There are many points to argue about what is right and wrong when it comes to Social Security and other age based entitled programs. But one point I think we can all agree on without beating the point to death is that Social Security is in serious trouble as we currently use it.

I am not interested in placing blame or running through all the statistical data why it won’t last. Simply put, we borrow from the future to pay for the present but sooner or later the future shows up. Anyone that borrowed against their homes in the last few years knows all to well how that statement rings true.

But what will Obama, McCain or other politicians going to do about it?  How about get real!

According to the American Academy of Actuaries, raising the retirement age to 70 will cut the projected Social Security deficit in half. The statistics back up this age as a base age to use to start benefits with incremental increases built in. The current system increases the social security age one month at a time to age 67 but that is not enough.

The fact of the matter is that people are living longer. In 1935 the retirement age was 65 and you could expect to collect for 12 years. Now that number is closer to 19 years. That’s the type of inflation we can live with, “age inflation”. But that puts pressure on the social programs geared to help seniors with their expenses including Medicare.

According to the National Bureau of Economics the retirement age that is more realistic is closer to 73-74. That might be pushing it a bit and probably impossible to get through politically. The American Academy of Actuaries concludes that long after all the baby boomers are gone the demographics tell us that social security will only cover 75% of its costs. Women will be affected even more since they live longer than men.

But will this be a blow to current generations regarding their expectations for retirement? The answer is no, at least not for those that have given it any thought. Many baby boomers have simply not saved enough for retirement and a large percentage of them do expect to earn some type of income through work during their retirement years.

Financial advisors are also not optimistic about their client’s chances of retiring at the current young age of 65 and having their money last. Inflation and modest investment returns over the last decade have pushed an even greater number of workers into that work longer, save more demographic that will come to dominate those tapping age based social programs.

Raise the retirement age and acknowledge the simple fact that were living longer and we need to make some adjustments to age based entitlement programs.

To the North American Securities Administrators Association (NASAA), there are plenty of modern-day Willie Suttons eager to go “where the money is.” Today, “the money” is largely held by seniors. Hence, regulators say, seniors are the targets of unscrupulous salespeople armed not with pistols, but with professional designations that exaggerate their competence or their concern for seniors’ well-being.

Now some of these individuals are being sought out not by potential clients, but by federal regulators, including the SEC and FINRA. These regulators are making it clear that advisors who use the word “senior” or various synonyms to transact business unethically are squarely in their sights. These individuals are “among [regulators'] top targets,” says Tracy DeWald, general counsel at Securities America, a broker-dealer based in Omaha, Neb. “People age 60 and over are the biggest source of regulatory complaints.”

Targets

Indeed, seniors are targets for all types of unscrupulous vendors. In the financial world, many of those engaged in unethical practices—or merely failing to make adequate disclosures—hold designations that include the words “senior,” “elderly” or “retirement.” contrary to the unethical practices, the designations indicate that the holders are experts in serving the financial needs of senior citizens.

The burgeoning controversy has prompted some reputable firms to take action to avoid being tarred by the same brush. These firms have been limiting the ways their people may use some “senior” designations when doing business. According to NASAA, some product salespeople using “senior” designations typically invite senior citizens to seminars where a free lunch is served along with a presentation on investments. Either at the seminar or through follow-up contacts, some advisors ultimately sell unsuitable investments to some of the attendees.

In April, NASAA introduced a model rule on the use of senior- specific certifications and professional designations. This rule, which prohibits the misleading use of designations that include words like “senior” and “retiree,” has already been adopted by the state of Washington. At press time, New Hampshire was set to adopt the rule and other states are likely to follow suit. A report issued last year by NASAA, FINRA and the SEC lists the popular Certified Senior Advisor (CSA) designation among those it considers misleading or confusing.

That’s not to say that the mere use of the word “senior” will automatically spur regulatory scrutiny. In its model rule, NASAA leaves room for certain designations to be recognized. “Regulators are drawing a distinction between designations that are earned and those that are bought like prizes in a Cracker Jack box,” DeWald says.

What distinguishes a real designation from a specious one? “An authentic designation requires you to pass a difficult test,” DeWald explains.

In addition, DeWald adds, “there are continuing education requirements and you can be kicked out if you violate the rules. On the other hand, there are some designations that you can get by writing a check and spending a couple of hours online. Some are just made up by the person using it.”

NASAA, FINRA and the SEC are by no means the first to recognize the potential abuses of professional designations, especially when it comes to seniors. Some states, including Massachusetts and Missouri, have filed complaints or cease-and-desist orders against people for giving inappropriate investment advice to the elderly while using the “senior specialist” title. Underlying these charges is the idea that certain designations imply specialized knowledge or training, lending credibility to salespeople.

Forbidden Credentials

Some broker-dealers have effectively banned reps from publishing senior-related credentials. Genworth Financial, for example, prohibits its employees and agents from using the CSA designation (the most common senior designation) on their business cards or in their marketing materials.

“We have a similar policy,” says DeWald of Securities America. “In fact, we have lists of which designations are acceptable in published materials and which aren’t. None of the ’senior’ or ‘elder’ designations are on the accepted list. Some of our reps have these designations, which they can mention to clients in conversation. They can’t put the letters behind their names to promote themselves.”

Comparable cautions are in effect at major brokerage firms, says Sean Walters, deputy executive director at the Investment Management Consultants Association (IMCA), which confers the Certified Investment Management Analyst (CIMA) designation. “We work mainly with full-service wirehouses,” he says. “They’re paying a lot of attention to designations, including those aimed at seniors, and deciding which ones should be approved for use.”

Designations are also under scrutiny in the fee-only universe. “At NAPFA, we looked at senior specialist designations,” says Tom Orecchio of Greenbaum and Orecchio, a wealth management firm in Old Tappan, N.J., and chair of NAPFA’s board of directors. “The vast majority were not worth anything, we felt. They don’t require much studying or continuing education. There are too many credentials around; the last thing we need is more clutter,” he says. The one exception, Orecchio notes, is the Chartered Advisor for Senior Living (CASL). “It’s offered by the American College and [courses for it are] taught like courses for the CLU and ChFC.”

9,500 Strong

Of all the senior-oriented designations, the CSA is the only one mentioned specifically by states, including Nebraska, when warning seniors to check the credentials of so-called senior specialists. Several of the individuals identified in state regulatory actions hold a CSA.

The CSA designation is conferred by the Society of Certified Senior Advisors (SCSA), which bills itself as the world’s largest membership organization for professionals seeking to improve their skills in working with seniors. More than 9,500 advisors now hold a CSA designation.

SCSA executives are quick to defend their organization. “We’re aware of regulators’ concerns that certain professional designations may be misperceived by the public,” compliance specialist Bill Kaluza says. “That’s why SCSA requires each CSA to provide a written disclaimer to clients and potential clients.” This statement, while asserting that designees have taken steps to bolster their knowledge of seniors’ financial needs, includes notification that “the CSA designation alone does not imply any expertise in financial, health or social matters.”

Of course, whether all 9,500-plus CSA designees are actually making this disclaimer to every potential client they approach is difficult to determine. Kaluza says SCSA makes an effort to police its designees. “CSAs themselves are often our most reliable reporters about CSAs who do not comply with these rules,” he says.

What’s more, Kaluza claims that when a member of the public contacts the SCSA to inquire about a particular CSA, the organization investigates to see whether the CSA in question actually provided the disclaimer. “To date, we’ve had very little indication that CSAs are not using the statement,” Kaluza says.

By Donald Jay Korn
August 1, 2008

As Barack Obama and John McCain are poised to become the presidential nominees of their respective parties, money managers who ordinarily might already have an idea of where to invest after the November election are, like many U.S. voters, still undecided.

A cliched view is that a Republican president helps sectors such as defense and healthcare and a Democratic president is good for, well, not much. The reality, of course, is more complicated that that — for instance, markets typically perform better during Democratic administrations than when a Republican is in the White House.

“It’s amazing that with the election as close as it is, we have so few policies that we can bank on,” said Mark Bavoso, head of U.S. asset allocation at Morgan Stanley Investment Management.

Part of this is because both candidates are veering away from policies that typically define their parties and moving more to the center. It’s also because, said Bavoso, that in a turbulent year neither man wants to corner themselves with their promises.

“There’s still no concrete [economic] plan from either candidate,” said Mike Church, senior portfolio manager of the Church Cap Value fund (CVLAX). “And that’s concerning.”

“Uncertainty from the election has been one factor that’s weighed on the markets,” said Brian Levitt, corporate economist at OppenheimerFunds Inc. He added that, historically, markets prefer one party in the White House and one in Congress. “Free markets like logjam in government,” he said, because it usually means less regulation.

Church said that there’s one fact that faces the country regardless of who wins: George Bush’s legacy. “Bush came in with a budget surplus and he’s leaving a budget deficit,” he said.

And it’s likely the deficit will only increase under a new administration — the Tax Policy Center estimates that under Obama’s plans tax revenue will reach 18.3% of GDP in the next decade, while McCain’s plans will bring in 17.6% of GDP. But even at current levels, spending will account for 19.7% of GDP. The difference of 1%-2% doesn’t sound like much, but GDP over the next 10 years will amount to $185 trillion.

Bavoso said he believes the results of Congressional elections will be just as important as who wins the presidency. Bob Doll, global chief investment officer of equities at BlackRock Inc., said that the biggest question is whether the Democrats reach the magic 60 number in the Senate. With 60 votes, the Democrats would be able to force legislation through the upper chamber regardless of who is president.

Expect a bigger tax bite under a new administration, though the pace and extent of the rises will depend on who wins. Despite McCain’s tax-cutting promise, money managers predict that a Democratic majority in Congress all-but-guarantees the Bush administration’s tax cuts will expire in 2010. In other words, expect higher capital gains, dividend and income taxes by 2011 at the latest.

Doll says that both candidates will raise taxes, and most likely before the expiration date. As Bavoso pointed out, McCain will still need a package that meets the approval of a heavily Democratic Congress.

The Tax Effect

“We handicap the outcome as investors to take the worst-case scenario,” Bavoso said. The expectation of higher tax rates is already being discounted in the market and will continue to be into 2009, he noted.

Once taxes do rise, look for certain sectors to take a hit. “Higher taxes could create a challenge to disposable incomes,” Bavoso said — another blow to the already struggling consumer discretionary sector. “Fewer high-end retailers will do well,” Doll added.

But while tax rises may hurt some equities, they can be good for the bond sector, especially tax-free municipal bonds.

“When federal tax rates go up, municipal bond yields on an after-tax basis also go up,” said Steven Permut, co-manager of American Century Tax-Free Bond Fund (TWTIX).

Bob Williams, a principal research associate in the Tax Policy Center, said the tax increases should be taken in context. While the next administration might raise taxes overall compared with today’s levels, the Bush cuts have brought the tax burden down to generational lows.

Sector Benefits

Changes to the tax code may provide the new president with a way to promote pet projects. Sectors that could benefit, Bavoso predicted, are alternative energy and state and local healthcare. “Any areas that the president wants to feature will benefit from tax advantages to drive opportunities and investment,” Bavoso said.

All the money managers agreed the alternative energy sector will benefit if Obama wins, though Church said the sector should improve regardless of November’s outcome because of the likely introduction of a carbon trading scheme along with the continuing high price of oil. Church and Doll predicted that companies in the nuclear energy area will do well if McCain wins.

“McCain seems pretty convinced that nuclear power is the solution [to energy concerns],” Church said, though he added that this enthusiasm may be tempered by a Democratic Congress. Doll said that he expects traditional oil and gas companies also to do well under McCain.

As for the defense industry, Doll said that it would be wrong to think that a McCain victory would immediately lead to an uptick in that sector. “Given how long it takes to impact the defense budget, I think there’ll be less difference in the early years,” he said, adding that defense-related stocks could get a quick lift, however, from investors who expect better times ahead.

Doll added that infrastructure can be expected to better under Obama, while managed care companies in the healthcare sector should benefit from a McCain presidency. But, said Doll, fiscal conditions will hamper the more ambitious parts of either candidate’s healthcare plans.

“It’s going to be sluggish at the start of anyone’s administration,” said Oppenheimer’s Levitt. He suggested sectors with “long-term, secular growth” — for instance, a booming healthcare industry as the country’s population ages.

With tough times on the way, Bavoso at Morgan Stanley suggested a move into a specialized corner of the beleaguered financials sector — investment management companies. “People will be seeking advice on how best to hold on to their money,” he said, and investment managers should benefit.

-By Sam Mamudi

WASHINGTON — U.S. inflation soared to a 17-year-high annual rate in July, a government report showed, led by gains in food, energy, airline fares and apparel.
With energy and commodity prices on the retreat this month and the U.S. dollar strengthening, the report is unlikely to spook Federal Reserve policymakers into raising rates anytime soon as the economy struggles with rising unemployment and soft consumer spending.
Still, a surprising rise in core inflation that excludes food and energy last month will keep officials on edge about the possibility that food and energy prices will become more firmly entrenched in the economy.
The consumer price index rose 0.8% in July, the Labor Department said Thursday. That came on the heels of June’s 1.1% rise, which was the second largest June 1982.
Excluding food and energy, the CPI advanced 0.3% for a second-straight month.
Wall Street economists had expected only a 0.4% rise in the headline and 0.2% core increase, according to a Dow Jones Newswires survey.
Unrounded, the CPI rose 0.818% last month. The core CPI advanced 0.327% unrounded.
Consumer prices jumped 5.6% on a year-over-year basis, the highest rate since January 1991. The core CPI grew a more modest 2.5% compared to July 2007, though that’s still well above the Fed’s long-term goal of 1.5% to 2%. Over the past three months, core inflation rose at a 3.5% annual rate.
Though Fed officials said in a policy statement last week that inflation remains a “significant” concern, they are likely to look past the July data. The Fed is generally expected to keep official interest rates steady into next year, though the rise in core inflation, if repeated in coming months, could put rate hikes later this year back into play.
Many of the forces boosting prices in recent months — particularly high energy and commodity prices and the weaker U.S. dollar — have reversed since mid-July.
In a Dow Jones Newswires interview Wednesday, Minneapolis Fed President Gary Stern said even though the U.S. is “probably…in for a few more sizable increases” in overall prices measures, “assuming we don’t get a resurgence of energy prices, we will see over time a diminution of headline inflation, for sure.”
“As that occurs, I think we’ll also see some diminution of the core,” said Stern, who is considered one of the most vigilant inflation fighters on the Fed.
Energy prices swelled 4% last month, according to Thursday’s report. Gasoline prices spiked 4.1%, and natural gas prices rose 7.4%. Food and beverage prices rose 0.9%.
Medical care prices, meanwhile, increased a modest 0.1%.
But other core items posted sharp gains, a sign that higher headline inflation may have started seeping through the rest of the economy.
Clothing prices, for instance, rose 1.2% compared to June, a 10-year high. Transportation prices soared 1.7% on the month as airline fares swelled 1.3%, reflecting the rise in fuel prices. New vehicle prices advanced a modest 0.2%, reflecting falling demand.
Housing, which accounts for 40% of the CPI index, was up 0.6%. Rent increased 0.3%. Owners’ equivalent rent advanced 0.1%. However lodging away from home rose 0.7%, while home fuel and utilities posted sharp gains.
Services prices rose 0.5%.
In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, fell 0.8% in July, suggesting incomes aren’t keeping pace with prices.
That, in turn, could further damp consumer spending which appeared weak in July, according to a retail sales report released Wednesday.
-By Brian Blackstone; Dow Jones Newswires;

WASHINGTON — The prospect of higher taxes on long-term capital gains and dividends may spur a selloff of stocks and other assets by the end of this year, according to wealth-management advisors.

Investors and business owners are on high alert because of a proposal by Sen. Barack Obama, D-Ill., the presumed Democratic presidential nominee, to hike capital gains and dividend tax rates for many investors by between five and 13 percentage points.

Some advisors are telling clients to consider taking gains soon, because tax rates could change next year, particularly if Democrats win the White House and hold on to their congressional majorities.

“For the foreseeable future, you’re not going to get a better chance to move out of appreciated positions, from a tax perspective,” said Hank Alden, an advisor at Everest International Group.

Investment advisors caution that taxes alone should not be the overriding factor in investment decisions and decisions to buy or sell should be made as part of an overall strategy related to one’s portfolio.

But for many investors who have stocks or other holdings that they would otherwise sell in the next several years, the window for doing so at preferential tax rates may be closing.

Obama wants to bump the long-term capital gains and dividend rates up from their current level of 15% to at least 20%, and possibly as high as 28%.

The higher rates would apply only to individuals with income in excess of $200,000 or more, or couples earning more than $250,000.

Jason Furman, economic director for the Obama campaign, said that even for those making more than that amount, “we believe a rate much closer to 20% would be feasible.” That is based on campaign projections that assume that other Obama proposals would also be enacted.

Obama’s opponent, GOP nominee-designate Sen. John McCain, R-Ariz., favors keeping the capital gains and dividend rates at 15% for all investors, regardless of income level.

Screening for “Insiders” Business owners in particular may accelerate plans to sell their firms because of a looming capital gains increase, wealth advisors said.

“A number of family businesses have asked us the question, if we sold later than 2008, how much would my business have to appreciate just to break even,” or to realize as much profit as they would if they sold in 2008, said Jeff Paravano, a partner at the law firm of Baker Hostetler.

“When they see the spreadsheet, and the additional tax, a number of them have decided to sell this year,” Paravano said.

Some investors are even trying to turn a looming tax increase to their advantage by betting that business owners will sell before the tax hike. Investment advisor Robert Willens said some investors are “screening” for companies where founders or their descendants own a large share of the company stock.

Since those “insiders” are likely to have a low basis, they will be more motivated to avoid the tax hit by selling the business before the higher rate kicks in, he said.

“If investors believe a company will be sold at a premium, they may buy in the hope of reaping gains,” said Willens.

Dividend Rate Hike

Companies that pay dividends and their shareholders also are feeling pressure to act ahead of any tax hike.

Some companies may accelerate their fourth-quarter dividend payment from December 2008 from January 2009, according to Paravano.

In anticipation of a higher tax rate on dividends, investors who hold income-producing stock may want to shift to stock that doesn’t pay dividends and roll that into a tax-preferred savings vehicle such as an individual retirement account. That way the entire investment could appreciate without being taxed until the IRA is cashed out.

But they will be limited by annual contribution limits to IRAs, set at $5,000 for 2008, with an additional $1,000 for individuals over 50.

Uncertainty about how quickly Congress might move to raise taxes, and when higher rates will actually take effect, adds to the urgency. While recent GOP-led Congresses have typically made tax changes prospective from the date a bill is signed into law, that has not always been the practice, according to wealth advisors and economists.

Under current law, the 15% rate on capital gains and dividends is in effect until the end of 2010. But many observers expect Congress to act next year to fix the estate tax. Facing budgetary pressures, lawmakers may move at the same time to hike capital gains, dividend and other tax rates that were cut during President George W. Bush’s first term.

Economic Impacts

Rep. Richard Neal, D-Mass., said lawmakers will weigh carefully the effect of tax increases on an economy already burdened by high energy prices and credit woes. “We don’t want to do anything that would slow a recovery. But the deficit is a very stubborn fact,” Neal said in an interview.

Economists disagree over the broad economic impacts of an increase in the capital gains and dividend rates. Stephen Entin, president and executive director of the Institute for Research on the Economics of Taxation, has argued that a hike in the capital gains rate to 25% could damp the gross domestic product by as much as 6% over the long term.

But Furman of the Obama campaign said there is evidence that measured increases in tax rates that help reduce the deficit, as Obama is proposing, will not have a sustained negative effect on the economy.

Furman also said other Obama proposals will encourage savings and investment, such as an enhanced saver’s credit for lower-income earners.

“What investors should look at is what’s going to happen to overall economic policy. This is a change in economic strategy to emphasize fiscal responsibility in a way that we haven’t seen,” said Furman.

By Martin Vaughan
Of DOW JONES NEWSWIRES