observations for the first six months of 2010. The data on FICA/SECA
tax receipts and benefit payments: (all amounts in $billions)
The numbers are going in the wrong direction. Receipts are down across
the board while expenses keep rising. This chart looks at the Jan.-June
results for 2008-2010.
These lines were not
expected to cross for at least another five years. This is the cost of
the protracted recession and the failure of the economy to generate new
jobs. The 2008-2009 increase in benefits was at a nosebleed level of
9.5%. That level has collapsed to 3.9% in the 2009-2010 period. This is
the result of a “0%” COLA increase for 2010. The flip side is that those
receiving checks are getting squeezed as their costs rise and income is
stable. In the real world COLA is a joke. As this evolves it will just
be a drag on consumption and extend the weak economy.
Most analysts, the CBO and the SSTF look at the Fund’s results in the
context of a 75-year time horizon. Some point to a date in 2037 as a
point where SS “may have problems”. I leave that discussion to
others. It has been well proven that we can’t look two years into the
future with any degree of accuracy. I prefer to look at the here and now
and focus on cash flow. Consider the changes in the 2009-2010 semi
annual period:
Cash flow has fallen from $63b to $7b from 2008 to 2010. One might take
heart that the number for 2010 is still in the black. But that will not
last long. The seasonality of the Fund produces big cash flow losses in
the second half of a calendar year. For the full year 2009 the net cash
flow was $3.4B. In other words the cash flow fell by $32 billion in the
July-December in 2009. It is certain that cash will evaporate in 2010 as
well. My number for the net cash flow drain in the second half of 2010
is $55b. This translates to a~$50b deficit for the full year.
My thoughts on the SSTF year to date results:
-I am stunned by the continued drop in FICA/SECA tax receipts. There are
many metrics on the overall economy that have shown YoY improvement.
The SS revenue numbers are telling us something different. They measure
the incomes of 160 million workers. This is the broadest definition of
employment we have. My read on the numbers is that we have very
fundamental weakness in employment. The problem is bigger than the
headline numbers from the BLS suggest.
-The payroll tax revenues versus the benefits paid number lines have
crossed. Some, including the CBO, see this as a temporary phenomenon. I
disagree. For there to be a return to a positive result of (payroll tax
revenue – benefits) the economy would have to grow on a sustained basis
at 5% and inflation would have to remain near zero. Those conditions are
unlikely to be met.
-The estimated $50 billion of negative cash flow to be realized in the
second half of the year is just more money that Treasury has to borrow.
It does not, by itself, increase our total indebtedness. It is a shift
between the Intergovernmental and Debt to Public accounts. Does an extra
50 Bil matter when the total the public holds is already 8.6 Tril? No,
not really. Not as of today at least. But when the tables turn and the
markets focus on the US bond/bill calendar it will make a difference.
-All heavily indebted borrowers, whether they be individuals,
corporations or sovereigns are highly dependent on cash flow to service
debt. When cash flow goes negative individuals and corporations go
bankrupt. Most sovereigns do too. The US is in the enviable position of
being able to ignore cash flow. We can simply print our way out of this
problem. At least some people think we can.
-SS is $2.5T of the $4.5T Intergovernmental account. I believe that this
entire group is going cash flow negative. The IG account cost us ~$160
billion in interest last year, but some out there are pretending the IG
account does not exist. An example of this is in the following link.
Sorry,
U.S. Federal Debt Is NOT Approaching 100% Of GDP Anytime Soon
This kind of thinking is not only lunacy; it is dangerous.
Great piece. THanks BK.
In the discussion of true unemployment, Shadowstats estimates that we are at 22%. That seems to fit with the fall in social security receipts and I would expect (but have seen no numbers that federal income tax witholdings are similarly down.
admission: despite being categorically opposed to any further government spending, i have to say that as a surgeon, im routing for congress to pass the delay on the 20% cut in doctor's pay. if they dont, i will still see medicare patients, but i know many other mds will not.
in strange logic, i hedged it this way. i am short the equity market, thinking that if there is a sustained rally, they will pass the legislation (which is only to punt for 3 years).
after three years? well, zero hedge.
So revenue continues to drop, and this was supposed to be the ARRA job sweet spot?
Not good.
No vastly improved unemployment outlook after all of the liquidity pumped in?
Not good.
----------
Economic lesson.
Bad debt should written off.
Insolvent banks should have been allowed to fail and their debts restructured at market rates, not paid for with borrowed money.
If Government intervention crowds out private investment, it better show similar returns, or it should be stopped. Meaning the costs are too high, growth will ultimately suffer.
----------
Government sponsored demand, is not growth.
When paid for with borrowed money, it is delayed default.
----------
When you look at the amounts disbursed on stimulus and real estate, the performance of the government and FED response is horrible for the economy. Incredibly so. Because, we will now have to pull this liquidity and support, at a time when, based on the resources spent, has not produced any fundamental strength.
The first sign will be a comparitive collapse of real estate price. The equilization towards mean wages (including the impact of unemployment). The classic deflationary scenario. But perhaps not deflation overall. A strange mix of inflation and deflation due to Government intervention in private markets.
Behold, the new economy. The inability to control, or even understand, what they themselves have created. A non-economy, devoid of market capitalism. A clear meassage to the world. Financially, the US is not to be trusted.
Mark Beck
Miscellaneous Implicatory Factoids, Inc.
#1) According to the Tax Foundation’s Microsimulation Model, to erase the 2010 U.S. budget deficit, the U.S. Congress would have to multiply each tax rate by 2.4. Thus, the 10 percent rate would be 24 percent, the 15 percent rate would be 36 percent, and the 35 percent rate would have to be 85 percent.
Don't want to minimize the issue,
but the percentages for the bottom line appear to be calculated wrong.
periodic percentages don't sum to get an aggregated percentage
eg table 1 s/b -5.2%, table 2 s/b +3.9% etc
As Barbie would say, "math is hard!"
What can we do?
I would like to stop paying and exchange my accrued benefits for a stake in Federal Lands or Federal bullion. Anyone care to join me?
This is another great article which attempts to get at the truth. Particularly interesting was your comment: " The SS revenue numbers are telling us something different. They measure the incomes of 160 million workers. This is the broadest definition of employment we have."
We better either have a much bigger underground economy than we think or the BLS figures are just another type of government propaganda. Probably both.
I love the numbers and they have been consistant from earlier numbers; however, how is June 2010 obtained?
SS is the only government agency in the world who publishes monthly data in advance.
They are estimates and subject to revision. But I have the numbers to be pretty good.
http://www.ssa.gov/cgi-bin/payment.cgi
Thanks Bruce for finding and putting up the data. Maybe we'll learn a bit more from the annual trustees report, due out soon.
But I think the implications are bigger than you seem to. When assessing a government's debt growth, both the amounts and sources are very important. Public retirement programs are the most stable type of source. They are domestic, and they never sell their debt holdings on the market.
As recently as FY01, all US federal borrowing was from pubic retirement programs. Their cash-flow surpluses more than covered the government's borrowing needs. Other US federal debt, domestic and foreign, was being paid down. The only reason total US debt was growing was that interest payments to public retirement programs were in the form of more debt.
As borrowing has skyrocketed to $3.2 trillion in FY02-07 and $4 trillion in FY08-10 (through this May), the sources have changed to be increasingly dominated by foreign central banks, and both foreign and domestic private capital markets. These types of lenders are far more footloose, especially the latter. The Chinese central bank's holdings have become a tool of political leverage. Demand for Treasuries is still very strong, but only because there is a surplus of liquidity and a scarcity of more plausible safe havens.
Meanwhile, domestic public retirement programs have changed from being the standby support of the US fiscal deficit to being an additional weight. Intra-governmental borrowing is still rising year-on-year, but only because of those payments of interest in the form of debt. The aggregate day-to-day cash flows of federal retirement programs went negative sometime last year.
Demographic trends will only make it worse - even if one believes in a rosy scenario in which the cash flows will temporarily turn back positive. From the standpoint of fundamental valuation, if anybody believes in that anymore, ten years from now is today.
We are fuuuuuuuuuh-ucked.
These are the things which even the MSM can grasp. I'm wondering what the first big one is to wake up the people: SS costs outstripping revenues as shown here?
Next time we increase the debt ceiling and they ask for $20 trillion?
Other?
There is nothing good about this situation. Higher taxes on every level for bare-bone services. Tons of government workers joining the breadlines (good to have less bureaucracy, but bad for added unemployment and general misery. Plus we'll still be paying the taxes.)
I don't know what to tell my parents who just retired. I have to approach the topic carefully, because if I start talking about going to cash and gold, etc. they'll think I'm insane.
That's easy: Set an example for them. Show them the roll of American Silver Eagles you just bought -- and why.
Bruce - Thanks for a GREAT article! This is why I come to ZH.
Time to go into fetal position for a little while. This crap is getting scarier by the minute.
Thanks for the article. Seriously. Nice work.
If inflation ticks up this all fails. The COLA increase kicks in and the Fed will need to increase rates resulting in increased outlays to SS recipients and interest expense to the Treasury.
The incentive to revise CPI will be tremendous and unavoidable.
Which will in turn depress demand for TIPS. Yeah, that's not a death spiral at all.
1 The payment of Social Security benefits can always be guaranteed. What can not be guaranteed is what you can buy with them.
2. Social Security should never have been part of the budget. It has artificially reduced the defcit for years (including giving Clinton a "fake" surplus).
3. Compare to Canada with its CPP, which is independently managed and has done relatively well. That money is actually "there".
billwilson,
Yep, just hope you do not have a Canadian Pension,as they are in deep caca.
My accountant used to scold me for trying to minimize my self-employed social-security tax payments every year. This was back in the mid-1970s. "You'll retire one day, and if you don't make enough payments, you won't get enough benefits," said he.
To which I said, "I don't trust any government to keep my money for me."
There is no pleasure in having been right about this.
My accountant tried that bullshit line once with me. I gave him a three minute reply ending with, "Advise me how to minimize ALL my tax payments legally, ALL the time or I will find a new accountant."
For anyone who may have missed this in a previous post, and it certainly applies to this thread in fullest extent. A little Q&A for you:
Your Social Security
Just in case some of you young whippersnappers (& some older ones) didn't know this. It's easy to check out, if you don't believe it. Be sure and show it to your kids. They need a little history lesson on what's what and it doesn't matter whether you are Democrat or Republican. Facts are Facts!!!
Social Security Cards up until the 1980s expressly stated the number and card were not to be used for identification purposes. Since nearly everyone in the United States now has a number, it became convenient to use it anyway and the message was removed
An old Social Security card with the "NOT FOR IDENTIFICATION" message.
Our Social Security
Franklin Roosevelt, a Democrat, introduced the Social
Security (FICA) Program. He promised:
1.) That participation in the Program would be
Completely voluntary,
No longer Voluntary
2.) That the participants would only have to pay
1% of the first $1,400 of their annual
Incomes into the Program,
Now 7.65%
on the first $90,000
3.) That the money the participants elected to put
into the Program would be deductible from
their income for tax purposes each year,
No longer tax deductible
4.) That the money the participants put into the
independent 'Trust Fund' rather than into the
general operating fund, and therefore, would
only be used to fund the Social Security
Retirement Program, and no other
Government program, and,
Under Johnson the money was moved to
The General Fund and Spent
5.) That the annuity payments to the retirees would never be taxed as income.
Under Clinton & Gore
Up to 85% of your Social Security can be Taxed
Since many of us have paid into FICA for years and are
now receiving a Social Security check every month --
and then finding that we are getting taxed on 85% of
the money we paid to the Federal government to 'put
away' -- you may be interested in the following:
Q: Which Political Party took Social Security from the
independent 'Trust Fund' and put it into the
general fund so that Congress could spend it?
A: It was Lyndon Johnson and the democratically
controlled House and Senate.
Q: Which Political Party eliminated the income tax
deduction for Social Security (FICA) withholding?
A: The Democratic Party.
Q: Which Political Party started taxing Social
Security annuities?
A: The Democratic Party, with Al Gore casting the
'tie-breaking' deciding vote as President of the
Senate, while he was Vice President of the US
Q: Which Political Party decided to start
giving annuity payments to immigrants?
AND MY FAVORITE:
A: That's right!
Jimmy Carter and the Democratic Party.
Immigrants moved into this country, and at age 65,
began to receive Social Security payments! The
Democratic Party gave these payments to them,
even though they never paid a dime into it!
Then, after violating the original contract (FICA),
the Democrats turn around and tell you that the Republicans want to take your Social Security away!
And the worst part about it is uninformed citizens believe it!
If enough people receive this, maybe a seed of
awareness will be planted and maybe changes will
evolve. Maybe not, some Democrats are awfully
sure of what isn't so.
But it's worth a try. How many people can YOU send this to?
Actions speak louder than bumper stickers.
AND CONGRESS GIVES THEMSELVES 100% RETIREMENT FOR ONLY SERVING ONE TERM!!!
...and the Republican Party is bunch of trustworthy, morally responsible little angels. -- You're dwelling on party-lines shows you are still ignorant of the problem... unless you don't realise what Arlen Spector et al is about...
+100
Really liked your nice historical review-facts are stubborn things. Its much like the Dems attempt to deflect blame for their failure to supervise the type of loans FNE and FNM would buy, the true root cause of the financial crisis. Loans based upon "social justice" are just are not as sound as those based upon "skin in the game (i.e. 10-20% downpayment and real income and employment history).
For years, I've refused to furnish my SS # for ID purposes, pointing out its the sole domain of the SS admin. This always surprises people with no respect for privacy or freedom.
"Social Security Cards up until the 1980s expressly stated the number and card were not to be used for identification purposes."
This is false. I'm looking at my original ss card right now (issued in 1972) and it doesn't say this on it.
Thisson,
It's common knowledge that SS #'s were never to be used a Proof of I.D..
I am looking at mine, and it plainly say's,
"For Social Security and Tax Purposes-NOT FOR IDENTIFICATION".
The only reason to show it, is for loan app's, or some newer Gestapo law I am unaware of.
One minor correction, the employee rate is 6.2%. Medicare is 1.45%.
Actually the ignoble details:
FICA wages
6.2% up to $106,800
self employed
12.4% up to 106,800
Medicare
1.45% up to the sky
self employed
2.9% to the moon Alice
Obomacare - I don't even care but I don't really feel like working anymore I know that!
You really need to see www.usdebtclock.org/
Over $14.3 trillion in So-So Security obligations. And how much of that is UNfunded liability by this PONZI scheme....
But hey, add in drug/medical and you get a mere $109 trillion of unfunded liability.
I don't think I ever got the 400k I owe. :)
Even an idiot – but not the CBO – can understand that this is a BIG problem. BK’s ruminations on SST are lucid, incisive and are THE single most important financial commentary out there. IMO this charts the end of the Empire as we know it. “…continued drop in FICA/SECA tax receipts. … very fundamental weakness in employment.”
WOW, if you were to throw extended unemployment benefits in there along with Medicaid/Medicare Payments vs. inflows, that chart would be even grosser than it is now. It is simply sick how they just keep on spending like they don't care anymore.
jk,
"like they don't care anymore".
Newsflash, they never did...............and the current regime, cares even less.
So what? The deficit goes up another notch. And "deficits don't matter" - until they do.
Thanks, Bruce. Another solid article.
Well, the article and the earlier one by the Western Asset Management alum/whatever is right: under a GAAP treatment intragovernmental debt is equivalent to intercompany borrowings, which net out. But that's hugely disingenuous, because the "one arm of government" is me and people from my (younger) generation who work everyday, and the "other arm of government" that I owe are the generally wealthier retired who just want what's theirs.
And then! Then, under GAAP you also have to report, say, unfunded pension liabilities as part of a pension shortfall. So even if we let these imbeciles net out IG, apply the same logic and you bring enormous liabilities in SS and Medicare on-balance sheet. If you want to get even nastier with GAAP, bring everything on-balance sheet where the government has an effective equity risk position: Fannie, Freddie, etc.
Hmm, I wonder what our debt/GDP would be under that scenario? Does anyone mind guessing what the rate of return is on our SSTF (ha)?
Under that scenario debt/gdp would be about 1000%.
Logan's Run, here we come.
@sticky fingers
Word up. One my favorite movies of all time. Renew! Renew!
Almost time to get dressed up for Carasel.
Social security is not an entitlement. Too bad ever bureaucrat has robbed the store.
swamp,
"Social security is not an entitlement"
No it's never been, if it were, it would be a gift.
A Gift by virtue of it's definition, means it cost the recipent nada.
As this puppy unwinds, and the folks start getting less, and double taxed on it to boot.............the SWHTF.
I know a lot of 62yr old's I would not want to cross..........
Like the old saying,
"Don't start a fight with an old man, he will kill you".
You got that right DosZap. I am 62 and finished my application for SS this week. I started as soon as it was available just in case there is nothing left -- or I die first.
Don't mess with the Angry Coon!!
You can undo this decision to take the early payments later if you want.
I ran the numbers on it Mr. President. Didn't look like a good deal to wait, and I'm aware that I can repay the payments to start over at a new rate. Right now it's a bird in the hand rather than "the bird" from their hand.
Yes, it is an entitlement.
This may be related to whether or not we are using the same terms: While you *think* you paid into the system, and you *think* the government has a contractual obligation to make payments to you (perhaps based on your contributions to the Social Security program), that is NOT true. Thus, the government has no contractual obligations to make payments to you (decided in the 1960 US Supreme Court decision Flemming v. Nestor).
That makes Social Security an "entitlement program". The government may revise the program at any time, to make payments to you or not, at any level, without regard to whatever you might have paid in.
This has been done many times in the past.
not to worry. the sockpuppet's hands will inflate to hyper and tell old people that eggs cost $100 because the chickens are unionized.
I noticed on my last Social Security letter that says what you paid in and what you might expect, it had this disclaimer. I don't remember ever seeing it before. Maybe it was there, but this was the first time I noticed it:
"Your estimated benefits are based on current law. Congress has made changes to the law in the past, and can do so at any time. The law governing benefit amounts may change because by 2037, the payroll taxes collected will be enough to pay only about 76% of the scheduled benefits."
As if the problem is in 2037 . . .
That disclaimer has been there as long as I can remember. Gives a plausible reason for keeping the unfunded liability off the balance sheet, among other things.
Not boring and not surprising. Jobs are gone and folks can no longer delay going on SS
My contribution + employer is at $203k. Sure wish SS had put that in Physical. I'd be taking delivery about now...I'll never see that money again.Pure fraud...This is what happens when children are in charge...
You WILL get paid but in Dolloonesos