Archive for November 2007

RETIREMENT RIDDLE

November 13, 2007

Riddle:I am the key to unlocking your finances, I am unique only to you, I have the power to destroy politicians who challenge me, I am worshiped by millions, and I offer false promises to future generations. Who am I? If you answered Social Security you would be correct.  Charles Blahous, special assistant to the president for economic policy stated that the “Rumors of the death of Social Security have not been exaggerated.  In fact the often-stated belief that the solvency problem is being blown out of proportion encourages the false sense of security, and gives cover to those who would shirk their responsibility for dealing with this problem.” Blahous added that the historical track record of the mid-range estimates made by the Social Security fund trustees have proved more accurate than their more optimistic estimates, which indicates that Social Security costs will start to exceed tax revenues by 2017.  Delaying action has further limited the available options for reform, and in particular, it has made it harder and harder to fix the system in a way that’s fair to all generations, and most especially younger people. The Department of the Treasury stated that Social Security is headed for $13.6 trillion shortfall.  In a brief entitled “Social Security Reform: The Nature of the Problem,” called for a rapid change that would help “spread the burden across generations.  In other words, keep the Ponzi scheme alive longer. Pick your poison.  Projections show that the Social Security trust fund will hit its peak in 2009 at a level of $99 billion, and cash flows will become negative after 2017.  If no program changes are made, then all beneficiaries will have their benefits cut back by 25% in 2041.  The report suggests a payroll tax hike of 3.5% now, or face a 5.8% hike in 2041. As well, cut all retirees benefits by 20.4% immediately or face a 30.4% cut in 2014. It is appalling how the solvency of Social Security is used as a political football to divide Americans in to different camps.  When discussing Social Security, I have realized that most individuals fail to realize that the money they and their employers pay in to the system is not saved in any bank account, “lock box” or trust fund. Rather, it is spent immediately by our government on what ever they like.  Can you imagine the wealth that could have been created if our money was invested in a conservative manner over time?   We at Markowski Investments will continue to treat Social Security as “found money” when it comes to setting up financial plans.   “If you end up receiving it, fantastic!  But, certainly do not rely upon it.” The topic of Social Security reform has been raised with the current crop of presidential candidates and their responses or lack thereof, have ranged from “Tax them to oblivion” to “Problem? What problem?”  Unfortunately for us, it looks as if the eight-thousand pound gorilla is here to stay    

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PERFORMANCE SHENANIGANS

November 13, 2007

A new academic report by Professors Vikas Agarwal, Naveen Daniel and Narayan Naik entitled Why is Santa So Kind To Hedge Funds? studied the performance of hedge funds returns for the month of December.  The professors looked at 7,535 hedge funds from 1994-2002 and what they found is in their words is a “December spike.”  December’s performance was 2 ½ times better than the other 11 months.  This was especially true when compensation for the hedge fund was performance based and the managers get to place any value they choose on illiquid investments.  The professors suggest that the “December spike” is the product of managers who “inflate returns.”  Often at the expense of January results. This does not surprise us in the slightest.  It would be interesting to see the volume of Ferraris and Aston Martins sold in December.   Anyway…the professors are asking the regulators to take a look.   I won’t hold my breath. 

AMT FIX OR TAX HIKE

November 13, 2007

The most powerful committee in the House of Representatives is Ways and Means.  Members of the caucus wield the most powerful instrument in the United States, the tax code.  This past month Chairman Charles Rangel outlined what is being dubbed in many outlets as the “Mother of All Tax Hikes.”  This is the largest individual income tax increase in history.   Read them and weep… The bill will add a 4% surtax on individual Americans earning more than $150,000 a year, $200,000 for couples.  This is in addition to the expiration of 2001 and 2003 tax cuts.  So under the Democrat plan over the next several years, the individual income top tax rate will rise from 35% to 44%.  By way of comparison:  There are 29 countries in the organization for Economic Cooperation and Development, which for all intents and purposes are the worlds most developed nations.  The average top marginal rate for those countries is 35.7%.  Only five OECD countries would have higher top marginal tax rates, if the current Democratic plan is passed. Most small businesses, (which just so happens to be the greatest originator of jobs in our country) are set up as either S corporations or limited liability companies.  This in turn means all their profits pass through directly to their owners.  They will be grossly affected by a rate increase of this magnitude. This tax as well is on adjusted gross income, not taxable income. This means that the bill will chop the value of various tax deductions such as mortgage interest, charitable giving, medical expenses, state and local taxes, and the standard deduction.  Also, consider the penalty for being married; the surtax kicks in for individuals at $150,000 and $200,000 for couples. The Democrats are selling this tax as an AMT fix.  Their “PAYGO” system requires tax increases for any tax cuts.  The AMT was never designed to affect the middle-class. However, since it was never indexed, it does.  The AMT “mistake” is being replaced by another at a cot to taxpayers of $3.5 trillion.  There has been a lot of talk about recession lately in the financial press of late. If you want a surefire to get to destination recession, tax increases are a first class express ticket.


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