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If we don’t do something in ten years, 40% of middle-class older workers will be downwardly mobile into retirement poverty – a potential political flash-point and certain human tragedy. Older workers don’t have adequate retirement accounts and Social Security won’t be enough for most retirees to maintain their living standards. The median older worker, age 55-64, has only $15,000 in their retirement account; the middle-class worker has $60,000; and even those in the top 10% of the income distribution don’t have enough, the median balance is only $200,000.

Two fixes could help secure adequate retirement income without extra cost or new bureaucracies. Congress could allow Social Security to administer bridge annuities to help people delay claiming Social Security benefits and allow people to buy extra Social Security credits. Social Security should innovate fast to save Americans' retirement future.

Though most people don’t have enough retirement income to spread over their retirement life, many can use their IRAs and 401(k)s to delay claiming higher Social Security benefits -- benefits are reduced by as much as 44 percent if beneficiaries claim before age 70. My coauthor and I, Tony Webb, propose that the Social Security Administration help people use their retirement account to bridge to a higher Social Security benefit. We also proposed in a recent AARP innovation competition, with another coauthor Michael Papadopoulos, that people could buy extra Social Security credits., called Catch-Up Credits

Fix #1: Bridge Annuities:  Workers should maximize their Social Security benefits by spending down their IRA and 401(k) balances and delay claiming. Congress could help people do that efficiently by allowing Social Security to convert retirement balances to “bridge” annuities to  delayed Social Security receipt.

Let’s take Wanda, an average wage earner who has $100,000 in her retirement account. She has several choices and unless she has a fatal disease and no spouse only one is a good choice. Her bad choice  is to keep her $100,000 and claim a reduced $1,125 Social Security benefit at 62. Her good choice is to delay claiming Social Security until age 70 to get a lifetime monthly of $1,980. How would she survive those 8 years waiting? Wanda can get by in those eight years by spending down her $100,000.

Another way to see how bridging can maximize benefits is to calculate the present value of Wanda's choices. If Wanda waits, she gets more in present value terms. A 2018 price-indexed annuity of $1,125 at age 62 is worth about $291,000. But a $1,980 monthly annuity in 2026 is worth $307,000 today! And people could choose how long to bridge. Bridge to age 63 with $100,000 and live on $8,502 per month. Bridge to age 70 and live on $1230 per month until the $1980 Social Security benefit kicks in. The bridge works with more or less money and at various ages.

 Fix #2: Buying Extra Catch-Up Credits in Social Security

Congress could also help workers boost their lifetime Social Security benefits by defaulting workers into Social Security catch-up contributions of 3.1% of earnings starting at age 50. This extra credit would increase the chance a person can maintain their pre-retirement living standards.  The proposed program uses the existing structure of Social Security. It would not increase the Social Security deficit, instead it would strengthen the program’s financial health.  All workers would get a decent return from their contributions of 3.1%.  Low- and middle-income workers would earn additional benefits of 7% of pre-retirement income and higher income workers would earn 3-4%. The detailed proposal is here

Social Security needs more revenue -- by raising the payroll tax from 12.4% to 15.4%  and/or raising or eliminating the taxable earnings limit. Without more revenue Social Security benefits will fall by 25% for the median household in retirement in less than 15 years.

But, Congress should look ahead and beyond just maintaining current benefits. Social Security is a well-run and efficient agency. It can effectively spread risk across a large population and over time. Adding bridge annuities and catch-up credits to Social Security reform is the type of old age income security we so desperately need as the current American retirement system crumbles described so well in the Wall Street Journal this summer.

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In December 2017, Congress cut government revenues by passing a $1.5 trillion tax cut. Congress claimed the corporate tax cuts would benefit everyone because businesses would invest or use the tax cut to raise wages. Donald Trump tweeted “TAX CUTS will increase investment in the American economy and in U.S. workers, leading to higher growth, higher wages, and more JOBS!” (Emphasis in his original tweet.) The promise hasn't materialized. Even Fox News, in an August 2018 poll, found Obamacare to be more popular than the tax cuts.

Here is the Fox News poll.

But so far, the cuts have not been linked to an increase in labor share or more investments. The Federal Reserve Bank of Chicago’s current capital spending index indicates private business investment plans have remained in negative territory since 2015. The most certain effect of the tax cuts has been to help fuel a massive increase in the federal deficit and debt.

So where is all the money saved from corporate tax cuts going? First, to companies’ bottom lines and second to stock buybacks, which were recently at a record high. So far, in 2018, the 500 corporations in the S&P Index have received $30 billion from the corporate rate cut, which in turn accounts for over 40 percent of S&P equity earnings growth. When economies are strong, equity values rise because the issuing corporations are engaged in innovation and other fundamental strategies to raise the real performance of the company. However, innovation and fundamental performance do not seem to be the cause of the rise in equity values. The Shiller PE ratio, which compares share prices to earnings, is now over 30, the highest since the expansion began mid 2009.

Buybacks are attractive because most CEO pay is directly linked to stock values and not to productive capital expansion. Increasing pay for the wealthiest Americans and reducing their taxes will boost equity values, but America’s inequality will get worse. The Economic Policy Institute (EPI) documented that 2017 average compensation for the CEO of large companies increased by 17.6%.  And that was before the tax cuts kicked in. (Disclosure:  I am on the board of EPI.)

Unfortunately, corporations have not used the money they've saved from the tax cut to raise workers’ pay and any potential increase in compensation could be soaked up by health insurance premiums. And, of course, paying more for health insurance doesn’t help households buy food or shelter. Without substantial income growth for most Americans and without new productive investment by businesses, tax cuts will not boost economic growth. Worse, government spending cuts triggered by cuts in tax revenue could cause a recession.

The bond market bolsters the assertion that the tax cut did not boost economic growth. Long-term interest rates remain low, and observers see a recent small bump as a result of the long-term government deficit and debt forecast, not business investment.

If you hold stocks, you have benefited from the cuts pushing up stock prices, though you should beware of a sharp downturn. These P/E and price levels are probably not sustainable, especially with little overall growth and continuing inequality.

But what of the promise that these cuts would benefit all Americans? Most household incomes haven’t received a meaningful increase in after-tax income from the cuts, and since they are skewed to the rich, it is unlikely they will spur a broad-based economic stimulus.  Companies are using the cuts to further push up stock prices, not make productive investments.

Regrettably, the President’s tweet turns out not to be true.  Perhaps that’s why voters aren’t enthusiastic about the tax cuts. People just aren’t getting any real economic benefits from the tax cuts and they know it.

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National debt is now 105% of GDP. Should we worry? Debt alone is not a problem.  During WWII, war-related debt was at a all-time high: 118% of GDP. And, debt levels naturally rise in recessions.

So, not all debt is bad.  But economists worry when borrowing fuels consumption and not investment.  Increase debt to build schools, railroads, health systems, create anti-recession spending, and to fight fascism. Good debt makes us richer. But debt used to cut taxes for corporate stock buybacks and affluent household spending, which yields little research and development and other productive investment is bad debt. Bad debt makes us poorer.

And high debt levels can leave little room to maneuver. The IMF predicts that among rich nations, only the U.S. will increase its debt-to-GDP ratio in the next five years, the wrong direction during an economic expansion.  During an expansion, especially the current nearly record-setting long one, debt should be falling, not rising. In Q3 of 2008, the government had collected revenue from the booming economy; the debt-to-GDP ratio was a low 64%. When the Great Recession hit, the government had room to borrow to finance our fiscal lifesavers, including the American Recovery and Reinvestment Act (ARRA) and TARP, which helped keep the deep recession from turning into a global depression.

Government deficits before a recession are even more dangerous.  Fueling a large federal deficit before a recession is a big mistake. If the economic downturn hit now the government would have less ammo to fight it. Interest payments alone will take up an ever-higher share of the budget as the debt ratio grows.  And as the Federal Reserve continues to raise interest rates, the interest share will grow even faster, again leaving little room to increase spending when the next recession comes.

The Congressional Budget Office (CBO) issues a monthly report on deficits and debt. Compared to fiscal year 2017, the deficit for the first 11 months of the fiscal year rose by $222 billion, an adjusted 22.8% over last year.  A steep rise in the deficit while the economy is growing will cause debt to rise even more in the next recession and eventually fuel increasing tax rates while boomers are retiring.

Although rolling back last year's tax cuts would make economic sense, politics may prevent tax cuts ever getting repealed— President Obama left over 80% of George W. Bush’s tax cuts in place.  Without healthy revenues, federal spending cuts and a national recession could erode federal and household investments in human and physical capital and infrastructure.

Why is the deficit spiking during an economic expansion?  Mainly because of the Republican 2017 tax cuts.  Although income and payroll taxes have kept pace, the tax cuts sharply reduced revenue coming from capital gains and corporate tax receipts, and that is creating a revenue gap.

But the biggest red warning light on the spending side is the rising net interest on the public debt.  Using our precious income to pay off past debts – especially if the debt wasn’t used for investment --  leaves less for future investment and help during a recession. Driven both by the overall increase in debt and rising interest rates, CBO writes that "the government’s net interest costs are projected to more than double as a share of the economy over the next decade."

Former Forbes contributor Stan Collender called the debt-causing tax cuts among the most fiscally irresponsible in modern history. Yet Republican majorities in Congress --  hoping to influence the fall elections – are proposing another $2 trillion in tax cuts.

We can afford to reverse the tax cuts now and we should before the recession.  Forbes contributor  Jeffrey Dorfman argues  tax revenue to GDP is a better measure of national capacity than debt. In 2016, the U.S. took 26% of GDP in taxes, compared to 31.7% in Canada, 33.2% in the United Kingdom, and 37.6% in Germany.  The economics and math for stabilizing the economy is known and easy – raise tax revenue during an upturn, take on good debt, and cap increasing interest payments. But last year’s tax cuts aimed to repeal the laws of math and economics and ignored the goal of stabilization.

All in all, the 2017 tax cuts created bad debt and more economic risks.  When the next recession hits, we all will pay the price.

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Our retirement system invites financial abuse of the elderly -- it causes the same problems we would have if we sent old people out on buses with thousand dollar bills pinned to their shirts. More elderly people will have lump sums, live alone, and begin to suffer cognitive decline, making them targets. This problem is an American one – Americans suffer five times the risk of financial abuse than our counterparts in Europe. The U.S. is a ripe environment for financial abuse because Americans are expected to handle so much cash alone.

I do not believe that financial tips will help people significantly because the problem is systemic, widespread and deeply-rooted. The only way to make an impact is to change the system, which includes heavily regulating the money management and advice industry. And other countries have proven that it is possible to minimize the abuse. But until our government moves boldly and quickly to prevent it, I feel obligated as an American to provide protection tips. Whatever we do, we must not let these financial tips become an easy way to blame the victims; to stop financial abuse, we need a system-wide fix.

Here are some tips. Warning: the list is insanely long and not always practical to elders living alone and in isolation.

1. When you or someone close to you is still mentally sharp, create powers of attorney and health care directives. Unfortunately, for those who are alone and without a trusted family member or friend, options are limited. Bank trust advisors are not regulated well enough. Some tip sheets suggest going to a financial institution (but I do not), or an attorney (they are usually helpful for contracts but not financial advice). I recommend a fee only financial advisor, which are more transparent and objective. You can find a fee only advisor here.
2. To protect your parent, develop a relationship with his or her caregiver and be a hawk over finances. The caregiver will be deterred from financial exploitation if they know you’re paying attention.
3. Set up direct deposit for checks so others don’t have to cash them.
4. Consult with a financial advisor or attorney before signing any document – assume you don't understand it.
5. Shred receipts, bank statements and unused credit card offers before throwing them away.
6. Lock up your checkbook, account statements and other sensitive information when others will be in your home.
7. Order copies of your credit report once a year to ensure accuracy.
8. Never give personal information, including a Social Security Number, account number or other financial information to anyone over the phone unless you initiated the call and the other party is trusted.
9. Never pay a fee or taxes to collect sweepstakes or lottery "winnings."
10. Never say yes to a financial decision the first time a decision is asked for. Never. Get all the details in writing and get a second opinion.
11. Have the bank and advisor look out for any suspicious activity related to your account.
12. Don't allow people you have hired (caregivers, cleaners, etc.) to have access to information about your finances.
13. Get references for any worker you hire. Do not be afraid of sounding mean or rude. In double checking, you are you are being careful, professional and friendly.
14. Pay with checks and credit cards instead of cash to keep a paper trail.
15. Say no more often than yes. It is your money.
16. Trust your instincts. Watch and acknowledge your own feelings of being threatened or intimidated. Don’t ignore those gut feelings – they are important clues. If you think or feel someone close to you is trying to take control of your finances, call your local Adult Protective Services or tell someone at your bank. There are new rules to make banks proactive about elder abuse. Exploiters and abusers are often very skilled. They can be charming and forceful in their effort to convince you to give up control of your finances. Don't be fooled; if something doesn't feel right, it may not be right. If it sounds too good to be true, it probably is.

Here are some worrisome bank activities that are warnings signs of financial abuse or exploitation.

1. Unusual activity in an older person's bank accounts, including large, frequent or unexplained withdrawals or ATM withdrawals by an older person who has never used a debit or ATM card.
2. Changing from a basic account to one that offers more complicated services the customer does not fully understand or need.
3. Withdrawals from bank accounts or transfers between accounts the customer cannot explain.
4. Uncharacteristic attempts to wire large sums of money.
5. New "best friends" accompanying an older person to the bank. Also, a caretaker, relative or friend who suddenly begins conducting financial transactions on behalf of an older person without proper documentation.
6. Sudden non-sufficient fund activity or unpaid bills.
7. Closing certificates of deposits (CDs) or accounts without regard to penalties.
8. Suspicious signatures on checks, or outright forgery.
9. Confusion, fear or lack of awareness on the part of an older customer. Shame could be conveyed by refusal to make eye contact and reluctance to talk about the problem.
10. Checks written as "loans" or "gifts."
11. Bank statements that no longer go to the customer's home.
12. New powers of attorney the older person does not understand.
13. Altered wills and trusts and/or loss of property.

True protection comes from a radical change in self-directed individual accounts.

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Elder abuse will get worse as 10,000 people turn 65 every day for the next ten years. A growing pool of fragile people – retirees, older workers and survivors – are susceptible to financial exploitation. Sure, thieves and legal exploiters are the perpetrators, but the root of elder financial abuse is our retirement system that for 40 years has required individuals to accumulate and handle very large pots of money to last their lifetime. In 2017, $14.5 trillion (85% of GDP) is in self-directed retirement accounts, which are targets for financial predators.

Bottom line: our 401(k) and IRA system invites financial abuse. We can warn people, but offering financial protection advice to older Americans with lump sums is as effective as saying “be careful” before sending a group of mentally and physically impaired and socially isolated people out on a bus with thousand dollar bills pinned to their shirts.

Helpful experts provide tips (I will in my next blog) about how to help yourself or loved ones. But providing “tips” inadvertently blames the victim. They can barely have an effect because the U.S. do-it-yourself retirement system practically begs financial predation to occur.

Requiring professionals who handle Individual Retirement Accounts to be fiduciaries, legally bound to act in their clients' best interest, would have helped prevent legal financial abuse. Sadly, that regulation was overturned by the Trump Administration and Republicans in Congress. The headline in Bloomberg news told the story – “The ‘Fiduciary Rule May Sound Boring, But Its Collapse Threatens Your Retirement.” Now professionals handling IRAs, the fastest growing type of retirement account, are held to a lower professional standard. They can't lie, but they can manage your account without putting your interests first because they are not required to be fiduciaries.

Just how widespread is financial abuse among the elderly? One in 20 older adults said they were financially mistreated in the recent past, according to a study financed by the Justice Department. In one year, the prevalence of emotional abuse among elders was 4.6%; 1.6% for physical abuse, 0.6% for sexual abuse, 5.1% for potential neglect, and a whopping 5.2% for current financial abuse. Even this number doesn't tell the whole story as it only considers abuse by family members.  The Government Accountability Office also found elder abuse to be a growing epidemic. And because our unique American system advises workers to acquire 8–10 times their final salary in retirement individual-directed accounts, with no realistic option to acquire a fair and efficient lifetime annuity, elder financial abuse is far more prevalent in the U.S. than in other nations.

A survey of four nations found financial abuse to occur less than one percent of the time in these nations and five times more in the U.S.—a finding consistent with the Department of Justice survey. Stories of abuse confirm the survey’s findings. The New York Times, in a story aptly called “Declaring War against Financial Abuse Among the Elderly,” described a 87-year-old women who was defrauded of $127,000 by a younger friend. The abuse came in the form of mild and gentle persuasion of the older woman to loan money.

Another chilling story came in an advice column to The Moneyist from “Concerned for my Golden Years":

I have a situation that keeps me awake at night. I have no family left. I’m 65 and concerned about being victimized as I get older. I have some reason to believe … I have cognitive decline. How do I protect myself from being taken advantage of as I get older? I am already wrestling with a bank investment adviser putting me in an investment with ridiculous fees. Currently I am able to undo the damage but what if I wasn’t able to do that? As my mother got older (she died at 92), I felt people had the attitude that they could “fleece” her anyway they wanted to and it was appropriate. With her I went through crooked lawyers, accountants, church members, the investment “people who lunch,” charities, and on and on. .. Who will help me? My net worth is about $1.3 million, but money goes fast as my health needs increase.

This concerned retiree, who like many Americans has saved throughout her life in an effort to live comfortably in her "golden years," reminds us that our retirement system and lack of financial safeguards leave older Americans on their own and in the dark, grasping blindly to hold on to their savings. We should be adding financial protections, but instead the Consumer Financial Protection Board and the federal government under the current Congress and Administration are backing away from much-needed regulation that would protect everyday Americans and worry the financial advisement industry.

It's true that a large share of financial abuse comes in the form of theft and illegal behavior outside the money management industry. But abusive financial practices that are completely legal, like selling inappropriate products when the advisor is not a fiduciary, can be just as harmful, and this exploitation will be on the rise as more and more elderly people have cash nest eggs.