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On SSTF - Let's Go Back to 1956
I want to make a case that we are paying far more than we should be to
borrow money from the Intergovernmental Accounts (“IG”). I will try to
make this argument based on a review of the Social Security Trust Fund
and then expand on that to the entire IG.
In 1983 the master fixer, Alan Greenspan, put the SSTF on a long-term
path to build a big surplus. Thirty years ago it was obvious to anyone
looking at the problem that SS would face an enormous bulge of expenses
as the baby boomers began retiring. The plan was to increase SS revenues
in order to create a surplus. When the boomers aged the surplus
(savings) would be eaten into. After the boomers died the surplus was to
have been depleted. At that point (around 2035) the system would go pay
go.
It was a pretty good plan. The surpluses were created. The excess cash
earned interest on the Special Issue Treasury Securities investments. As
a result, we find ourselves today where the SSTF is sitting on $2.5
Trillion of government debt. Three times what the Chinese and the
Federal Reserve currently own. The surplus is derived from two sources.
The principal or excess cash flow on an annual basis and interest on the
principal.
The following graph shows the annual cash surpluses from 1983 through
2010. Notice that for 2010 the number is negative $40b. The TF expects
that 2010 was an aberration; that the surpluses will resume in 2011. I
am one who doubts that.
The following graph looks at the cumulative total balance of the Fund
(blue) and the contributions of both the cash surplus (green) and
interest (red). The cumulative interest income is equal to $1.4
trillion. Therefore 54% of the total surplus is interest.
I have no problem with SS or any other Agency earning a reasonable
return on their Trust Fund assets. I do have a problem if the
calculation on how interest is determined is far from reasonable. The
interest that the Trust Fund earns is based on a formula that was
created and enacted by Congress in 1960. The description from SS:
The average market yield on marketable interest-bearing securities of the Federal government that are not due or callable until after 4 years from
the last business day of the prior month (the day when the rate is
determined). The average yield must then be rounded to the nearest
eighth of 1 percent.
Notice that the formula excludes short date and maturities up to 4
years. That is very convenient. The Fund earns a yield that is the
average of 5 through 30 years. They have reaped the benefit of a steep
yield curve. They have avoided the investment death of ZIRP. They have
been doing that on a mountain of short-term investments for the past 27
years.
The 1960 formula replaced one that had been established in 1956. The older language read:
The average coupon rate was computed for all outstanding marketable obligations, with no limitation on the maturities. In addition, the rounding formula called for rounding to the next lower multiple of one-eighth of 1 percent.
This includes all maturities. It therefore includes short-term yields as
part of the formula. I love that they even rounded the result down.
How much of a difference does this change in the formula make? Given the
number of zeros and years involved in this equation, even small changes
in yield produce significant long-term results.
An example: In January of this year the SSTF bought a net of $35b of
five-month bills from Treasury. The yield was set 3.5%. At the time that
this was done the market return for this investment was 25 basis
points. That yield difference comes to a tidy $474 million. Keep in mind
that this goes on nearly every month and every year for the past
quarter century. That adds up. Which state or city could not use an
extra half bil?
The average yield on the Trust Fund portfolio is a very desirable 4.76%.
The average maturity is 8 years. As of today the market yield for this
would be 2.2%. The Fund is enjoying a yield that is 2.5% over market or
220% over the current yield. Bill Gross over at PIMCO would die for this
book.
My estimate on the average benefit to the Fund from the 1960 formula
over time comes to 1-2%. Using a middle estimate of 1.5% the cumulative
effect is $485 billion dollars or 19% of the assets of the Fund. The
conclusion is that SS is costing our economy much more than we think.
This interest bill is killing us.
The SSTF is just one component of the IG account. The following is a
partial list of Trust Funds that hold Special Issue Securities. The
total in this group comes to $3.7B or 150% larger than the SSTF.
Therefore, if you gross this analysis up for all of these accounts, the
excess annual interest cost comes to a whopping $55B a year. And you
wonder why our fiscal accounts look so bad. The excess interest is 10%+
of future projected (CBO) budget deficits. We can’t afford this any
longer.
The 1960 law that started this all off should be reconsidered. At a
minimum it should be understood. Treasury knows this problem full well.
They publish a report on it daily. The IG account is equal to 1/3 of our
total debt, yet the IG account costs us 50% of our debt service.
If the 1960 rules were revisited and adjusted for reality (the 1956
formula would be fine with me) SS would look much different going
forward. The funding gaps would be accelerated from the current thinking
of 2037 to a year that is much closer to today. That would imply that
very significant cuts would have to be made to scheduled benefits to
keep the system solvent. So really there is no solution. But masking the
problem with a 50 year-old formula is just that. Masking the problem.
On balance 56’ was a pretty good year. I think we should go back to that
year as far as calculating interest on the Trust Funds. No more “off
market” pricing. Yes this would starve the Trust Funds. Doing so would
force other changes. But those changes are badly needed.
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Dear Granolageek Assclown;
I give BO credit. He has fucked up more shit in 18 mo.s than most people can in a lifetime. Heez a at-ta-lete! Great sinker. Excellent parcheesi player, bocce ball. Hero.
Thanks so much for your concise analysis. It's solutions like this that make a visit to ZH so worthwhile. While others are busy blaming this, that, and the other, you've found the true solution. Blame Obama.
I can feel the world improving already. These comments have added infinitely to our understanding of macroeconomics.
I am six years away from full retirement date. I have not a single illusion. Anything created by the gonnerment is a total joke. I will collect eventually something, but is not part of my cashflow calculation. My wife's check is going right into gold and tips. When the shi--hits the fan, I will be as ready as I can be. Stay tuned. Yesss, thanks for MM!! When I see her face I feel young again.
they create your freedom. they die for you. unless of course you prefer they lose for you as well.
Bruce, two thumbs up for including two pics of Marilyn Monroe.
and don't forget who has been "borrowing" from the trust fund. yes your friendly neighborhood bankster owned congressman who has been raiding it to fund current budgets.
actually it's far worse than that.
I'm really disappointed in you ZHers. Obviously this is all Obama's fault. He used the time machine his Mau-Mau grandfather stole from MI5 to go back and convince that pinko socialist Ike to get this law passed.
is he Mau-Mau or Bantu?
If you read Fekete or Gary North you will understand that when we went off the gold standard the possibility of retirement was eliminated. Had the SS program bought gold and stored it safely in individual accounts, the retirees would be assured of getting back all of the purchasing power that they had saved over a lifetime. Since inflation has averaged over 5% since 1970, the dollars saved over a lifetime now have the purchasing power of pennies.
The second problem, which has helped support such fuzzy thinking over all these years, is that when the program began, it created benefits which had not been earned, and these costs were never paid for. As others have already noted, the present razzle is just more bad bookkeeping on a program that has always been a fraud, in fact perhaps the first serious attempt by the government to run a Ponzi on a large scale. Still today, many of the 58 million people on SS are getting benefits they never earned or paid for. The program was never insurance, or a forced retirement savings program; it has always been a welfare program, and those programs always eventually run out of other people's money.
are you saying our government has no gold?
How about we just reinvest the money in 3 month TIPs?
That would definitely make me feel a lot more secure against an inflationary default, it would instantly cut the interest rate in the next Obama budget, and it would give us pension beneficiaries the interest rate spike that is going to hit when the Chinese stop giving us free money.
Works for me.
The author is wrong for one simple reason:
It's not interest payments, but principal re-payments that are the problem for the government.
The yield Congress gives the SSTF on its non-marketable securities is not only reasonable, it is, if anything, too low. This is not meant to be a market interest rate. This is meant to be a trans-generational yield - with adequate compensation for the possibility of legislative default.
As we all know, Congress has created, in essence, the mother of all balloon payments (albeit over a decade or two), due at time when the government's capacity to refinance that debt will be stretched to the limit. Default is likely, and therefore an above-market yield is totally appropriate.
What's needed now with the SSTF is not fewer accounting gimmicks, but more accounting gimmicks. Now is the perfect time for the government to use the SSTF to monetize debt and create credit.
2 sides of the same governament wallet. in the end, one way or the other, the money to money comes from peoples' taxes. If you allow Treasury to transfer less interest payments to the SS fund, they will feel like they have a "room" to borrow even more!
SS trust fund is a bad joke.
The program should have never been taken off a pay as you go basis with some kind of deliniated percentage basis of budget or gdp alloted to it and adjustments in benefits and retiement age to keep it within a pre-set band. Daniel Patrick Moynahan was correct many years ago when he advocated for it staying on pay as you go.
I believe it was Alan Greenspan who's commission thought the trust fund was the way to go.
Another brilliant move by maestro G.
There is not now and never was any way to store wealth at the federal level for future generations without major distortions in the capital markets.
So with all due respect for Bruce the piece misses the central problem.
The best we ever could have hoped for was no debt carried into the years of heaviest withdawals and a balanced budget leading up to those years.
That ship has already crashed and burned so we are screwed.
This extra percent wouldn't be a bad thing if it was going to the elite. The problem is more where it's going. How can the elite get this money? They will, you know, maybe by some backdoor accounting razzle-dazzle that requires one more IQ point than anyone has in order to understand how.
Actually, we can afford this. Cut back the military and force the Fed to up it's equity based on the NPV of future seigniorage as discussed last week in Willem Buiter's paper. http://www.zerohedge.com/article/willem-buiters-game-theoretical-explana...
obviously it's interesting to hear folks exclaim "there's no money in there" so now "i want my money back." obviously there is "trillions" in there and "that ain't no fiction." this comment and this article is very interesting. needless to say you haven't even mentioned a far more important agency called "the United States Postal Service." Unlike this insignificant "trust fund" the United States Postal Service is right in your back yard. Needless to say the word "trillions" is bandied about with them, too, since "who the hell uses mail anymore."
and poof its gone!
Just PFM ;-)
Perhaps SS interest is really not an expense? It is not disbursed.
Interest on an obligation that will never be paid.
I would have to look closer, but to me this could be distilled down to the actual practice of cash accounting for Treasury. CASH, the true representation of inflows and outflows. The balancing of accounts for internal transfers just a historical pretense. A legacy method.
1956 that is a long time ago, but the Military was still having fun.
http://www.youtube.com/watch?v=Yc12VGsFr2s
Mark Beck
Perhaps the more important ideas to take away from BK's article are 1) the ideal woman had a lot higher body fat ratio in 1956, and 2) the oceans/beaches were a lot cleaner.
Sonny, that is NOT body fat on that lady!!! Ya want to see body fat, go to a mall this afternoon. Milestones
By awarding the SSTF funds a higher (bookkeeping) rate on its 'funds' (which have all been frittered away on other important government boondoggles) than market, the politicians can pretend that the fund is healthier than it is, which allows them to run up a larger debt before defaulting. This seems consistent with their strategy in all other areas of spending. What it also demonstrates clearly is that criminals can plan ahead.
What a fuck. They are going to default on a major portion of the debt anyway and this clown is worried about the one systemic break middle-income taxpayers have in the whole bond structure. In essence what the author is saying is who gave those damn slaves an extra percent? Forget the fact that becasue the slaves were limited to one very poor investment they deserve the extra percent the fact that they actually got it was just apauling in his view. Damn 60s liberals.
More smoke-and-mirrors accounting tricks! I would be surprised, if anyone here on ZH would be surprised!... surprised?
How 'bout we turn the Social Security system over to the Pentagon? They can misplace a trillion here or there and not bat an eyelash. They'll have it back into a state on solvency, on paper, in a couple of weeks. And if you question the accounting you can be conveniently disappeared.
I am going to DC to get my $200k back, before its all gone. I hear Big Al has the key, so I should probably talk to him first...
Why does it matter, it's the government loaning itself money. Accounting fiction! In order to collect on the special bonds in the SSTF the government has to sell more bonds or use money collected from taxes. If there was no SSTF, to pay SS benefits the government would have to sell bonds or use money collected from taxes. The same with or without a SSTF, so it is fiction. The only thing, well 2 tings, it accomplishes, no new laws to spend money when payouts exceed income and it lets politicians tell a lie to the citizens and pretend that all is well with SS.
None of this would really matter, if the government wasn't poised to tax the everloving fuck out of the very same generations that are going to get exactly zero benefits from this whole scheme, in a vain attempt to keep the ball rolling for another few years. If you think we're not paying attention, you're sorely mistaken. I have yet to see an acknowledgement of that problem anywhere from anyone over 30.
And then it really won't matter, because you'll be too busy worrying about the big bald guy outside with the hockey mask and the bullhorn. Go ahead, just walk away... there has been too much violence....
From Fortune Magazine (http://money.cnn.com/2009/07/29/news/economy/fixing_social_security.fort...):
Maybe back in the day, seems like the norm now though, everything off book.
I'm afraid Species is right, Bruce, this whole long article is clueless jabbering about a complete non-issue. Social Security always has been pay as you go, de facto.
The existence of the intragovernmental debt, and the rate of interest paid on it, are completely unimportant. If the federal government's off-budget funds invested in something other than federal government debt, that would matter. But they invest exclusively in federal government debt, so they make absolutely no difference whatsoever.
When Social Security and other off-budget programs spend less than their revenues (excluding interest on intragovernmental debt), Treasury just takes that money and spends it, reducing the consolidated budget deficit.
When Social Security and other off-budget programs spend more than their revenues (excluding interest on intragovernmental debt), Treasury must cover that gap, increasing the consolidated budget deficit.
That's all that matters. The rest is meaningless intragovernmental accounting that nets out to zero in a consolidated federal balance sheet.
You could argue that maintaining the mirage that Social Security and Medicare and other off-budget programs have invested is a waste of money. I'm sure there's tens of millions spent on the pointless bookkeeping maneuvers.
http://keynesianfailure.wordpress.com/2010/08/10/lies-and-the-lying-liars-who-tell-them-a-fair-and-balanced-look-at-this-years-medicare-and-social-security-trust-fund-reports/
yes, it's a moot point since, in fact, the SSTF has not 1 cent in it.