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Bernanke – My Goal is to Wreck Social Security

Bruce Krasting's picture





 

In June of each year the Social Security Trust Fund (SSTF) reinvests a significant portion of its investment portfolio in newly issued Special Issue Treasury Securities. The interest rates on these bonds is set by a formula that was established in 1960. The formula was designed to insulate the SSTF from transitory changes in interest rates by averaging market based bond yields over a three-year period.

Bernanke’s Fed has set interest rates at zero the past four years. In 2012 the 1960's formula has finally caught up with the SSTF. It got murdered on this year's rollover.

The following is from the SSA (link). It shows what has matured this year and what new investments have been made. I will be breaking down sections of this report, so don’t get eye strain looking at this:

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Consider the bonds that matured in 2012:

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$135 billion of old bonds matured this year. This money was rolled over into new bonds with a yield of only 1.375%. The average yield on the maturing securities was 5.64%. The drop in yield on the new securities lowers SSA's income by $5.7B annually. Over the fifteen year term of the investments, that comes to a lumpy $86 billion. It gets worse.

Bernanke has pledged that he will keep interest at zero for a minimum of another two years. The formula used to set interest rates for SSA looks back over the prior three years. Therefore, SSA will be stuck with a terrible return on its investments until at least 2017. I anticipate that the formula will result in still lower investment returns for the next five years, but I’ll conservatively use the rates set this year to evaluate the consequences to SSA.

The following looks at what is maturing at SSA:

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A total of $543 billion of securities with an average yield of 5.6% is coming due in the existing ZIRP window. The reduction in income from the 4.2% drop in yield translates to a nifty $23 billion a year, for fifteen years ($350b). It gets worse.

As a result of the Fed’s extended ZIRP policy, and the SSA's interest rate setting formula, it is now a certainty that interest income at SSA is going to substantially drop over the coming decade. The problem is that SSA has provided projections for its interest income over this time period that don’t jive with this reality.

From the 2012 SSA report to Congress:

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The SSTF believes it will earn an average of 4% over this period. That is not possible any longer. I calculate that the most SSA could earn is an average of 2.3% (it could be significantly lower). The drop in yield translates to a reduction in income of $535B over the forecast period. That’s a lot of dollars.

Consider again the base case provided by SSA in April. The following compares the size of the trust fund based on SSA’s estimates and my adjustments for what interest income will be (everything else is constant).

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Based on a realistic assessment of interest income at SSA, the trust fund tops out in 2015, its peak value will be ~$2.823B. The SSTF has reported that the TF will top out at $3,061B, and that milestone will not be reached until 2021. Essentially, the train wreck will happen six years earlier then assumed, and the TF will be $250B short. It gets worse.

The other key ingredients in the SS "pie" are tax receipts from workers and the amount of monthly benefit payments (the assumptions used is that GDP growth will average 4%, and unemployment falls to 5.5% -  no recessions over the ten-year horizon). These are not realistic assumptions. This means that once the SSTF hits its peak in 2015, the run off in assets will happen very quickly.

The SSTF has stated that the date in which the TF falls to zero will be 2033. The actual termination date of the TF is much closer than that. It could come as early as 2023.

Anyone who is 55 or older should be worried about this. Based on current law, all SS benefit payments must be cut by (approximately) 25% when the TF is exhausted. This will affect 72 million people. The economic consequences will be severe. The drop in SS transfers translates into a permanent drag on GDP of 2%. In other words, when this happens, the country will be unable to have any significant positive growth for a long time to come.

I know I will get comments from readers who have worked 40 years and paid into SS and now want it back. I tell those folks in advance that I'm sorry, but they will have to accept a cut in benefits. It will happen it about ten-years. Make your plans accordingly. If you don’t like these conclusions, write a letter to Bernanke. It’s well past time that the true consequences of his monetary policies are understood. He’s not just breaking the backs of small savers; he’s killing Social Security.

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&

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Enjoy the fireworks!

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Fri, 12/14/2012 - 05:20 | Link to Comment cbhattarai
cbhattarai's picture

The bets thing that you can do is get an ip cameras for security

Thu, 07/05/2012 - 14:17 | Link to Comment Wheres mine
Wheres mine's picture

I am unclear on the role this interest rate plays in the solvency of SS vs the USA. Lowering the rate to zero is bad for SS but equally good for the treasury. Why even have any interest? Or why not make it 12%? I do appreciate that the low rate will force SS to recognize that it is insolvent sooner and this triggers automatic cuts. To me, anything that forces the govt and we voters to face our choices is good.

Thu, 07/05/2012 - 17:01 | Link to Comment Don Levit
Don Levit's picture

Wheresmine:

You are correct how the interest works for or against the Treasury and the SS trust fund.  But, this is only in an accounting sense.

From a cash perspective, when the cash outgo exceeds the cash income, is when the budget is immediately effected, negatively.

The interest must be redeemed by general revenues, for the interest is gone  -  it was lent to the Treasury years ago.  The same can be said when the interest is exhausted, and the principal is then liquidated, and  must be redeemed.

So, the key here is when cash outgo exceeds cash income, irrespective of how large or small the trust fund is.

The trust fund is an accounting mecjhanism, which provides the amount of money that can be wothdrawm from the Treasury, without an appropriation.  This withdrawal is the same way we pay for all pay-as-you-go expenses, like Medicaid.  The trust fund, thus, does not represent a store of wealth, and makes it no easier to pay benefits than without a trust fund; only more "convenient," for an appropriation is not needed.

Don Levit

Thu, 07/05/2012 - 14:00 | Link to Comment LMAOLORI
Thu, 07/05/2012 - 13:05 | Link to Comment newworldorder
newworldorder's picture

Thank you for the easy to follow report Bruce.

Bennie however is only the SS executioner. The idiots who issued his orders are the Executive and Legislative branches of government we have elected. Since the population is asleep on this and most other financial related/debt issues, nothing will be done.

The MSM who should be shouting from the roof tops is interested only in their access to the powebrokers. The founding fathers would be ashamed if they knew what  became of their grand experiement.

Thu, 07/05/2012 - 11:47 | Link to Comment Don Levit
Don Levit's picture

The interest is not real interest, as in private sector bonds.  The interest was "credited" with debt.

That is why when the interest had to be redeemed the last few years, due to the cash inflows were lower than the cash outflows, it took general revenues tio redeem the interest.  If these special-issue bonds had kept their original purpose, to be exclusively for Social Security, the principal and interest would have ben left intact.

Instead, these so-called special bonds were spent on other expenses over the years, leaving the trust fund, from a cash perspective, empty.

Don Levit

Thu, 07/05/2012 - 10:38 | Link to Comment ATG
ATG's picture

Let's do the math.

Anyone think the SSTF will be redeemed before babyboomers die?

Appears the western world going to hades in a handbasket and one protection is to short the s**t:

 

EQ, EUD, PM's, TNX all headed South despite rate cuts. (for the rest of the summer?). We'll know more toward the close today...

 6:10 AM - 5 Jul 12 via web · Details

 

http://richcash8tradeblog.blogspot.com/

Thu, 07/05/2012 - 10:08 | Link to Comment boogerbently
boogerbently's picture

Many countries, including China and India, have been adding to their gold stockpiles for months.

The "price" of gold has been unaffected.

Thu, 07/05/2012 - 09:59 | Link to Comment Totin
Totin's picture

So what realistically can the average person do? Do we just save as much as we can? Or is that pointless too? 

Mon, 12/10/2012 - 18:21 | Link to Comment SAT 800
SAT 800's picture

Saving is not pointless at all; but you must understand that "money" has two definitions, or a two part definition; one-an instrument of exchange. two-a store of value. At present the "dollar" serves perfectly as an instrument of exchange; but it does not function as a store of value. You cannot save anything in dollars; or any other "currency"; as they are all the same now; just paper. You can, however save in the form of Silver Coinage for instance. pre-1965 US coins such as quarters were 90% silver and they are available; just look on google. you can buy them in bags; this will have to be your savings; because it will maintain it's purchasing power. Also you can if you have some amount of dollars you wish to make into real monetary savings, contact bullionvault.com; google that; it's on the internet. Read all the information on the website. This functions like a bank account; you can make regular deposits to it; you can make withdrawals from it; put you will maintain your money in the form of Silver. Please avoid gold because it is the play ground of worlds rulers and central bankers and they may make rules that damage you as they become desperate. Silver doesn't really occupy their attention in the same way, however, it is a precious monetary metal. Saving is certainly not pointless, but you must understand what you are saving. Silver is real money and you will be able to buy things you need by exchanging it when  you need to; the dollar is not real money and will continue to devalue as it has for the last 100 years. I hope you find this helpful.

Fri, 07/06/2012 - 02:55 | Link to Comment steveo77
steveo77's picture

Gold, Guns, Antibiotics

Thu, 07/05/2012 - 09:30 | Link to Comment michigan independant
michigan independant's picture

SS is not a tax. LBJ spent it. You people are like them fighting the last war.

http://www.zerohedge.com/news/us-capex-boom-ends-fed-now-truly-out-ammo

They are leaving the States since who will cloth, feed, care, or for that matter even work, Pelosi, Boener? Ten or so years sounds about right Bruce thanks.

Thu, 07/05/2012 - 09:53 | Link to Comment Jason T
Jason T's picture

I just bought a chain saw.. I figure as soon as I cut 1 cord of wood, I'll have paid for the cost of it.  $200 .. stihl.

Fri, 07/06/2012 - 02:58 | Link to Comment steveo77
steveo77's picture

shhesh, you are paying too much for wood

Thu, 07/05/2012 - 09:33 | Link to Comment AGuy
AGuy's picture

Agreed, Worrying about SS interest rates are pointless since there is no money available to back them up. The US gov't is running $1.2 to $1.6 Trillion deficits. The town is being burned to the ground and you're worrying about a missing cobble stone from the street.

The US is insolvent. All Bernanke is doing is kicking the can down the road as far as he can by printing money. Eventually money printing will become a problem and the US will go bankrupt.

Thu, 07/05/2012 - 09:12 | Link to Comment malikai
malikai's picture

Benocide is definitely acting as facilitator in this trainwreck. Doubtless.

But we can't place all the blame on the FED. They are as I say, just facilitating this mess. The blame truly lies within us, for many decades of electing congress after congress full of idiots, crooks, and charlatans. And again, back on us for allowing this to go on and expecting any sort of good (or, more accurately (not bad for "me")) result.

Thu, 07/05/2012 - 08:15 | Link to Comment Widowmaker
Widowmaker's picture

Bruce Krasting missed Libor manipulation?

BULLSHIT!

What else are you dry-fucking to protect your crooked racket of friend's, Bruce?

Thu, 07/05/2012 - 08:14 | Link to Comment rsnoble
rsnoble's picture

Fuck the fed raw. Put them in millitary uniforms, give them a gun, drop them off in the fucking Iran desert.

As far as SS goes..........let's see, put $100 or so a month into something, expect $1500 a month back in 30 years based on what happens at WallStreet? There's nothing 'secure' about that.

Thu, 07/05/2012 - 08:07 | Link to Comment Getting Old Sucks
Getting Old Sucks's picture

Pick a topic that couldn't take down the Nation.  You can't because they're all fucked up.  And this is just a partial list.

National Debt

Budget Deficit

Social Security

Medicare

All forms of Welfare

Bank Solvency

Government Pensions

401K and IRA

Unemployment

Corrupt Government

It's over folks!  Eat Drink and be Merry cause in a little while, these will be the GOOD OLD DAYS!

Thu, 07/05/2012 - 06:59 | Link to Comment CPL
CPL's picture

Oh wait it gets better.

 

Power has been off in DC for a week now, the pension systems haven't though.  If anyone thinks there is anything left in there might want to get into doubt.

Thu, 07/05/2012 - 06:43 | Link to Comment dcb
dcb's picture

Ah, bruce you still don't get it. Bernanke's goal is to cover up whata fuck up he and greenspan were, and do everything he can to prevent an over leveraged financial system from reforming itself. He doesn't care of the collateral damage he does beyond that.

sosial security is just collateral damage

Thu, 07/05/2012 - 03:09 | Link to Comment ebworthen
ebworthen's picture

If they let the grid fail in a few select metropolitan areas for a week or two at the right time it could add ten years to the life of Social Security.

Another named for unplanned emergencies are planned failures.

Thu, 07/05/2012 - 01:17 | Link to Comment working class dog
working class dog's picture

So the 230.000 dollars that the scumbag congress, treasury and IRS has taken from my labor over the last 40 years is where?

Mon, 12/10/2012 - 18:26 | Link to Comment SAT 800
SAT 800's picture

just consider it a special fee that you paid for living in the (oficially) "greatest country on Earth". LOL.

Fri, 07/06/2012 - 03:00 | Link to Comment steveo77
steveo77's picture

Handed to a banskter in the Hamptons, laughing it up, they get a kick out of it seriously....raping the honest hard workers

Thu, 07/05/2012 - 07:54 | Link to Comment wonderatitall
wonderatitall's picture

...at a bankrupt solar company...dig it bitches...

Thu, 07/05/2012 - 03:14 | Link to Comment ebworthen
ebworthen's picture

IMF, African Dictators and their thugs, Mexican drug gang weapons, spent ammo and equipment and fuel in the Middle East growing poppies and securing oil, rare earth minerals, the military industrial complex ($900 toilet seats), Congressional salaries/retirment/healthcare (Cadillac), Bridges to Nowhere, Vegas, Cocaine, Prostitutes (they earned it), and perfectly useful appliances piled high in a landfill, 3,000 pieces of 3,000 page legislation that no one understands, and pissed into the wind and sand (etc., etc.).

Thu, 07/05/2012 - 00:41 | Link to Comment vft2212
vft2212's picture

Two possibilities exist. USA buys ETFs. USA requires a %age of one's IRA's to purchase treasuries. This confiscation will fill any deficit and we KNOW to expect a deficit.

Wed, 07/04/2012 - 22:45 | Link to Comment butchtrucks
butchtrucks's picture

Social Security is a COMMUNIST program that needs to be abolished right now. The U.S. Social Security program is the largest government program in the world and the single greatest expenditure in the federal budget, accounting for 20.8% of the total budget?!  And what is 'social security' ? It’s nothing but a program to take hard-earned money from the likes of you and me to allow lazy old people who didn't bother to save for their retirement during their working years to live high on the hog.

In other words SOCIALISM at its worst - much bigger and badder than the equivalent socialist pension systems in Europe and other western countries.

Nothing worse than creating programs like this which give lazy people a sense of entitlement.

Good on Romney for committing to the repeal of Obamacare.  Now I just hope he has the guts to commit to unwinding the other socialist and communistical atrocities in the US such as Social Security, Medicare, Medicade and VA - which are also totally unconstitutional and anti-American.

Medicare in particular is the worst socialist program ever introduced in this country (by another lefty Dem President - Lyndon Johnson in 1965). It's a single payer government run program funded from taxes paid by you and me - to support old sick people we don't even know!

Back in the '60s the GOP fought long and hard to prevent this communistic system becoming law. As Ronald Reagan said at the time the Dems were trying to force this thing through "If you and I don’t stop Medicare then one of these days we are going to spend our sunset years telling our children and our children’s children what it once was like in America when men were free.”

George HW Bush Described Medicare in 1964 as “socialized medicine at its worst” and. Same with Barry Goldwater who said: "Having given our pensioners their medical care in kind, why not food baskets, why not public housing accommodations, why not vacation resorts, why not a ration of cigarettes for those who smoke and of beer for those who drink.”

And look where we are now!!!

 

Thu, 07/05/2012 - 08:09 | Link to Comment Dburn
Dburn's picture

It is possible that you douchebags could buy some intelligence?  Maybe a Moron tax would help the deficit in Social Security.

 

Hey Moron- Pay your Moron Taxes. Then  Talk to the the millions that not only work in Wal-mart stores and those like them, including Apple stores , how they are going to save for retirement. I know, lets get rid of social security and let them live in your house.

Geeeyaaad ...the stupid...

Thu, 07/05/2012 - 10:18 | Link to Comment Revert_Back_to_...
Revert_Back_to_1792_Act's picture

A friend told me about his grandparents.  They were simple midwest dairy farmers and did a milk route for their neighborhood.

They had no bank account.  They just saved the silver quarters and dimes in milk cans from their milk sales.

They lived for a very long time on their farm after they retired and just sold the coins as they needed money.

They were effectively un-banked because of living through the great depression when peoples bank accounts just vainished overnight.

There was still a lot of money left in the milk cans for their kids and a paid off farm for a heritage when they passed.

They effectively ended this form of retirement saving system in 1965.

http://www.presidency.ucsb.edu/ws/?pid=27108#axzz1zl0WhKCR

 

Mon, 12/10/2012 - 18:10 | Link to Comment SAT 800
SAT 800's picture

No; they didn't. and this is very important to understand. The pre-'65 quarters are still available. today. they will hold their Silver, real money value. I can buy a gollon of gas today with one quarter of the same type I had in the pocket of my jeans when I graduated from high school in 1960. A silver quarter. This is where your salvation lies. It is crucial that you understand this. real money does not lose its purchasing power. You can put your savings in pre-1965 silver coinage; and larger quantities in silver bars right now; and you should; right now. Avoid Gold because it is the playing field of the Central Bankers and the Governments and when they start making regulations to benefit them and take care of their problems you will get run over. Silver doesn't occupy the same space in their minds; but it is a monetary precious metal and it will maintain it's purchasing power. It won't matter at all if you have to exchange silver quarters for new world credit units, or new dollars, or whatever; you will get your purchasing power; actually you will profit considerably, because by then there will be tremendous demand for silver coinage. Nothing surprises me more than to see these coins still available; for very reasonable prices; remember they're bullion coins; every week. I keep thinking people wll wake up and buy these things up; not yet. There's still some left. Don't be left holding any form of paper; you won't like the result.

Thu, 07/05/2012 - 01:22 | Link to Comment Lednbrass
Lednbrass's picture

Romney is a gutless worm who isnt going to unwind anything, he is a big government twerp to the bone.

Anyone who looks at his actual record and see anything substantially different from the current idiot is hallucinating from watching too much tV and listening to too much radio.

Fri, 07/06/2012 - 12:44 | Link to Comment RKDS
RKDS's picture

Don't you get it?  Spending a few trillion dollars we don't have on another war we can't afford is totally different than spending a few trillion dollars we don't have on social programs!  Stupid librul.

Wed, 07/04/2012 - 21:51 | Link to Comment onlooker
onlooker's picture

Email this to everyone you care about age 20 to 70. This is a big heads up.  THANKS Bruce

 

 

Wed, 07/04/2012 - 21:39 | Link to Comment steve from virginia
steve from virginia's picture

 

Bernanke is guilty as charged ... what is the alternative?

4% interest rate and 'normalized' yield curve and the outcome is government service costs that would explode. Last year cost the Treasury US$454 hundred billion. While all US debt does not fall due and payable at once, the change of service cost would soon eat up more than the current 15% or so of current budget, to 30% and more.

Whatever the Fed is to do there is cost, one way or the other.

Personally, the US is flat broke, it cannot create any more value or real goods, it can only multiply claims on what value remains.

Wed, 07/04/2012 - 22:37 | Link to Comment jekyll island
jekyll island's picture

Uhhh, helicopter ben has a printer.  He will print dollars to cover the shortfall in SS.  Krasting should probably say the recipients would love to have a cut of just 25% when the TF runs out, but in reality they will be using FRN$ that will be so devalued by inflation that it is probably more likely they will only have 25% of their current value today.  

Wed, 07/04/2012 - 23:35 | Link to Comment HoofHearted
HoofHearted's picture

I just like to see it all as a Catch-22. You might call it having your nuts in a vise or you may mention a rock and a hard place. No matter what, we're taking up the old sphincter. As Jeremiah Wright famously said, "The chickens are coming home to roost." We have chickens. And when they roost, you don't want to be underneath them. It can get dirty and disgusting.

Wed, 07/04/2012 - 21:14 | Link to Comment groundedkiwi
groundedkiwi's picture

Occupy congress with placards and T Shirts saying " You are either with us or against us"

Wed, 07/04/2012 - 22:08 | Link to Comment tlnzz
tlnzz's picture

They should be with us. With us in the SS program and no other.

Wed, 07/04/2012 - 19:37 | Link to Comment Fix It Again Timmy
Fix It Again Timmy's picture

We live in an Oligarchy [WE are free to f#@k you over in any way we can] - have a happy fourth, regardless!

Wed, 07/04/2012 - 19:35 | Link to Comment john_connor
john_connor's picture

Who do you think will fund this haircut for retirees? How about their 40 something unemployed children who can barely make their own ends meet.

People won't even have enough money for an IPad.

Wed, 07/04/2012 - 19:31 | Link to Comment TooBearish
TooBearish's picture

Dont stop with SS Bruce- extapolate your logic to EVERY PENSION FUND, RETIREMENT PLAN, TRUST, BANK PORTFOLIO, CREIDT UNION.... ad naseum.

The ugly side of Bens ZIRP is the total destruction of any rational savings, retirement or aunnity that relies on positive real interest rates.

Go FUCK URSELF BEN!

Thu, 07/05/2012 - 13:11 | Link to Comment machineh
machineh's picture

Nearly EVERY other pension plan in the country holds a mix of equities, debt and alternative assets, such that they are not totally dependent on Treasuries.

Social Security is utterly undiversified, and is uniquely getting killed by flat-on-the-floor interest rates.

Soc Sec is an engine of impoverishment, stripping workers of 15% of their pay and 'investing' it for zero or negative real returns.

The Rape of the Middle Class writ large, if you will. All thanks to the evil genius of Frank 'Hand Over Your Gold' Roosevelt.

He's still rolling around Hell in his wheelchair, laughing his ass off about how he screwed the little guys.

Wed, 07/04/2012 - 19:31 | Link to Comment lynnybee
lynnybee's picture

can i have all those social security money that was automatically deducted from my paychecks for the past 30 years + interest ?    i could be quite well off in my elderly years, i could even eat ! 

Wed, 07/04/2012 - 18:53 | Link to Comment bankruptcylawyer
bankruptcylawyer's picture

BLAMING SOCIAL SECURITY IS BULLSHIT. 

 

social security isn't even a FIXED ---DEFINED BENEFIT. how can you blame it ?

 

blame medicare for inflating paper work costs. 

blame fraud throughout government

blame disability fraud

blame unemployment being too much

blame food stamps paying for prepared food. 

blame government jobs with pensions over 100k. 

blame government workers whose jobs destroy the economy like prison guards. 

SOCIAL SECURITY WAS PAID INTO. SIMPLE. NO ONE MADE PROMISES THAT COULDN'T BE KEPT. FRAUD AND THEFT  IN OTHER AREAS ----RESULTED IN A SITUATION WHERE ZIRP WHICH IS USED TO KEEP THE BANKS AFLOAT ---IS DESTROYING THE ABILITY TO PAY BACK SS. 

the banks are stealing social security ---through their financing scheme that destroys reasonable interest rates. think about what happens in this situation if interest rates go up. paradoxically the banking system explodes and with it, the treasuries ability to sell debt any any interest rate thus destroying the ss system. the itnerest rate is irrelevant. either social security will get robbed slowly by the banks, or get destroyed quickly by their failure. 

it's the hostage crisis stupid. 

Wed, 07/04/2012 - 21:47 | Link to Comment PulpCutter
PulpCutter's picture

Blame MEDICARE for paper costs?? 

Private insurers skim 31% off every dollar that passes through their fingers.  ACA will limit that to 15%.  Medicare gets it done for 12%.  HORRORS! Govt does healthcare more efficiently than private industry.

Wed, 07/04/2012 - 22:42 | Link to Comment jekyll island
jekyll island's picture

Take your liberal bullshit bias somewhere else PC.  Private insurers have a profit margin, the gov't does not.  Quite frankly I would not want products from either entity, but it is what it is.  Gov't intervention into any industry has only inflated costs.  You are campaigning for higher taxes and bigger gov't and that does not fly on ZH.  Go back to CNN or Yahoo message board.  

Thu, 07/05/2012 - 01:06 | Link to Comment Lednbrass
Lednbrass's picture

Oh it flies with plenty here nowadays. GW's posts have brought the DKos tard types here in numbers.

 

Wed, 07/04/2012 - 20:29 | Link to Comment brettd
brettd's picture

Blame government education.

Keeping people economically ignorant lets the government do what it does.

Do NOT follow this link or you will be banned from the site!