How The Supreme Court's Chevron Ruling Could Impact Retirement

0:00Happy 5th of July and happy 248th birthday to the United States. We're going to kick off our 5th of July, First Friday episode by talking about the British, because as of today, they have a new prime minister. We'll discuss what that may mean for the economy. We're also going to talk about the jobs report, which came out this morning and was better than expected. And we're going to discuss the fact that the S &P 500 is now the S &P 5500. We are in absolutely new terrain with the S &P 500 hitting never-before-seen highs. We'll discuss what the Chevron decision might mean for Social Security benefits and other matters of retirement and your wallet.

0:44And we'll talk about California's new accessory dwelling unit law and the implications that this may have for the housing market. Welcome to the first Friday episode of the Afford Anything podcast. This is a show that understands you can afford anything but not everything. Every choice carries a trade-off, and that applies not just to your money, but your time, your focus, your energy, your attention, to any limited resource that you need to manage. This is a show that's all about helping you be a better resource allocator. And we touch on five pillars with the acronym of FIRE with two I's. Financial psychology, increasing your income, investing, real estate, and entrepreneurship.

1:27Every first Friday of the month, we do a monthly economic update. And today's update will touch on most, if not all, of those five pillars. My name is Paula Pant. I'm the host of the show. Welcome. We'll start with the latest news. The UK held its general election yesterday on the 4th of July. Their left-wing Labour Party won by a landslide with Labour leader Keir Starmer becoming the new Prime Minister. This puts an end to 14 years of conservative rule in the UK and stands in sharp contrast to right-wing parties winning or poised to win many elections across mainland Europe. The current prime minister, Rishi Sunak, has resigned and also, and this was cute, apologized for not living up to people's expectations of him, which is something I would never imagine any American politician doing.

2:19It is heartening to see such a display of civility. I raise this, of course, not just for some 4th of July fun, but also because the UK is the sixth largest economy in the world. And for months now, we have been closely watching the Bank of England and the way that the UK handles its inflation rate as a data point, a signal that may give some clues to how inflation and correspondingly interest rates might play out in the US. with the Bank of England a month ago stating that they expect the UK to reach its target 2 % inflation within two years. It seems as though the US is likely to beat them, as Fed Chair Jerome Powell made public remarks earlier this week, noting that the headline inflation rate is 2.9%.

3:10Again, I'm going to emphasize that 2.9 % over the trailing 12 months. Now that's headline inflation, which is the raw inflation figure reported through the Consumer Price Index, the CPI. Headline inflation is different from core inflation because core inflation excludes food and fuel because those elements can be volatile for reasons that are not inflation related. The cost of food and fuel can sometimes be volatile due to climate events or geopolitical events, wars, blockades. Many things can impact the price of food and fuel. And so those are stripped out of core inflation, but they are included in headline inflation.

3:50And all of this is to say headline inflation over the past 12 months has come down to 2.9 % in the US, which is still above that 2 % target, but it is a heck of an improvement from 7.1%, which was where we peaked. Now, Fed Chair Jerome Powell, in his remarks earlier this week, said this is a very positive sign, the fact that headline inflation is down to 2.9%, but we're not declaring victory yet. We're going to wait and see if this is durable. Does this last or is it merely a blip? But the fact that our in the US, our headline inflation is already down to 2.9%. Now, let's compare that to what's happening in the UK.

4:30Their inflation peaked at 9.6 % in October 2022. It has since come down significantly. And in the trailing 12 months prior to May 2024, their CPI was at 2.8%. Now that data comes from the UK's Office of National Statistics, and we will link to it in the show notes. Now that is distinct from their core CPI, including housing, CPIH inflation rate, which was 4.2 % in May of 2024 versus our core, which is at 3.41. I know I'm throwing a lot of numbers at you right now. But zooming out, here's what makes this interesting. The UK's inflation rate at its peak was worse than ours by about two and a half percentage points.

5:16Today, their core inflation is still worse than ours, but their headline inflation is about on par with what's going on over here. Now, the economists and the policymakers at the Bank of England, which is their central bank, comparable to our federal reserve, think that they'll hit the 2 % target in about two years. Given the fact that our headline inflation rates are comparable, it poses the question, will it take us two years as well? But given the fact that they're trying to rectify a worse situation, maybe we'll beat them to it. That's why observing what happens with inflation and interest rates over in the UK is, an interesting signal.

6:03It's not, of course, you need multiple data points. It's not a silver bullet answer, but it is a relevant data point as we try to figure out what inflation here is going to look like in the coming year. And as an extension of that, as we try to figure out how soon interest rates are going to drop, because regardless of whether you are a homeowner with a locked in fixed rate mortgage and potentially golden handcuff situation, or whether you're a renter who's now staring down a barrel of really high interest rates, anyone who lives in a home is interested in the question of when are rates going to decline.

6:42That's why watching the UK as a signal is so interesting. And that's why this major political change that happened today, Prime Minister Rishi Sunak resigned on the 5th of July. That's why this is so fascinating. What will this new change in government mean for the economy of the UK? That is the question on everybody's mind as we unpack this new leadership change over the span of the coming months. Changing gears, the S &P 500 is now the S &P 5500, as I like to call it. It's actually topped 5555. That's fun. This is new terrain. I remember, and this was not that long ago, I remember making an Instagram video saying, hey, the S &P 500 just topped 5 ,000 for the first time ever in history.

7:35I made that video, I don't remember exactly when, but it was not very long ago. And now we've topped 5 ,500. Why is this significant? It's a milestone. It's a round number milestone. It's like turning 20 or turning 30 or turning 40. There is no significant difference between being 29 versus 30 or being 39 versus 40 or 49 versus 50, right, in terms of your age. But that birthday is a milestone because it's a symbolic round number. That's what the S &P 500 has just experienced, the symbolic milestone of crossing 5 ,500 for the first time. So I guess the best analogy is it's like it just turned 25.

8:17You know, it's a birthday that feels like a big deal because all of a sudden you're like at that age where it rounds up to 30. Nearly 60 % of the gain in the S &P 500 year to date was driven by just five companies, NVIDIA, Microsoft, Amazon, Meta, and Apple. In fact, just one company, NVIDIA alone, accounted for 31 % of the S &P 500's first half advance. So there is a thin blade separating a bull market from a sluggish flatline or even bear market. Is this a cause for concern? I posed that question to Michael Kitsis, the famed financial advisor who gave a keynote speech at the Morningstar Investing Conference, which I just attended in Chicago a couple weeks ago.

9:04You're going to hear that interview on the Afford Anything podcast in two weeks. So make sure you're following us in Apple Podcasts, Spotify, in your favorite podcast playing app. Back to the question, should we be worried about the fact that so much of the gains have been driven by so few companies? After all, the rise of the S &P 500 is one of the strongest performances for the opening six months of a year since the dot-com bubble of the late 1990s. Is this the AI bubble of the 2020s? financial advisor Michael Kitsis' take is that the performance we're seeing is historically normal. It may feel scary.

9:46This goes to that first F, financial psychology. It is psychologically disconcerting to see so much of the gains accrue to NVIDIA, Microsoft, Apple, and to a lesser extent, Amazon and Meta. That is certainly psychologically disconcerting, but it is historically normal, according to Kitsis, who pointed out that railroad stocks dominated the U.S. stock market in the early 1900s, with the overwhelming majority of stock market gains accruing specifically to a very small handful of railroad stocks. After that came an era called the Second Industrial Revolution that was 1910 to 1930. It was brought about by electricity and the internal combustion engine, and that's when we saw new products like automobiles and soft drinks just start to dominate the market with General Motors and Ford dominating the automobile market, Coca-Cola and Pepsi dominating the soft drink market, obviously, and industrial companies, including Andrew Carnegie's U.S.

10:45Steel, emerging as the absolute runaway winner. In fact, U.S. Steel was more than three times larger than the country's second largest company, which was AT &T. It was so big that the The U.S. government tried to break it up in 1911, but failed to do so. And so U.S. Steel was the absolute runaway overwhelming winner. And at that time, in that era, 40 % of the largest companies in the U.S., ranked by asset size, were in the oil, steel, or mining industries, with the company Standard Oil by John D. Rockefeller also emerging as a major player. So back then, if you look at some of the overwhelming winners of the stock market, U.S.

11:28Steel, Bethlehem Steel, Standard Oil, the American Telephone and Telegraph Company, DuPont, and then when it came to heavy farming equipment, International Harvester, U.S. Rubber, you saw in the early 1900s and then continuing through to the mid-1900s, steel, oil and gas, and telecom, as well as chemicals and heavy equipment. and conglomerates like GE become the overwhelming winners and drive the bulk of the market growth. Kitsis' take is that what we are seeing right now where AI is driving the bulk of the growth in the market, that is to borrow the cliche, history doesn't repeat, but it does rhyme.

12:11We like to think that there will be a normal distribution, but in fact, there is a fat tail distribution. And for those of you who are familiar with productivity, you've likely heard of the 80-20 rule. You know, 20 % of customers account for 80 % of revenue. That is a manifestation of a fat tail distribution. We see the same thing in market returns. And that is why index fund investing is so essential because we never know which companies they're going to be. And so if we try to hand select who the winners are, we run the risk of guessing wrong and missing out on the majority of the gains. By the way, the majority of gains occur not just among a small handful of companies, but also on a very small handful of days.

13:00So if you look at the biggest returns that a stock market has over the span of a given year, a given 12-month period, there are a tiny handful of days in which the market produces outsized returns that drive the bulk of that annual growth. And if you miss those days, you also miss out on the majority of the returns. So you can miss returns either by trying to time the market or by trying to hand-select the winners. Conversely, you have a high shot of enjoying the upside if you buy into a broad market and do not try to time your entry and exit. So there we go, a discussion on financial psychology and on investing all wrapped into our reflections on the S &P 500 crossing the 5500 threshold and continuing to go up from there.

13:57Let's dive in with the topic that could have some big social security implications, which is the Supreme Court's decision on Chevron deference. Before I get into this, let me make a disclaimer that I am not a legal scholar, nor do I play one on the radio. For the purposes of today's episode, I contacted a friend of mine who graduated from Georgetown Law. I said, can you meet with me? Can you explain Chevron to me? We met, we spoke for an hour. By the end of it, I understood certainly much more than I had going into the conversation. but I am highly aware of the Dunning-Kruger effect. I understand that an hour of conducting an interview does not in any way qualify me as an authority on this matter but I will give you to the best of my understanding a high-level overview of what has happened.

14:49To anyone who is listening who is an attorney or a legal scholar please chime in in the comments. You can leave a comment directly in the Spotify app. You can comment on this episode. You can also go to our community at affordanything.com slash community. We would love to hear from those of you who have actual scholarship in this area. The notion of Chevron deference came out of a 1984 court ruling in a case between Chevron, the energy company, and the National Resources Defense Council, which is an environmental group. Chevron deference, which was established by that court case, refers to the latitude that federal judges are able to give agencies over how to interpret the statutes they administer.

15:42Now that latitude comes from a two-part test. So part one, a federal judge will examine the wording in the context of a statute that is passed by Congress to see whether or not Congress's intent is clear. If it is, if the intent is clear, then there's no question. Matter is settled. The agency simply abides by the letter of the law. Now, if, however, the language is ambiguous, meaning there are multiple reasonable interpretations, then the court must defer to the agency in deciding how to carry out that statute. The idea, essentially, is that if there is statutory ambiguity, then the agency has the leeway to decide how to interpret that language, provided, of course, that their interpretation is reasonable.

16:38So recently, the Supreme Court ruled on a case that overturned Chevron deference. Now, this was a case between the owners of a New England fishing company against the National Marine Fisheries Service. The Fisheries Service is an agency that is tasked with carrying out the Magnuson-Stevens Act. And that is an act that sets catch limits in order to prevent overfishing. And it requires fishing boats have a government-appointed inspector on board who monitors compliance. But the companies have to pay for the cost of that monitor. And so the plaintiff in this case was paying about$700 per day for that onboard monitor.

17:23So the plaintiffs argued that the National Marine Fisheries Service didn't have the authority to force it to pay that cost. And that case wound its way through the courts and ended up at the Supreme Court. And in the syllabus, which I'm reading directly from the syllabus, we're going to link to it in the show notes. You can find it at SupremeCourt.gov. We will link to it in the show notes. Page seven. They say, quote, at best, Chevron has been a distraction from the question that matters. Does the statute authorize the challenged agency action? And at worst, it has required courts to violate the APA, which is the Administrative Procedure Act, quote, by yielding to an agency the express responsibility vested in the review of the court to decide all relevant questions of law and interpret statutory provisions.

18:22And then further down, it says, quote, Chevron has proved to be fundamentally misguided. And then a couple sentences later, it says, quote, experience has also shown that Chevron is unworkable. So Chevron's out. Agencies are no longer in charge of deciding how to interpret what Congress wanted them to do. And there's a different act, the Administrative Procedure Act, which requires courts to exercise their independent judgment in deciding whether or not an agency acted within its authority. So the power basically transfers from agencies back to courts. Now, why are we talking about this on a show that's all about personal finance?

19:04Well, can you name one of the biggest federal agencies?

19:12That's right. It's the Social Security Administration. It is the daddy of federal agencies with 84 ,000 employees and 1 ,300 field offices. Keep that in your back pocket for trivia night. Now, you and I are accustomed to thinking of Social Security as a retirement program. In fact, they say the three legs of retirement planning. A lot of financial advisors use the analogy of a three-legged stool when it comes to your retirement planning. And they say that one leg is your investment portfolio, one leg is your pension, if you have it, and one leg is social security. So in the world of retirement planning, social security is one of the three legs of the three legged stool.

19:59Which, by the way, I think the reason that that analogy exists is because you can have a two-legged stool, or theoretically even like a mono stool, you know, a one-legged stool. But the fewer legs the stool has, the easier it is to tip over. And the more sturdy, the thicker and sturdier those fewer remaining legs ought to be. Like if you're going to have a one or two-legged stool, those better be some load-bearing legs. At any rate, the Social Security Administration is one of the biggest federal agencies, and it actually does more than just retirement. It is responsible for survivors' benefits and disability insurance programs.

20:43So it administers the Supplemental Security Income Program for, quote, the aged, blind, and disabled. That is a quote that I'm reading off of federalregister.gov, by the way, so don't come at me for that. It also assigns social security numbers to U.S. citizens, and of course, it maintains records of everything that we have earned. Those records are maintained under our social security numbers, and they determine our social security payouts when we reach full retirement age. So what does Chevron mean for social security? Well, what we know is that the social security administration is no longer going to receive automatic judicial deference in its interpretation of any ambiguous provisions of the Social Security Act.

21:37That is what we know. What we don't know is what portions, if any, of the Social Security Act may be considered ambiguous. And what we probably are going to see is increased litigation as people begin challenging decisions that are made by the Social Security Administration. So this opens the door to a person saying, hey, I think that this agency's interpretation of the law is incorrect. And so I'm going to be the plaintiff and I'm going to challenge the Social Security Administration and it's going to go to the courts. And now the courts will have much more leeway to play a more decisive role in interpreting the Social Security Act.

22:31My guess, if I had to put money on it, and this is just a guess, I suspect that some of the first challenges that we are going to see will relate to the disability benefits portion of Social Security. I am guessing that disability benefits will probably get challenged before the retirement benefits portion will. But I think there's going to be challenge. I mean, I think it's probabilistically likely that there's going to be challenges in all. By the way, if you ever want to play a four to anything bingo, three phrases that should be on that bingo square. One is historically normal. The second is what we know.

23:14And the third is probabilistically likely. All three phrases should be on the bingo card because I've said all three in this episode. And I have noticed myself saying them often enough that they have, well, they would be catchphrases if they were catchier. But I guess they're just phrases. Back to Social Security. We're going to make some guesses on how this is going to go. Litigation related to the disability portion of what they do. I think that's going to come first. But no discussion of Social Security is complete without reflecting on the most recent trustees report, which was released last year in 2023, and which projects that the Social Security Trust Fund reserves will be depleted in 2034.

24:04Now, this does not mean that benefits are going to stop in 2034. So when people say, oh, you know, Social Security is going to run out, you hear that phrase a lot, the reserves will run out in 2034. That doesn't mean that benefits will cease. What does this mean? Okay, here's the backstory. So every year, the actuaries who work at the Social Security Administration put out a report that's called the trustees report, the Social Security trustees report. Within this report, the actuaries project the cost of future benefits. They also take a look at both current and projected payroll tax contributions, including FICA taxes, because FICA taxes contribute to the Social Security trust funds and all monthly payments to people who receive Social Security, whether it's survivor's benefits, disability benefits or retirement benefits.

25:02All of those payments come from the trust funds. So FICA tax is the trust fund income, but retirement, survivor, and disability benefits are all paid out of that trust fund balance. Now, as of the most recent trustees report, the trust fund reserves are on schedule to be depleted in 2034. That means that if Congress doesn't take action to keep the trust funds solvent, then the Social Security program will have enough FICA taxes coming in to pay about 80 % of scheduled benefits. So Congress needs to do something between now and 2034 in order to ensure the solvency of these funds. If they don't, benefits will still be paid, but there is at least a non-zero chance that those benefits might be paid at a reduced rate.

25:59Non-zero chance should also be on the bingo card. By the way, all of this information comes directly from ssa.gov, and we're going to link to it in the show notes. Also, fun trivia, Social Security currently pays benefits to 66 million people, which is about one-fifth of the U.S. population. So with one out of every five people getting Social Security benefits and a program that's about to be insolvent in a decade, the conditions are ripe for a serious lawsuit. About what? We'll find out. Stay tuned to the next episode of Humanity to see how this will play out. And the reason, by the way, that I'm being a little facetious right now is because what we are discussing fundamentally are known unknowns.

26:49We know that there is a reasonable likelihood of impending litigation that could reshape Social Security. We know that we do not know what that litigation will be. And we know that we do not know how it will reshape Social Security. So we are standing at the precipice of known unknowns. And at this stage, there's nothing that we can do other than strengthen the leg of the retirement planning stool that is within our direct control. And that leg is the portfolio leg, our personal savings, our portfolio of investments. It's the one and only thing we can do. I know the conclusions keep coming back to the same thing.

27:39What are the actionable takeaways from this episode? Strengthen your portfolio balance, put more money in your investment portfolios, and put that money into broad market index funds, and don't time the market. These are all the classic principles of personal finance that we already know. And when we go through the latest economic news and the latest legal news, whether it's the Chevron decision or the runaway performance of NVIDIA, the lessons that we derive from watching what's happening around us keep returning to these tried and true classic personal finance principles. Don't time the market, stick with index funds, and remember that your contributions are the single biggest determinant of your portfolio success.

28:29So shovel money in there. All right, we're going to take one break for this word from our sponsors. And when we return, we're going to discuss the jobs report as well as the latest in the housing market. It's that time of year again. Everyone knows that the holidays can become overwhelming quickly. So the sooner that you get things done, the better. And for both shoppers and businesses, the best time to score great deals during the holidays is Black Friday Cyber Monday weekend. Whether you are an established business or whether you are someone who's going to experience their first Black Friday Cyber Monday this year, you know that the most important thing you need is a platform that can handle everything that's about to be thrown at you.

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