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SS - The interest issue
It’s been ten days since the Social Security annual report to Congress
has come out. I’ve been waiting for the devotees of SS to write
something cheery about the report. For the most part the cheerleaders
have been silent. That’s with good reason. The report stunk. There’s
nothing in it to write home about.
The exception has been one of the principal defenders of SS. Dean Baker of CEPR wrote this article. The headline intends to create an air of optimism.
I got a chuckle when I got to the part where Dean spells out what he thinks is the “good news”:
In the
2011 report the trustees assumed that we would enjoy substantially
longer life expectancies than they did in the 2010 report.
I would agree with the notion that extending average life is “good news”. But, as Dean goes on to explain, this increase in longevity is just more bad news for SS. Dean describes the increase in life expectancy as the “main” reason for the financial deterioration at the Fund. That’s simply not correct. There is evidence of deterioration in all the fundamentals at SS. The bottom line is: Not even one of SS strongest defenders can find anything positive to say.
I think that the SS defenders are in shock. They have held up the annual report for decades and each time said:
“See! It’s solid as a rock!”
But they can’t say that any longer. The Trustees (finally) acknowledged
that the SSTF had entered a period of perpetual annual cash deficits.
This is a very critical milestone and the Trustees of the Fund didn’t see it coming. They missed this tipping point by six years.
A reader sent me this summary of the Trustee’s prior estimates of when we would cross into the dark zone of deficits. They missed by a mile, is all I can say.
2011 - shortfall is permanent
2010 -shortfall is a one year occurrence,
then back to cash flow positive
2009 - shortfall begins 2015 (6 yrs away)
2008 - shortfall begins 2017 (9 yrs away)
2007 -shortfall begins 2017 (10 yrs away)
2006 -shortfall begins 2017 (11 yrs away)
2005 -shortfall begins 2017 (12 yrs away)
2004 -shortfall begins 2018 (14 yrs away)
2003 -shortfall begins 2018 (15 yrs away)
2002 -shortfall begins 2017 (15 yrs away)
2001 -shortfall begins 2016 (15 yrs away)
2000 -shortfall begins 2016 (16 yrs away)
The question that has to come to mind is, “If the Trustees
missed the first critical milestone on this slippery slope, how much
faith should we put into their “Drop Dead Date” where SS runs out of
money?”
IMHO one should put little faith in that 2036 estimate. It could be a decade earlier.
A big “Pro SS” argument you hear is that there is a big surplus
in the Trust Fund. That this Fund is as big as it is because workers
have been paying into it for years. “They deserve the money back”,
is the thinking. At the end of 2010 the Fund was, in fact, very big. It
stood at 2.6 Trillion. But who actually did contribute all that dough? Not what you think.
The SSTF has enjoyed cash receipts greater than expenses for years.
These annual surpluses were invested in Treasury Bonds. The Trust Fund
is equal to the sum of prior year surpluses + interest (and interest on
interest). If you apportion the prior years surpluses between
contributions by employers and employees you get this pie (in the face) chart :
Note that interest income at the Fund is greater than all the prior year
surplus taxes from workers/employers. Note that the excess payments by
workers for the past 23 years comes to only 22% of the total.
Another big lie you hear from the lovers of SS is, “SS is self funding, it doesn’t add to the deficit”.
This is simply a false statement. Every penny of interest paid to the
Fund is expensed in the current year budget. It is a very big number
today. It gets scary big in the future. This looks at past and projected
future interest due to SS from taxpayers (SSTF “Intermediate” or Base case assumptions).
The annual toll reaches $204b in 2025 (up from $118b in 2010).
Now add it up. From inception (1987) to “big bang” (2036) the interest tab will come to a very lumpy $5 trillion. The bulk of that ($3.5 Trillion) is staring us in the face.
I don’t have a problem with the notion that the workers who contribute
to SS should get a fair return on their money. But as you look at the SS
picture and realize it is so highly dependent on interest income, it
has to raise some red flags. Central to this is the question, “How fair is that “Fair” rate that SS has (and will) receive?”
I think that the fairness issue is (and has been) a problem. The way the
system works there has been a subsidy. Consider these two charts from
the US Treasury and decide if this looks fair to you.
Note:
The $4.6T Intergovernmental account consists of SS, Civil Servants
Retirement Fund and Military Pension Fund. All of these Funds enjoy the
same implicit interest subsidies from general taxpayers:
The intergovernmental liabilities represents only 32% of total debt, but the interest expense in nearly 50%. There's something very wrong with that.
H/T Urban Redneck
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Since the gov't has no money, the SS trust fund can only collect if the feds tax more, borrow more or print more. Pick your poison. The money has been spent and it is long gone.
What? The intergenerational Ponzi is in trouble? Who could a node?
Don't worry, Uncle Ben will print whatever is required to cover the problem. It's all good.
That's because the return on the SS "assets" (an IOU bookkeeping entry for the funds received and already spent in addition to the accrued interest owed to the trust) is determined by formula that lags behind changes in market interest rates.
http://www.ssa.gov/oact/ProgData/intRates.html
The real, issued public debt interest rate is set by "the market" which is currently artificially suppressed by the machinations of the Fed that Tyler has so thoroughly pointed out. If and when the "market" rate rises, or as the formula rate falls, the percentages of interest expense will normalize. Of course, at that point, the Treasury won't be able to pay the interest on the outstanding public debt without massive austerity and tax increases, much less on the fake stuff in the "trust".
Bruce, I think that the interest ratio of public vs intra-governmental is skewed by the SS trust fund only buying long term treasuries. This means that we are currently getting the rollover of the '80s, which had very high interest rates.
It's more than that. Write and I'll explain.
bkrasting@gmail.com
In Ponz we trust. All others pay w silver.
Social Security - Robbing The Middle Class http://goo.gl/m8QMq $2.5 Trillion Dollar Surplus! Money! You have I.O.U.'s NOT! a Surplus!
but we owe $5 Trillion in 80 Years???
The left hand is going to bankrupt the right hand?
I don't think so. These are all accounting games.
From the US annual financial report;
The Government’s largely accrual-based net operating cost
(which increased from an already record high of about $1.3 trillion in FY 2009 to nearly $2.1 trillion in FY 2010)
typically exceeds the deficit due largely to the inclusion of cost accruals such as those for estimated future post employment benefit liabilities.
accrual-based ?
My right hand owes my left hand money, it's self-funding. My left hand is owed interest from my right hand who doesn't actually work. The right hand only steals. The only possible way righty pays lefty back is by stealing. There is no other way. Sometimes people loan money to righty to pay back lefty. Then only reason people give money to righty is because they believe righty can steal more money to pay them back. The people that loan righty money are doing it with the money held in accounts that lefty pays out to. This is totally sustainable and those who refer to it as risky are "insane", "racists", or "don't know that the government can not possibly go bankrupt".
All Americans are members of the SS. Next step is to upgrade to the Gestapo.
The American Gestapo currently resides at Airports. "Papers, Please!"
Yes, they've successfully mismanaged SS so much that it will have to be eliminated. Who cares? The top 1% that run everything don't need it anyway. It's chump change.
I spent my kids college savings but it's okay. I established a trust fund of IOUs.
Why is it *so* wrong that "ntergovernmental liabilities represents only 32% of total debt, but the interest expense in nearly 50%." - IMHO the question is when the contributions to the Fund were made.
Does the government pay more on 30Yr bond issued in 1980 or on bond issued in 2009? Is it unfair or what? Perhaps that the rate that bond investors are getting is too low, not that the rate SS Fund gets is too high? And how long did the 32%/50% distribution held in place? Were there years when the Gov't paid higher rate on regular debt than what SS Fund was getting? The bulk of the government borrowing was done after 2001 at ultra-low rates. The SS Fund surplus occured in prior years, when both the rates and "official" inflation readings were higher.
The bottom line is that if folks find out that they've been robbed of 12.4% of their lifetime income and have been paying effective tax rate of over 25% all along, and their tax money enabled Buffett, Gates, and Wall Streeters to cut their effective rate to just 17% - this country just might turn marxist!
No worries, it's Monday and Dancing With the Stars is on tonight!!
The things that worry me most here are the flip sides of that 32/50% interest issue. I'm assuming the differential is due to SS having a lot of long term debt. It worries me that the countries is increasingly relying on short term debt for its funding, it doesn't seem stable. I can't blame the market for preferring short term debt. Our Ponzi financing scheme makes me want keep fluid enough to jump ship at a moments notice. Who would want to lock money up for 30 years in a ZIRP era? The flip side is SS having invested all that money long term, what happens if inflation sets in as feared? A couple trillion dollars locked in at 3-5% and inflation moves to double digets or even hyperinflation, it's not a soothing thought.
Government, and its associated programs and activities, is not a business. When it is run like a business the final result is similar to a dot com "business": No product = no reason to exist. Government produces nothing, it only consumes and redirects assets. Our present government is corrupt in the sense that it is picking and choosing not only business types that prosper, but specific businesses that thrive. Choking off nascent business and giving tax and regulatory relief to the businesses which have the most powerful lobbies makes government a leech, a parasite, that is bound to kill its host -- the populace.
My neighbors had a huge oak tree that had been completely entwined by ivy, all the way to the top. This spring they had the tree cut down. The trunk was hollow, infested with termites. It was a hazard not only to their own house, but those of the neighbors. It was expensive to remove and created a lot of waste and collateral damage. If only... some years before, the base of the ivy had been cut. If only... after the situation was recognized, something had been done to alleviate the cancer-like growth. If only...
This country of ours is going to fall because there is no person with the courage to even trim back the kudzu and the ivy, let alone trim any of the many main branches of the government waste that is killing us. The metaphors abound in nature and they are merely laws of physics which are being ignored. Sometimes it is best to simply cut the monster down but ego and saving face causes fear that the world will see our decayed core.
Excellent anecdote on failure to act.
Some years back I worked as a life-guard. The most dangerous element of in water rescue was identified as the panicking victim. No matter how brave a guard may be, the fear of the out of control individual was the real danger.
I remember when a friend of mine took the test to become a water safety instructor. I asked him how the "final" went. He said it was really difficult. They put a big fat guy in the pool who tries to drown you. At least the dangers are identified.
Well said.
Re: "no person with the courage...", most of the time when someone comes with bad news (or reality) people shoot the messenger thinking the problem will go away. Unfortunately, most voters are human and subject to this short-coming and thus this is the government we deserve.
Hey, I have an idea... Lets all go and raid the Railroad Retirement Fund, along with the Congressional Pension Plan. I'm sure we can find a few sheckels inside those couches... This way we can all have "shared sacrifice".. we can all circle the drain together...
Bruce:
You write that every penny of interest is expensed in the current budget.
Interest is Treasury debt, which has no current budget impact until that Treasuru interest is redeemed, as occurred in 2010.
That is because the interest is a liability to the Treasury and an asset to the SSTF, resulting in a "wash."
Don Levit
Hello Don. How are you? Some claim "white wash" others "money laundering." Either way "it's a great wash if you can get away with it." I have my eye an island myself. "Disabled Vet Land" i'm calling it. You're invited of course. It has national anthem (Margaritaville by Jimmy Buffet) and "largesse" (in the form of a beer glass with wishful beer. Donations are accepted!) The national dress is "swim trunks." The national past-time is "playing with the fishies." Retirment plan? We're "working on it"!
a brick wall is an appropriate last image