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Financial Planning > Tax Planning

Financial Satisfaction Hits Another Record High: AICPA

By Michael S. Fischer

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Americans’ personal financial satisfaction hit a record high in the first quarter, thanks to the stock market rebound and abundant job openings, the American Institute of CPAs reported Thursday.

The AICPA’s personal financial satisfaction index measured 36.1, an 11.3% increase from the fourth quarter. This was the result of a 2.4-point increase in the Personal Financial Pleasure Index combined with a 1.3-point decrease in the Personal Financial Pain Index.

The PFSi is calculated as the Pleasure Index minus the Pain Index, with positive readings signaling that Americans are feeling more financial pleasure than pain.

In the first quarter, the PFSi bounced back from its first decline in two years to reach its sixth record high in seven quarters.

Pleasure Index

The AICPA reported that the Pleasure Index, which is made up of four equally weighted factors, clocked in at 73.9 in the first quarter, up 3.3% from the previous quarter and up 27% from the year ago level. This was its 10th record high in the last 11 quarters.

The quarterly gain was primarily driven by a 11.3% jump in the PFS 750 Market Index, an AICPA proprietary stock index comprising the 750 largest companies trading on the U.S. market adjusted for inflation and per capita. At the end of 2018, the PFS 750 Market Index dropped sharply, but managed to bounce back in the January-to-March period to just shy of its all-time high.

Because of the big quarterly gain, the PFS 750 Market Index is once again the biggest contributor to financial pleasure, as it has been for all but two quarters in the past decade, according to the report.

“The recent rebound is a perfect example of why it’s important to resist the urge to time the stock market and instead remain focused on the long-term goals of your financial plan,” Kelley Long, member of the AICPA’s consumer financial education advocates.

“If you had moved into more conservative assets after the stock markets year-end performance, you would have missed out on all of Q1’s big gains.”

The job market’s continued positive performance further supported Americans’ financial pleasure in the first quarter. Job openings have exceeded the number of unemployed Americans since March 2018, the report said.

Although the Job Openings Per Capita Index was flat with the previous quarter level at 86, it remained near its record high set in the 2018 third quarter. It has increased by 16.3% from a year ago, with gains in nearly every sector based on data published by the Bureau of Labor Statistics.

The Real Home Equity Per Capita index registered 69, based on data issued for October, 2.7% above its prior year value and 0.6% ahead of the previous quarter level. It is still 11.5% below its 2006 all-time high.

The AICPA CPA Outlook Index, which captures the expectations of CPA executives in the year ahead for their companies and the U.S. economy, was unchanged from the fourth quarter at 52, but was down by 8.2% from a year ago.

Pain Index

The AICPA report said the positive first quarter gains to the overall PFSi got a boost from the lower overall value of the Pain Index, which decreased by 3.4% from the fourth quarter. The Pain Index declined by 9.9% from a year ago, with all four of its component factors lower.

A drop in loan delinquencies led the way. The report noted that more Americans are paying their mortgages on time than they have in nearly two decades.

As a result, first-quarter loan delinquencies fell by 5.5% from the previous quarter, with the improvement mostly driven by mortgages. With a reading of 30, this loan delinquency factor is at its lowest level since the end of 2007, but is still slightly above what was typical between 1994 through 2003, according to the report.

In the first quarter, pain from personal taxes at 47 was about the same as in the previous quarter. After the new tax law resulted in an initial decline of 7.5% in the 2018 first quarter, quarterly levels have been relatively flat.

Still, taxes continue to be an outsize contributor to financial pain. Over the last three years, the personal taxes factor has been the largest contributor to financial pain for nine of 12 quarters, according to the report.

The personal taxes value uses information from the Bureau of Labor Statistics on income tax, tax on realized net capital gains and taxes on personal property.

According to the AICPA, the tax component of the Pain Index is particularly important when measuring financial satisfaction because it affects so many Americans. When income taxes change, their take home pay shows the effect.

Not only that, when tax season comes around, Americans hope for a lower tax burden which for some can be reflected in a higher refund. For the 2017 tax year, the average tax refund was $2,899. In the 2018 tax year, the first under the new law, the average tax refund was down by about 2%, according to the IRS.

“If you wound up receiving a sizable refund from the IRS, it may be prudent to adjust your payroll withholding,” Michael Landsberg, member of the AICPA’s personal financial planning executive committee, said in the statement.

“Otherwise, you are essentially giving the government an interest-free loan instead of using that money to improve your own financial situation.”

The other two components of the Pain Index also declined from the fourth quarter to the first. Underemployment registered 32, down by 4.7%. In comparison, its peak value was 84.3 in the fourth quarter of 2009. It is now almost 14% below its average value in the two years before the recession.

The blended inflation measure for the first quarter was 1.75%, which is still below the Federal Reserve’s 2% target for inflation. In terms of the Pain Index, the value was 41, down 5.1% from the fourth-quarter level.

According to the report, inflation is the most volatile factor contributing to the overall PFSi, and with absolute levels so low, small changes result in large percentage gains. The first quarter measure relied on the February level.

— Check out This Is Your Clients’ Top Retirement Planning Fear, According to CPAs  on ThinkAdvisor.

Michael S. Fischer

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