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SSTF Annual Report to Congress – Advance Read
Quick update on SS. Tomorrow is a big day. The Fund releases its annual
report to Congress. This report is three months late. The normal release
would have been May. The official reason given for the delay was
“necessary” revisions resulting from the passage of the health care
legislation.
I am afraid concerned that this report is going to
present a fairly optimistic assessment of the Fund’s position. I believe
they will not alter any of previously established “drop dead” dates for
SS. The critical milestones are (1) when will SS first go negative? (SS
est. = 2017) and (2) when will the fund be exhausted? (SS est. = 2037).
The assumptions used to achieve the static YoY results will be flawed.
They will assume that inflation (COLA) will be less in the future then
previously assumed. Their assumptions on GDP will be overly optimistic. I
expect them to assume long-term growth around 3%. They will assume
payrolls will recover and return to 2007 levels over the next 24 months.
They will make new assumptions on the DI fund that assume that the
health care bill will reduce costs. A central assumption will be a
significant increase in payrolls related again to health care. The
conclusion being that when all these folks get coverage there will have
to be workers to provide those services.
These are just my guesses. We shall see what is released. SS does not
want to paint a dire position. That would just open the door to the many
who would love to rewrite the SS book. On the list of those leaning in
the direction of “Tear em Down” is the Fiscal Commission (AKA the “Cat
Food Commission”, as the belief is they will gut SS and seniors will be
eating Meow mix).
At the same time, SS does not want to show too good a face. They will
propose that the time has come to raise SS payroll taxes from 12.4% to
14.4% (16% increase) or cut expenses by 15% (or some combination of the
two).
A 2% payroll tax increase comes to about $110 billion a year. That tax
would continue forever and rise with inflation. This increase would be
born by America’s workers and their employers. This would be a kick in
the teeth to many small businesses. There is no way this is going to
happen. It would be the dumbest policy choice of them all. It would
insure a second recession.
The flip side of this, cutting costs, is worse. You can’t cut 15% of
benefits to the 65 and over set without a very serious consequence. That
would be the “Cat Food” option. I would put the odds on that happening
at about zero.
Again, these are my assumptions of what will come tomorrow. I’ll write again after wading through it. To summarize:
I expect the report
to reflect a series of optimistic assumptions so as to not cause any
public concern, but the Fund will point to the growing weaknesses and
recommend (modest) fixes that have not a snowballs chance in hell of
being enacted. Those modest fixes are in fact draconian. They would
have major impacts on our economy and our society.
If the SSTF were modeled using (A) Average annual GDP growth = 1.5% and
(B) Unemployment is greater than 8% for the next ten years the results
would surprise us. The check to fix a problem that big is hard to
comprehend. It is so big that it would, by itself, cripple us.
Unfortunately, the 1.5% growth and 8% unemployment scenario is a highly
probable outcome. The Fund does produce a “high cost” (nice way of
saying “worst case”) analysis. I am anticipating that analysis will not
reflect the long-term slow growth reality that America faces.
On more mundane matters, the July and August data is available to make a
forecast of the Fund’s cash position for these months. No surprises.
More deficits.
July 2010 Negative cash flow =~$3b (versus -.5b in 2009)
August 2010 Negative cash flow = ~$9b (versus -5.7 in 2009)
At this point it is certain that September through November will all be
deficit months. The yearly total will be ~45 billion net cash flow
deficit. That would be the first time since 1983. This milestone was on
no ones time horizon a year ago. Except me.
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It will produce lots of smoke which will be immediately blown up the public's ass.
If we want fire we'll have to provide that ourselves.
Lock and load...
It's election season.
Vote
Reload
Vote again!
Why worry? This can be fixed with the 1-2 punch of money printing and CPI manipulation, like most fiscal problems. CPI is a joke anyway, why not make it scream and get things comical?
"Huh it's funny, I don't remember Fancy Feast costing $200 a can... and it replacing steak in my grocery cart..."
It's game over when those prices show up.
$12/gal gas is my stop loss mark to seal the fallout shelter.
Oh ye of little faith. With the proper formula tweak $200 a gallon can look like $2 :) Of course I'm just talking about how the Gov can engineer the CPI to have raging inflation and not adjust it's payments for inflation.
But seriously I'm thinking that anything past $5 and things start breaking. It crosses $7 and unless it goes back down in a hurry then it's game over.
I'd say that this, being the dumbest policy choice, almost guarantees that it WILL happen. Are you underestimating the capacity of elected officials to act stupidly, Bruce?
Raise taxes right now? I think not. More likely the report will assume 10% GDP increases per year for the next decade along with 2% unemployment.
Great article Bruce. Thanks for keeping us informed on this since the MSM certainly isn't. An decreasing cash flow problem is the first red flag for any dividend paying stock holder that dividends will decrese in the future. So, for the SS bagholders they will get lower payouts in the future (and certainly no more intergovernmental borrowing!). The solution seems to be raising the eligibility age to account for longer life spans and means testing.
This might sound stupid, but since it is an entitlement program and not a retirement program why do they not just decrease the rate, and not limit the ceiling contributed by individuals (company match can be limited if not limiting it will have too big an economic impact).
Also (and this is reaching way out there), how about having government employees including Congressmen contribute to Social Security and instead of giving them government pensions convert everything to 401Ks and SS like the real world. Fair is fair, no?
The ceilings will be raised. There will be many small fixes to fill the void. There is a conflict in this. The theory behind SS is that it is not welfare. One is supposed to get back what they put in plus some extra. This assumes you live to an average age. So when someone who makes $1mm a year has to put up $140k a year to be in the program it looks silly and unfair. The average payout is in the range of $200k. So the guy making $2mm pays $280K every year and the most he gets back is 200k. So that breaks the rules of the system. Maybe that is what we should do however. But if you suck in this much money just to bail out SS, then we are going to have a big hole elewhere.
The second (not so out there) point you make is interesting. Government workers have a program similar to SS. The total is about a trillion in Federal IOUs. There is no public information on this "trust fund". I have asked about it. No responses.
b
What parallel universe do you live in? :>)
SS turned into a cash cow for CONgress a couple of decades ago, when they figured out they could promise benefits for tomorrow, charge for them today, spend the collected money today and place IOU's in a jar for some sad sack politician to deal with sometime around 2025-2030. Only the bad news is that the SS Ponzi ends now, not in 10 or 20 years.
So this means the politicians have a shortened time frame now when dealing with SS, meaning get to the next election. No way will they cut benefits before Nov 2010 and most likely not afterwards either, what with the 2012 Presidential election looming. Now self respecting Demopublican will decrease benefits to the one class of voters who actually turn up at the polls.
Sadly, I think the only thing you will be materially wrong on is that this report will get a lot of press. The PTB/MSM are too busy feeding the sheeple 100 days of bread and gladiators. And the sheeple are content for the moment.
My cat prefers her premium scientifically designed kibbles to most human food, though she loves yoghurt.
I've been wishing someone would make a similar food for humans. It would probably be better than the OGM pesticide perfectly formed tastless crap we buy in the stores. At least I would hope that such human kibbles would not be made from Roundup Ready vegetables. This would dispense with the need to cook and could be designed to provide optimal nutrition. We probably will never have this due to various food lobbies in Washington.
As for SS, that's one of the few things left to be looted. Surely it will be looted by whatever surreptitious backdoor approach works (think Republicans).
Escapeclaws... Have you tried Blue Diamond lightly salted, roasted almonds in combination with Sunsweet whole pitted and dried dates?
The reason I mention the brand names is that I find they are available in most grocery stores. More exotic brands are available but I have found they taste about the same.
On topic: I don't think they will gut SS yet. Maybe they will make some tentative moves after the election. Galbraith is suggesting the SS and Medicare be expanded to 'get older people out of the workfore and free up those jobs for younger people.' I think that solution would require some changes in the rules of retirees collecting SS and continuing to work. Not sure about that. Maybe Galbraith is considering run for Gov of Texas? Here is the link to recent Galbraith comments:
'Galbraith: Expand Social Security and Medicare'
http://economistsview.typepad.com/economistsview/2010/08/galbraith-expand-social-security-and-medicare.html
Thanks, Snidley. Nice site.
I will guess your guesses to be accurate.