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Social Security - 2012 Results
Social Security (SS) has released its estimates for the December data for benefits payed and taxes received. With this info, I can estimate the 2012 results that will be formally reported in five-months. It was a ho-hummer of a year for SS, it tread water vigorously, and ended up with a cash deficit of $46.7B, just a tad more red ink that 2011’s $45.6B. The pieces of the pie, and YoY comps:
Payroll tax receipts: $712.7B (+6.5%)
(Includes payment from Treasury Re the 2% tax cut)
Income from Tax on Benefits $27.1B (+15%) !!
(Means test)
Total Cash Receipts $739.8 (+7.0%)
Benefit Payments $780B (+6.9%)
(Includes RR interchange)
Overhead $6.7B (+4.7%)
Total cash Outlay $786B (6.8%)
Net cash flow loss $46.7B (+2.4%)
Interest income $111.4B (-1.7%)
(non-cash)
Accounting surplus $64.7B (-2.5%)
(Paper minus cash)
Number of Beneficiaries 56.8m (+2.5%)
Some thoughts on these results:
- The $46.7B annual cash deficit is the third in a row. The 2012 shortfall confirms it; SS will never see a cash flow surplus again. Every dollar of the cash shortfall MUST be funded by selling additional debt to the public.
I hope this is clear. I’ll repeat it. Social Security is adding to the debt held by the public. It is forcing the country to borrow more to fund current operations. When Senate Democrats, like Dick Durbin and Harry Reid say, “SS does not add a penny to our debt.” – they are lying.
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- The Tax on Benefits is up to a meaningful $27.1b (+15%). The increase is the result of many newly retired folks who are getting SS, and also have other income (investments and pensions). This forces them to add the SS income into their tax base. THIS IS A “MEANS TEST”.
I emphasize this fact as there is very strong opposition to the concept of a means tax for SS by Democrats in Washington and the liberal press (Dean Baker). But it already exists!
Liberals don’t like means testing because it undermines the principals of SS. It makes it appear that SS is a form of welfare. The fear is that if SS is labeled as welfare, the popularity of the program would quickly wane. So the staunchest supporters of SS are avoiding a fix that could patch the finances for the worst reasons. They are supporting Roosevelt’s dreams, at the expense of the base they say they are trying to protect. Only in America….
The problem with the existing Tax on Benefits is that it does not cut deep enough to fill the bucket. I advocate that the tax bite for high-end seniors be increased. I will go further, and state that the means test for SS benefits should be based on assets, not just income that can be manipulated.
My strong feelings on means testing SS benefits are to my personal disadvantage; my SS benefits would be gone under my plan. I say this now, as I know there will be many who will throw rocks at me for my stance. I can already see the words, “I paid for it, the money is mine!” I say,"Sorry, this will come sooner or later."
My gripe is that the generation that is causing the problem, the Baby Boomers, is getting off scot-free. All of the proposals to tweak SS (Age and inflation adjustments) would phase in over twenty-years. With this, the bulk of the baby boomers would get a free ride. This doesn’t seem fair at all to me. Society, as a whole, will have to pay for the Boomers, but the Boomers should shoulder a higher percent of the cost. By no means should their political clout result in an unfair outcome. This is a political "Kick of the Can", "screw folks sometime in the future". A downright ugly plan at that.
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- In 2012 the Treasury paid SS $115B to offset the drop in income related to the 2% reduction in payroll taxes for the year. The operating results (including the Treasury contribution) still produced a cash flow deficit of $46.7B. In other words, the shortfall for 2012 added $162B to the borrowing requirements at Treasury. This borrowing resulted in a dollar-for-dollar increase in the Debt Owed to the Public.
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- There was an improvement (+6.5%) in the YoY payroll tax income. A portion of the better results are annual “Adjustments”. 2012 had positive adjustments to revenue from the prior year totaling $2.1B, while 2011 had negative adjustments of $8.6B. Taken together, the real rate of increase for revenues at SS is closer to 5.2%. This data can be used to create an estimate of total payroll income (Adjusted payroll income / Tax rate {12.4%} :
2011 estimated SS total payrolls = $5.658T
2012 estimated SS total payroll = $5.951T
YoY change = $293B (1.8%)
The ~$300B of increased pay seems like a very big number, but when you consider that inflation is running at about that same 1.8%, most folks are getting no place fast.
I draw this comparison to make a point about the huge numbers that are part of the economy. A $300B increase in worker's incomes doesn't move the needle at all. Amazing...
Note: This quickie numbers analysis does not reflect the cap of $106.5K on SS tax, nor other sources of income that is not taxed by SS. I don't think this skews the results/conclusions by much. Social Security has 155m in its pool, significantly larger than the Non-Farms Payroll (135m). These numbers cover a big slice of the American pie.
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- The YoY increase in Benefits of $50.1B (6.9%) is a reflection of A) A COLA increase of 3.6% and B) A net increase of 1.4m in the number of beneficiaries. The costs at SS rose at a pace that is far higher than the economy grew in 2012. Approximately 11,000 people enter the system every day. 7,000 current members of the club, well, they leave the system 24/7.
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- Interest income is down 2.5% in 2012. The decrease of $1.1B is modest, but also significant. The passage of time and ZIRP/QE, has caught up with SS’s investment portfolio. The interest income at SS for 2011 will prove to be the zenith; from now on, the interest income at SS will be in annual decline. This is an important milestone, a decidedly negative one at that.
The Federal Reserve has cheapened the cost of money at the expense of SS. One can argue the merits of this tradeoff, but what can’t be argued, is the consequence to SS. If the Ten-Year were at 4% (Versus the 6% long-term average) it would add $700B to SS interest income over the next (critical) ten-years.
If you listen to Bernanke, the other Fed Doves, guys like the WSJ’s Jon Hilsenrath, and all of the economists on TV, you would think that there is no consequence to the government of perpetual cheap money. Actually, what Bernanke is doing is dramatically shortening the day of reckoning for SS. The current thinking is the SS “go bust” date is 2033. But when SS releases its annual report in May, it will confirm that the date has been brought forward a few years, and the culprit is cheap money. I wish that someone other than the blog world would point these things out. Bernanke is no pal of SS, Very Important People, like Paul Krugman, love SS and also hail Bernanke's endless cheap money. I guess they don't see the conflict.
+++ (finally, sorry for running on)
- There was no crisis at SS in 2012, and there won’t be a real crisis for a number of years to come. The growing annual cash deficits are now “programmed” to happen. This gives Democrats the opportunity to say, “Hands off SS”. “It ain’t broke, so don’t try to fix it”.
My guess is that the Democrats will prevail on SS with regard to the current fiscal cliff debate. As a result, there will be no changes to SS. Should that be the outcome, in about five years the wheels will fall off the cart. By then, SS will be running cash deficits of at least $200B a year. It will be much harder to “fix” than today.
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if ss were abolished, the tax savings would be more beneficial.
http://covert.ias3.com/forums/
If it were abolished, the politicians would lose some leverage over their voters and place their graft opportunities in jeopardy. Not going to happen. If you haven't noticed, Obama is all about getting as much power over our lives as possible so that we may benefit from the genius that is Harvard running every aspect.
FORWARD SOVIET! Starve the Stupid, Kill the unproductive (once their votes are not needed anymore).
Who pays the interest on these SS bonds? Is it the general public or the gov't? I was under the impression they were special bonds that were the responsiblility of the gov't. If so, does the interest rate really matter in that the gov't would be paying the additional interest anyway in the absence of ZIRP?
ROTFLMBO!!! Chub - I can't believe that anyone actually BOUGHT that mouthful of horsecrap!!! "Special Bonds... paid by the government".
Ummmm did you ever wonder where the govt gets it's money? Ummm... does it make lace doilies during coffee breaks and sell them to the French? Does it send the clerks out to shovel snow for citizens at $10 a sidewalk? Does it make beautifully handcrafted fine furniture? NO! IT TAKES WHAT IT NEEDS FROM THE US TAXPAYER!!! So given that little bit of real world, Chub... dear Chub... think about it for a second and then tell us... WHO pays for these "special bonds"???
The government pays the %, as is the case with all federal debt. And yes, this is moving money from one pocket to the other. It's important to note that on the Debt to the Public, the interest is paid in cash, while for the IOU's to SS, the interest is paid in paper. Big difference.
It does matter what the interest rate is in that the rate is a significant factor in setting the "go bust" date. The higher the interest rate, the longer SS survives, the lower the rate the life gets shorter.
This is accounting stuff, but it matters in that the Mandatory cuts in benefits that are required by law (on 'go bust' date), do not come into being until the Trust Fund is exhausted.
"The higher the interest rate, the longer SS survives, the lower the rate the life gets shorter."
Oh bullshit Bruce, and you should know better. The interest rate is meaningless, and if you can't understand that by now you should not be writing articles on SS.
Thanks for the clarification.
If the interest rates were normalized, interest rates would not be near zero but somewhere in excess of four, and interest income would be four times as much as the 111 Billion received. That would be 444 billion dollars or TEN TIMES THE CASH SHORTFALL!
Ben Bernanke hates grandmom. Maybe she can switch over to cat food.
Interest rates don't get normalized in a vacuum... with 4% rates, you have a U.S. default and a blown up FED balance sheet... among other things. Not going to happen.
Re Bruce Krasting's comment above
« ... if SS is labeled as welfare ... »
maybe the better strategy is the reverse:
Label all welfare as 'social insurance' ...
And realise that like insurance, it is absolutely necessary but also needs to be sustainable, realistic and sensible
What is needed around the world is people who strive to care for themselves. Work and save for their financial security, not rely upon an income redistributionist’s insurance scheme, which seeks to provide a buffer to risk, but instead creates blindness to risk and therefore even riskier behaviors. We complain about our financial institutions and their derivatives that try to conceal risk, insure it so to speak, and what has it accomplished? Disaster! So what we need is an ever growing government that extolls the dangers at every turn, with the only shelter provided by them. Of course they need a little of our money and liberties, but hey, its security right? Yet the danger grow ever larger! What oh dear shall we do? More of the same. If we want people to do the right thing, we cannot incentivize them to do the wrong. People used to actually save for calamity and did what they could to avoid bad things happening. Now we build beach houses and eat till we puke, but we’re OK cause we got insurance. We can piss all our money away on some stupid scheme or just drugs, booze and hookers, but hey, we’re a society that cares. We don’t have to look at laws or who is in office to explain what’s going on here. Just look around. I’ve been a small business employer of less than ten employees for 30 plus years and I’ve seen guys making the exact same pay, one supporting a house and kids, while another has a POS car, lives with a buddy, constantly broke nearly living on the street. Everyone wants to bitch about their pay, but as with our government and what my father told me more than fifty years ago, It’s not what you make but what you spend that matters. And never fool yourself, you are a slave if in debt but equally so if someone holds your very life in their hands in the form of an insurance policy. I equate social insurance with social disease, something you are stuck with because you chose poorly.
>>>> I hope this is clear. I’ll repeat it. Social Security is adding to the debt held by the public. It is forcing the country to borrow more to fund current operations. When Senate Democrats, like Dick Durbin and Harry Reid say, “SS does not add a penny to our debt.” – they are lying. <<<<
The SS received "CASH" from the workers "SS TAX". It "CASH" was needed by the government, so the government took the SS CASH, and gave SS US Treasury BONDS. So now when the SS needs some it's money back, and it is cashing in some of those T BONDS. The government does not have the cash (in the Treasury) so it now needs to print, and sell new bonds to the FED RES, or some one. So yes and NO it does not "ADD" to our dept (we all ready had it when the government raided SS's CASH). It is no different than you cashing in some of those US Savings bonds you took out years a go.
For those who do not understand the underlying principle at work here... put the magic wands away. They don't work in the real world.
What works in the real world is the accountant's law that says:
CURRENT EXPENSES/COSTS MUST BE PAID WITH CURRENT RESOURCES!
Bonds are not current resources. Treasuries are not current resources. Equities are not current resources. Unless the US goes back on the gold standard, PMs are NOT current resources. 401K's and other "retirement accounts" are NOT CURRENT RESOURCES!!!!!
I think the reality is a little different than what you wrote. I don't think the bonds given to the SS "trust fund" are normal, garden-variety Treasury bonds. They are some kind of "special" bond. In order to convert them to cash to pay out benefits, I believe the treasury has to issue a new bond, sell it into the market place, and exchange the resulting cash for the SS bond. Maybe someone can confirm this, but I think that is how it works.
I agree with you on the issue of NEW bonds. I did a poor job of making that point. I just feel that the adding of dept to the country happened when the SS trust fund loss the cash it had, and got the first bond. Congress played games with the dept ceiling many times, and the treasury had to find cash to keep paying the people who work for us. They got some of that cash from the SS trust fund. Now the same group wants to throw Grams under the bus (cutting SS benefits for those who trusted them years a go). I'm glade I'm not smart enough to be a politician.
I agree it should be a safety net for those who find themselves without income in their old age.
Well said.
Realistic? Sensible? Hard to use those words in a sentence about SS.
Bruce, there is one problem with what you propose, and that is that politicians will NEVER end up putting additional revenue to cogent use. If you could come up with any instance where Washington ever obtained stole extra revenue and subsequently utilized it responsibly, I'd consider the options in any proposed "fix" (be it SSI, deficits, etc...), but that hasn't happened in any meaningful way since Andrew Jackson...
Those critters need to be starved out, either by turning them over in elections (lol) or by the productive ASAP reducing their debts and going on financial strike...
He worries about Krugman's conflict. The whole thing is a grand design, once the opportunity was recognized, to bring the American machine to its knees. Then, we can be molded into that fairer, more compassionate society as envisioned by Progressives since God knows when. All the rest is white noise, the end game is dictatorship by the kleptocrats on a scope the old feudal empire builders never dreamed.
Conflicting opinion means nothing. Fill the heads of the low information voters with whatever sounds good and take them down like the simple minded, needy, greedy chumps they are. Starve the stupid, kill the unproductive.
FORWARD SOVIET!
Some people may be asking - why now? Energy wealth. The USA has endless energy especially on govt land. This is actually a curse because countries with lots of energy get taken over by vermin. The only exception is probably Norway but the left is firmly entrenched there as well.
You know Freddie there are these magical thing called "Google" and calculators. Using both might cause you to embarrass yourself just that much less.
Here's how much oil the world uses:
http://lmgtfy.com/?q=world+oil+consumption+per+year
This is how much is left in the USA.
http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=57&aid=6
And how much energy that represents:
Start here: http://lmgtfy.com/?q=cubic+mile+of+oil
If we had to depend on our own oil, we'd be empty in less than three years. If we started converting all of our natural gas to oil, we might last another 20 (half to power generation and half to transportation fuels).
We actually "have" lots of oil. What we don't have is lots of energy from that oil since the majority of the oil presented in the recent happy-talk stories brought to you by the clueless represents oil that has remarkably low net energy by volume, not to mention sky high cost. But those little facts don't make John Q. Voter all skippy and happy so you won't hear much about them. Nobody likes a Debbie Downer!
Within 5 years the takeover of the 401(k) and IRA's should be well on it's way to being a reality. Those funds would help provide the funds to keep SS going. It would also extend the ponzi out several more years.
And it will happen overnight so nobody has a chance to cash it in and you will wake up with your account saying "No access, please wait until the federal government finalizes your conversion of your funds and a social security statement will be mailed".
i think 401k is going away; who offers these anymore?
Within 5 years the takeover of the 401(k) and IRA's should be well on it's way to being a reality. Those funds would help provide the funds to keep SS going
Bullshit. No one will contribute another dime to their 401(k) if they are confiscated or if they are forced into buying ZIRP government bonds. It will not be a way to fund SS
"No one will contribute another dime to their 401(k) if they are confiscated or if they are forced into buying ZIRP government bonds"
You don't say! They won't have to contribute another dime. It's the dimes that they had contributed previously that I was focusing on.
The fed doesn't need our 401K or other retirement funds to fund their welfare programs. They have the big stick called "tax" and the leg breakers called the "IRS" to make sure you give them what they demand. You have no choice but to work and give them what they demand and try and slide a few pennies off to the side for yourself. They make the rules and its their poker table and you can only sit at their table if you have any chips that they can see. They will always have the winning hand because they can.
But you're making my point. If the plan you cite above is implemented, that will immediately cause basically everyone (except the stupid) to opt out of their 401K program. It will not be a SS cash-cow as some seem to think, because 401K balances would plummet. In fact, it would most likely precipitate a market crash because basically everyone with a brain will cash out their 401K.
Sounds like a game plan ... cut off the tax deferral on amounts going in, adding to revenue. Collect the taxes deferred plus the penalty on early withdrawals, and nationalise Fidelity, which will fail in the middle of the ensuing run to cash out and use that as the excuse to lock the rest into "good" annuities backed by the full faith and credit.
So where is the problem? Don't worry about Wall Street ... they'll be just fine handling the captive business of the new SWF of the USA.
Nobody is going to cash out anything when the Federal government absorbs the private retirement system for our own protection. I expect that when there is another big market crash they will pass the American Retirement Protection Act and simply confiscate the entire thing to be doled out later at their own discretion. It will be for our own good of course, and to the sound of tumultuous applause from Team Blue and their noise machine.
All your retirement are belong to them!
That would be the Argentina model.
This is a very common belief around here, but it's a red herring--it COULD happen, but it's definitely not going to happen like that.
The only way Fedgov is going to make a meaningful attempt to confiscate "investment holdings" is if one of the big financial services companies goes under and the pols claim it "has to be nationalized" to protect the wealth of the people.
(More likely is that within 5 years, there won't be any POINT in "taking over" 401Ks and IRAs--there just won't be enough money to seize to make it worth the trouble.)
The two coal mines to keep an eye on for regulatory and statutory canaries-
http://www.dol.gov/ebsa/aboutebsa/main.html
http://www.help.senate.gov/
Of course there's a Joe Canary in this dollar filled hole:
http://www.dol.gov/ebsa/aboutebsa/org_chart.html#.ULz0qYa4v_g
Joe Canary, Director
Office Of Regulations And Interpretations
The Office of Regulations and Interpretations is primarily responsible for carrying out the Agency’s regulatory agenda and interpretive activities. The Office also plays a major role in the development, analysis and implementation of pension and health care policy issues by providing technical assistance and support to the Assistant Secretary, external groups and other offices within EBSA. In addition, the Office coordinates regulatory and interpretive activities with other Federal agencies such as the Department of Treasury, the Internal Revenue Service and the Pension Benefit Guaranty Corporation.
The Office is comprised of three divisions, the Division of Regulations, the Division of Fiduciary Interpretations and the Division of Coverage, Reporting and Disclosure. The Division of Regulations is responsible for managing and implementing the Agency’s regulatory priorities under Title I of ERISA and coordinating regulatory activities with other Federal agencies. The general interpretive responsibilities of the Office are allocated on a subject matter basis between the Division of Fiduciary Interpretations and the Division of Coverage, Reporting and Disclosure. The Division of Fiduciary Interpretations is responsible for interpretive matters including the fiduciary responsibility, prohibited transaction, qualified domestic relations order and qualified medical child support order provisions of Parts 2, 4, and 6 of Title I of ERISA, as well as related provisions of the Internal Revenue Code and FERSA. The Division of Coverage, Reporting and Disclosure is generally responsible for interpretive matters relating to the coverage, reporting, disclosure, suspension of benefits, preemption, claims procedure, multiple employer welfare arrangements (MEWA), COBRA and other provisions of Parts 1, 2, 5 and 6 of Title I of ERISA.
My IRA will be cashed out and invested in hard assets by next year.
Wish more people would do the same...
I buy guns.
I think you are right. At the very least they will force you to buy US treasuries just as they have in Japan to their own populace.
100% correct.
The program is unsustainable; the only question is when does it end?
Looking at the larger picture one has to wonder what happens to the federal government when ZIRP is forced to an end and the Fed Funds rate goes up 500 basis points.
How will the politicians act when their beloved federal government is squeezed out of business by higher borrowing cost?
How is Greece responding to the problem?
Bruce does a great job but this problem goes much deeper than Ponzi retirement accounts.
I think by September 2013 we will be at the end of the 5 year monetary expansion cycle set off by TARP and all the other bail outs. There will be some major readjustments in financing with, or without Bernanke’s approval.
Kyle Bass looks at these events and predicts 6.6 years based on past cycles, which puts it at 2015. I disagree; I think the end of the ZIRP cycle will be in 2013 or 2014 at the latest.
When that happens SS will be a hot potato and looked at in a much different manner than today.
What will happen when interest rates rise? THAT is the real question. Any other problem - massive deficits, unfunded liabilities, pension funds going bankrupt, etc - can be finessed by Fed momentization. But the rise in interest rates is something different. The Fed can only monetize this by jumping on the Zimbabwe bandwagon.
I cannot see - even with massive collapse staring us in the face - politicians doing anything other than new taxes. I truly think they'd rather it all collapse than make the hard choice to live within our means.
It will probably be like Argentina. They will grab 401-Ks first. Expect a false flag or big market crash.
Has the Bank of Japan been "forced" to end ZIRP?
Didn't think so.
It is all normal until it is not.
"Within five years..."
Really?