The Case-Shiller U.S. National Home Price Index, which measures home prices in 20 major metropolitan areas, reported a 12-month increase of 18.6% in June 2021, the largest year-over-year gain in data going back to 1987.1
The National Association of Realtors (NAR), which provides more current data, reported that the national median price of an existing home was $359,900 in July, down from a record $362,800 in June. Even so, this was the 113th consecutive month of year-over-year price increases. The June to July price relief was due in part to increased supply. Total inventory of new and existing homes increased 7.3% over June but was still down 12.0% from a year ago.2
The July 2021 NAR data suggests that the red-hot market may be cooling slightly, but prices are still extremely high, and industry experts expect them to remain high for the foreseeable future. Here’s a look at some key factors behind the current trend and prospects for future direction.
Low Supply, Surprise Demand
The housing supply has been low for more than a decade. The housing crash devastated the construction industry, and a variety of factors, including labor shortages, tariffs, limited land, and restrictive permit processes, have kept the supply of new homes below historical averages, placing more pressure on existing homes to meet demand.3
The pandemic exacerbated labor problems and led to supply-chain issues and high costs for raw materials that held back construction, while demand exploded despite the economic downturn. With the shift to remote work and remote education, many people with solid jobs looked for more space, and low interest rates made higher prices more affordable.4
At the same time, homeowners who might have seen high prices as an opportunity to sell were hesitant to do so because of economic uncertainty and the high cost of moving to another home. Refinancing at low rates offered an appealing alternative and kept homeowners in place. Government mortgage forbearance programs have helped families from losing their homes but also kept homes that might have otherwise foreclosed off the market.5
Health concerns also played a part. The pandemic made it less appealing to have strangers entering a home for an open house. And older people who might have moved into assisted living or other senior facilities were more likely to stay in their homes.6
Taken together, these factors produced a perfect storm of low supply and high demand that drove already high prices to dizzying levels and created desperation among buyers. All-cash sales accounted for 23% of transactions in July, up from 16% in July 2020. The average home stayed on the market for just 17 days, down from 22 days last year. Almost 90% of homes sold in less than a month.7
Freezing Out First-Time Buyers
Recent inventory gains have been primarily in more expensive houses, and there continues to be a critical shortage of affordable homes. First-time buyers accounted for just 30% of purchases in July 2021, down from 34% the previous year.8 A common formula for home affordability is to multiply income by three — i.e., a couple who earns $100,000 might qualify to buy a $300,000 house. A study of 50 cities found that home prices in Q2 2021 were, on average, 5.5 times the local median income of first-time buyers, putting most homes out of reach.9
The lack of affordable housing for first-time buyers also helps to drive rents higher. People with higher incomes who might be buying homes are willing and able to pay higher rents. Rents on newly signed leases in July were 17% higher than what the previous tenant paid, the highest jump on record. After dropping while many young people lived with parents during the pandemic, occupancy of rental units hit a record high of 96.9%.10
Is This a Bubble?
From 2006 to 2012, the housing market plummeted 60%, taking the broader U.S. economy with it.11 Mortgage requirements were made much stricter after the housing crash, and homeowners today are more likely to afford their homes and to have more equity from larger down payments. The housing market has always been cyclical, so it’s likely that prices will turn downward at some point in the future, but less likely that prices will collapse the way they did during the Great Recession.12
What’s Next?
Prices are so high that some buyers are backing off, but demand remains strong and will outstrip housing supply for the foreseeable future. Some near-term relief might come if high prices inspire more homeowners to sell, and if the end of government programs puts more foreclosed homes on the market. There are more single-family homes under construction than at any time since 2007, but it will take months or years for those homes to increase the housing supply.13
The housing market tends to be seasonal, with demand dying down in the fall and the winter. That didn’t happen last year, because pent-up demand was so strong that it pushed through the seasons. With the supply/demand tension easing, the seasonal slowdown may be more significant this year.14 The Federal Home Loan Mortgage Corporation (Freddie Mac) projects that home prices will grow by 12.1% in 2021, lower than the current pace, and drop further to 5.3% growth in 2022.15
Location, Location
Although national trends reflect broad economic forces, the housing market is fundamentally local. The West is the most expensive region, with a median price of $508,300 for an existing home, followed by the Northeast ($411,200), the South ($305,200), and the Midwest ($275,300).16 Within regions, there are dramatic price differences among states, cities, and towns. The trend to remote work, which helped drive prices upward, may help moderate prices in the long term by allowing workers to live in more affordable areas.
1) S&P Dow Jones Indices, August 31, 2021
2, 7, 8, 16) National Association of Realtors, August 23, 2021
3, 4, 6) The New York Times, May 14, 2021
5) NBC News, July 6, 2021
9) The New York Times, August 12, 2021
10) Bloomberg Businessweek, August 18, 2021
11) NPR, August 17, 2021
12) The Wall Street Journal, March 15, 2021
13) Bloomberg, August 19, 2021
14) CNN Business, August 23, 2021
15) Freddie Mac, July 2021
IRS Releases 2022 Key Numbers for Health Savings Accounts
The IRS has released the 2022 contribution limits for health savings accounts (HSAs), as well as the 2022 minimum deductible and maximum out-of-pocket amounts for high-deductible health plans (HDHPs). An HSA is a tax-advantaged account that’s paired with an HDHP. An HSA offers several valuable tax benefits:
- You may be able to make pre-tax contributions via payroll deduction through your employer, reducing your current income tax.
- If you make contributions on your own using after-tax dollars, they’re deductible from your federal income tax (and perhaps from your state income tax) whether you itemize or not.
- Contributions to your HSA, and any interest or earnings, grow tax deferred.
- Contributions and any earnings you withdraw will be tax-free if used to pay qualified medical expenses.
Health Savings Accounts
Annual contributions:
2022 Self-only coverage $3,650, $50 increase from 2021
2022 Family coverage $7,300, $100 increase from 2021
High-deductible health plan: self-only coverage:
2022 Annual deductible: minimum $1,400, the same as 2021
2022 Annual out-of-pocket expenses required to be paid (other than premiums) can’t exceed $7,050,
$50 increase from 2021
High-deductible health plan: family coverage:
2022 Annual deductible: $2,800, the same as 2021
2022 Annual out-of-pocket expenses required to be paid (other than premiums) can’t exceed $14,000,
$100 increase from 2021
Catch-up contributions:
2022 Annual catch-up contributions limit for individuals age 55 or older $1,000, the same as 2021
Student Loan Payment Pause Extended Through January 2022
On August 6, 2021, the U.S. Department of Education announced an extension of the pause on federal student loan payments to January 31, 2022. The payment moratorium, currently in effect for millions of federal student loan borrowers, was set to end on September 30, 2021.
The Department noted that this extension would be the last one. U.S. Secretary of Education Miguel Cardona stated: “As our nation’s economy continues to recover from a deep hole, this final extension will give students and borrowers the time they need to plan for restart and ensure a smooth pathway back to repayment.”1
How many payment pauses have there been?
There have been four pauses to federal student loan repayment since the start of the coronavirus pandemic. The first pause was instituted in March 2020 for six months (through September 2020) when Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The second and third pauses came via presidential executive order and extended the payment pause through January 2021 and through September 2021, respectively. The fourth and “final” extension is now scheduled through January 31, 2022. This means federal student loan payments will resume beginning February 1, 2022.
The Department of Education will begin notifying borrowers about this final extension in the coming days, and it will release resources and information about how to plan for repayment as the end of the pause approaches.
Does interest continue to accrue during the moratorium period?
No, interest does not accrue during the moratorium period. Essentially, the interest rate is set at 0%.
Can borrowers make payments if they want to during this time?
Yes. Borrowers can choose to keep making their monthly student loan payments during the moratorium period if they wish. The full amount of a borrower’s payment will be applied to principal. Borrowers can also choose to make partial payments during this time.
Do private student loans qualify for the payment pause?
No, private student loans aren’t eligible. Only student loans held by the federal government are eligible. This includes Federal Direct Loans (which includes PLUS Loans), along with Federal Perkins Loans and Federal Family Education Loan (FFEL) Program loans held by the Department of Education.
Is student loan forgiveness likely when the payment pause ends?
Probably not. While some legislators have gone on record in favor of forgiving a certain amount of federal student loan debt per borrower, the Biden administration has not taken any steps in this direction and has given no indication that it will do so. Borrowers should be ready to start repaying their loans when the pause ends on January 31, 2022. In the case of continued financial hardship at that time, borrowers should contact their loan servicer to inquire about requesting an individual deferment or forbearance.
For more information, visit the Federal Student Aid website.
1) U.S. Department of Education, 2021
Mid-Year Is a Good Time for a Financial Checkup
The first half of 2021 is behind us. As life emerges from the pandemic to a “new normal,” a mid-year financial checkup may be more important than ever this year. Here are some ways to make sure that your financial situation is continuing the right path.
Reassess your financial goals
At the beginning of the year, you may have set financial goals geared toward improving your financial situation. Perhaps you wanted to save more, spend less, or reduce your debt. How much progress have you made? If your income, expenses, and life circumstances have changed, you may need to rethink your priorities. Review your financial statements and account balances to determine whether you need to make any changes to keep your financial plan on track.
Look at your taxes
Completing a mid-year estimate of your tax liability may reveal new tax planning opportunities. You can use last year’s tax return as a basis, then factor in any anticipated adjustments to your income and deductions for this year. Check your withholding, especially if you owed taxes or received a large refund. Doing that now, rather than waiting until the end of the year, may help you avoid owing a big tax bill next year or overpaying taxes and giving Uncle Sam an interest-free loan. You can check your withholding by using the IRS Tax Withholding Estimator https://www.irs.gov/individuals/tax-withholding-estimator . If necessary, adjust the amount of federal or state income tax withheld from your paycheck by filing a new Form W-4 with your employer. Be sure to factor any Advance Child Tax Credit Payments if you are receiving or expect to receive any. https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021
Check your retirement savings
If you’re still working, look for ways to increase retirement plan contributions. For example, if you receive a pay increase this year, you could contribute a higher percentage of your salary to your employer-sponsored retirement plan, if available. For 2021, the contribution limit is $19,500, or $26,000 if you’re age 50 or older. If you are close to retirement or already retired, take another look at your retirement income needs and whether your current investment and distribution strategy will provide the income you will need.
Evaluate your insurance coverage
What are the deductibles and coverage limits of your homeowners/renter’s insurance policies? How much disability or life insurance coverage do you have? Your insurance needs can change over time. As a result, you’ll want to make sure your coverage has kept pace with your income and family/personal circumstances. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased.
Ask questions
Some questions you should also ask yourself as part of your mid-year financial checkup:
• Do you have enough money set aside to cover unexpected expenses?
• Do you have money left in your flexible spending account?
• Are your beneficiary designations up to date?
• Have you checked your credit score recently?
• Do you need to create or update your will?
• When you review your portfolio, is your asset allocation still in line with your financial goals, time horizon, and tolerance for risk? Are any changes warranted?
Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
New Global Tax Accord Takes Shape
After more than four years of international negotiations taking place mostly behind the scenes, 132 countries — representing more than 90% of worldwide gross domestic product (GDP) and including the Group of 20 (G20) large economies — recently agreed to a new plan to reform international tax laws in an effort to “ensure that multinational enterprises pay a fair share of tax wherever they operate.”1
The negotiations, overseen by the Paris-based Organisation for Economic Co-operation and Development (OECD), represent the most significant attempt in over a century to overhaul the global tax system and bring international tax policy into the modern digital age. The accord has the potential to reshape global commerce.2
What is the crux of the new global tax agreement?
The global agreement has two main pillars. The first would require large, multinational enterprises (including digital companies) to pay taxes in countries where their goods or services are sold and where they earn profits, even if they have no physical presence there. This provision is aimed primarily at large U.S. tech companies that sell their goods and services abroad, and is intended to supercede attempted regulation by other countries that are already in the process of trying to collect taxes on these companies.3
The second pillar, proposed by the United States, calls for a 15% global minimum corporate tax rate in an effort to prevent multinational companies from shopping for a country or jurisdiction with the lowest tax rates, a phenomenon U.S. Treasury Secretary Janet Yellen described as a “race to the bottom.”4
President Biden added: “With a global minimum tax in place, multinational corporations will no longer be able to pit countries against one another in a bid to push tax rates down and protect their profits at the expense of public revenue.”5
The OECD estimated that raising the global minimum corporate tax rate to 15% would generate an estimated $150 billion in additional global tax revenues each year. It stated that the “package will provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure and the measures necessary to help optimise the strength and the quality of the post-COVID recovery.”6
What countries are on board?
All the G20 economies, representing over 75% of global trade, have endorsed the deal. They include the United States, Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and most countries of the European Union.7 In all, 132 countries are in favor.
However, several countries with low corporate tax rates that currently operate as tax havens have not agreed to the deal, including Ireland, several Caribbean countries, Hungary, Estonia, Kenya, Nigeria, Peru, and Sri Lanka.8 These smaller nations are attempting to secure a better deal to enable them to compete with larger countries and make up for the potential loss of any tax advantage. The refusal of Ireland, Hungary, and Estonia to sign on to a global corporate tax rate is a potential roadblock because of the European Union’s requirement for unanimity on tax issues. 9
Undoubtedly, there is a significant amount of work to be done to bring “holdout” nations on board. The Biden administration has pushed Congress to approve a new tax rule that would punish companies that operate in the United States but have headquarters in those holdout countries by significantly increasing their tax liabilities. The president has also pushed Congress to increase the minimum tax on revenue earned by U.S. companies outside the United States in an effort to help fund the $4 trillion infrastructure and economic agenda he hopes to pass this year.10
Has the new global tax agreement been enacted yet?
No. There are still significant, complex technical and policy details that need to be worked out, including how the plan will be executed and which U.S. multinational companies will be subject to the new rules on digital tax.
In addition, the plan needs to be approved by Congress and the national legislatures of participating countries. In the United States, each pillar of the plan could be considered separately. According to Treasury Secretary Yellen, the provision for a 15% global minimum corporate tax rate could be included in a budget bill headed to Congress later in 2021, while the provision on digital taxation of multinational companies might be ready for Congress in the spring of 2022. A further wrinkle is that if the digital tax provision is considered an international treaty, it will require two-thirds approval in the Senate.11
In any event, the global tax accord is due to be finalized by G20 leaders at their next meeting in Rome in October 2021, with G20 finance ministers anticipating global implementation in 2023.12
1, 3, 6) OECD.org, 2021
2, 4-5, 8, 10) The New York Times, July 8, 2021
7) G20.org, 2021
9, 11-12) Bloomberg, July 11, 2021
Should You Be Concerned About Inflation?
If you pay attention to financial news, you are probably seeing a lot of discussion about inflation, which has reared its head in the U.S. economy after being mostly dormant for the last decade. In May 2021, the Consumer Price Index for All Urban Consumers (CPI-U), often called headline inflation, rose at an annual rate of 5.0%, the highest 12-month increase since August 2008.1
The CPI-U measures the price of a fixed market basket of goods and services purchased by residents of urban and metropolitan areas — about 93% of the U.S. population. You have likely seen price increases in some of the goods and services you purchase, and if so it’s natural to be concerned.
The larger question is whether these price increases are temporary, caused by factors such as supply-chain issues and labor shortages that will be resolved as the economy continues to emerge from the pandemic, or whether they indicate a fundamental imbalance that could cause widespread long-term inflation and hold back economic growth.
Most economists — including Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen — believe the current spike is primarily due to transitory factors that will fade in the coming months. One example of this, cited by Powell in a recent press conference, is the price of lumber.2–3
Supply and Demand
Early in the pandemic, many lumber mills shut down or cut back on production because they expected a major slowdown in building. In fact, demand for housing and home renovation increased during the pandemic, as many people who worked from home wanted more space, a different location, or improvements to their current homes. Low supply and high demand sent lumber prices soaring.4
Sawmills geared up as quickly as they could and were reaching full capacity just as demand began to ebb, with builders cutting back due to high prices and homeowners using their discretionary income to buy other goods and services. Suddenly the supply exceeded demand, and prices began to drop. Wholesale lumber prices are still higher than before the pandemic, and it takes time for price drops to filter down to the retail level, but it’s clear that the extreme inflation was transitory and has been reversed. The lumber story also suggests that consumers and businesses will cut back on spending for a product that becomes too expensive rather than spend at any price and feed an inflationary spiral.5
Chips and Cars
Another example of pandemic-driven imbalance between supply and demand is used car and truck prices, which have skyrocketed almost 30% over the last 12 months and represent a substantial portion of the overall increase in CPI. Used vehicles are hard to find in large part because fewer new cars are being built — and fewer new cars are being built because there is a shortage of computer chips. A single new car can require more than 1,000 chips, and when auto manufacturers were forced to close their factories early in the pandemic and new vehicle sales plummeted due to lack of demand, chip manufacturers shifted from producing chips for cars to producing chips for high-demand consumer electronics such as webcams, phones, and laptops.6–8
As the economy reopened and the demand for cars increased, chip producers were unable to shift and increase production quickly enough to meet the needs of auto manufacturers. The chip shortage is expected to reduce global auto production by 3.9 million vehicles in 2021, a drop of 4.6%. Unlike lumber, the chip shortage may take some time to resolve, because chip manufacturing is a long, multi-step process and most chips are manufactured outside the United States. The federal government has stepped in to encourage U.S. manufacturers to build new facilities and increase production.9
Fundamental Forces
Imbalances between supply and demand are to be expected as the economy reopens, and most such imbalances should work themselves out in the marketplace. But other forces could fuel more extensive inflation. Massive federal stimulus packages have provided consumers with more money to spend, while ongoing stimulus from the Federal Reserve has increased the money supply and made it easier to borrow.
Although unemployment is still relatively high at 5.9%, millions of jobs remain open as workers are hesitant to return to positions they consider unsafe in light of the pandemic, are unable to work due to lack of child care, and/or are rethinking their careers in a post-pandemic world.10–11This may change in September as extended unemployment benefits expire and children return to school, but the current imbalance is forcing many businesses to raise wages, especially in lower-paying jobs.12
The increases so far are primarily “catching up” after many years of low wages and should be absorbed by businesses or passed on to consumers with moderate price increases.13 However, if wages and prices increase too quickly and consumers earning higher wages are willing to spend regardless of rising prices — because they expect prices to rise even higher — the wage-price inflation spiral could be difficult to control.
Reading the Economy
When considering the current situation, it’s helpful to look at other measures of inflation.
Base effect. On a purely mathematical level, high 12-month CPI increases in March, April, and May 2021 reflect the fact that the CPI is being compared with those months in 2020, when prices decreased as the economy closed in response to the pandemic. This comparison to unusually low numbers is called the base effect. To avoid this effect, it’s helpful to look at annualized inflation over a two-year period, comparing prices now with prices before the pandemic. By that measure, current inflation is about 2.5%, a little higher than the average over the last decade but not nearly as concerning as a 5.0% level.14
Core inflation. Prices of some items are more volatile than others, and food and energy are especially volatile categories that can change quickly even in a low-inflation environment. For this reason, economists tend to look more carefully at core inflation, which strips out food and energy prices and generally runs lower than CPI-U. Core CPI rose at an annual rate of 3.8% in May 2021, which sounds better than 5.0% until you consider that it is the highest core inflation since June 1992. The good news is that the 0.7% monthly increase from April to May was lower than the 0.9% rise from March to April, suggesting that core inflation may be slowing down. (The CPI-U increase also slowed in May, rising 0.6% for the month after a 0.8% increase in April.)15
Sticky prices. Another helpful measure is the sticky-price CPI, which sorts the components of the CPI into categories that are relatively slow to change (sticky) and those that change more rapidly (flexible). The sticky price CPI increased just 2.7% over the 12-month period ending in May 2021. By contrast, the flexible component of the CPI increased 12.4% over the year.16 This suggests that a variety of factors — such as problems with supply chains, labor, and extreme weather — may be moving prices on flexible items, but that underlying economic forces are moving more stable prices at a relatively moderate rate.
The Fed’s Arsenal
The Federal Open Market Committee (FOMC), an arm of the Federal Reserve, is charged with setting economic policy to meet its dual mandate of fostering maximum employment while promoting price stability. The Fed’s primary economic tools are the benchmark federal funds rate, which affects many other interest rates, and its bond-buying program, which injects liquidity into the economy. Put simply, the Fed lowers the funds rate and buys bonds to stimulate the economy and increase employment, and raises the rate and stops buying bonds or sells bonds to put the brakes on inflation.
The federal funds rate has been at its rock-bottom range of 0.0% to 0.25% since March 2020, when the Fed dropped it quickly in the face of the pandemic, and the Federal Reserve is buying $120 billion in government bonds every month, much less than it did early in the pandemic but still a substantial and steady injection of money into the economy.17 (Unlike an individual or a regular bank that must spend money to purchase bonds, the central bank buys bonds by creating an electronic deposit in one of its member banks, thus creating “new money” that can be used to lend and circulate into the economy.)
Some inflation is necessary for economic growth — without it, an economy is stagnant — and in 2012, the FOMC set a 2% target for healthy inflation, based on a measure called the Personal Consumption Expenditures (PCE) Price Index. The PCE price index uses much of the same data as the CPI, but it captures a broader range of expenditures and reflects changes in consumer spending.
More specifically, the FOMC focuses on core PCE (excluding food and energy), which remained below the 2% target for most of the last decade. In August 2020, the FOMC changed its policy to target an average PCE inflation rate of 2% and indicated it would allow inflation to run higher for some time to balance the time it ran below the target. This is the current situation. Core PCE increased at a 12-month rate of 3.4% in May 2021, but so far the Fed has shown little inclination to take action in the short term.18 The FOMC projects PCE inflation to drop to 3.1% by the end of the year and to 2.1% by the end of 2022.19
At its June meeting, the FOMC did indicate an important shift by projecting the federal funds rate would increase in 2023 to a range of 0.5% to 0.75%, effectively two quarter-point steps. (In March, the projection had been to hold the rate steady at least through 2023.) Fed Chair Powell also indicated that the FOMC has begun “talking about talking about” reducing the monthly bond purchases.20 Neither of these signals suggests any immediate action or serious concern about inflation. However, the fact that the funds rate remains near zero and that the Fed continues to buy bonds gives the central bank powerful “weapons” to employ if it believes inflation is increasing too quickly.
The next few months may indicate whether inflation is slowing down or changes in monetary policy are necessary. Unfortunately, prices do not always come down once they rise, but it may be helpful to keep in mind that prices of many goods and services did decline during the pandemic, and the higher prices you are seeing today might not be far out of line compared with prices before the economic slowdown. As long as inflation begins trending downward, it seems likely that the current numbers reflect growing pains of the recovery rather than a long-term threat to economic growth.
U.S. Treasury securities are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, bonds could be worth more or less than the original amount paid. Projections are based on current conditions, are subject to change, and may not come to pass.
1, 6, 10, 14) U.S. Bureau of Labor Statistics, 2021
2, 17, 19–20) Federal Reserve, 2021
3) Bloomberg, June 5, 2021
4–5) The New York Times, June 21, 2021
7) CBS News, June 22, 2021
8–9) Time, June 28, 2021
11) CNBC, June 8, 2021
12–13) CNBC, May 22, 2021
15) The Wall Street Journal, June 22, 2021
16) Federal Reserve Bank of Atlanta, 2021
18) U.S. Bureau of Economic Analysis, 2021
