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Social Security to Bernanke – “You’re Killing Us!”
Bernanke has said dozens of times that he wants to boost inflation in his effort to lift stocks. He’s succeeded in pushing up the cost of things over the past year. Everyone is paying a price. Social Security is no exception. As it turns out, Ben’s policies have been hitting SS in a number of negative ways. Ben is driving up the costs over at SS and at the same time he is killing their interest income.
We get inflation numbers for September next week. This is an important data point for some 55 million recipients of Social Security checks. On the assumption that there is no (little) change in the MoM numbers the CPI-W will come in at 223.4. This number is used to calculate the average for the fiscal 4th quarter. The result is then compared to the 2008 fiscal 4th Q. My numbers:
CPI-W 4th Q 2008 = 215.495
CPI-W 4th Q 2011 = 223.110
COLA increase for 2012 = ~3.5%
This is not good news at all for the folks at SSA. The COLA increase will add $25+ billion onto the existing expense base for 2012. On top of that there will be the increase in the total number who receive monthly checks (SS is getting 10,000 new beneficiaries every day). In 2011 the new (minus dead) beneficiaries added $25b to the cost of running the program.
The question to ask is, “What does this do for SS?” The answer is, "Nothing good".
To make an assessment of what 2012 will look like it is necessary to make some assumptions on what will happen in the real economy, and most importantly, what will happen to total employment.
My base case for 2012 is a repeat of 2011. No recession, but anemic growth. Total payrolls will rise (in part due to an increasing population). The number of new jobs will average 100k a month. As a result SS payroll tax income will rise by $24 billion (same as 2010-2011). Note: My Base Case is actually fairly optimistic. We could easily have negative growth (and zero job growth) for a quarter or two next year.
My numbers for the 2012 cash components at SS:
Benefits: $769
R.R Interchange: $5b
Overhead: $7b
Total Out: $781
FICA: $685b
Tax on benefits: $24b
Total In: $709
Net negative cash flow: $72 billion
There is a non-cash component to SS income. They get interest (paid in paper) on their holdings of Special Issue bonds. The SS Trust Fund owns $2.6 Trillion of this script. The % that the TF earns on this hoard is substantially above the current market rates. But there are troubling signs on the interest income line as well.
My number for % at SS in 2012 is still a whopping $112b. But this number is now headed south. (See notes below)
With the % income, the net change at SS will be a 2012 surplus of a lousy +$40b. This is a very important number. It’s dangerously close to zero. I can’t predict what will happen beyond 2012. What will happen with payrolls, the economy, inflation and interest rates is by no means clear. One very possible outcome is that 2013 and 2014 will bring (more or less) what we have in 2011/12. AKA Stagflation.
Ladies and Gentleman that would be an unmitigated disaster. Should we have more years of stagflation, the net surpluses (includes % income) at SS would fall to zero in 2014 and be negative in 2015. Once that line is crossed, it rapidly collapses. It's nearly impossible to reverse.
The current Base Case assumption by SSA is for the TF to “top out” in 2025. The forecast is that the TF balance will continue to grow for another 12-14 years. The SSTF projection is that the Fund will exceed $4 Trillion before it begins to decline.
Should the economy continue as it is, we reach the “top out” in 2015. The TF balance will never exceed $3 trillion. In other words, a critical milestone for SS will come ten years early, and leave the TF short more than $1 trillion. The broad implications of this are hard to fathom. A major restructuring of SS would be required.
Notes:
(#1)
To my knowledge, I’m the only one talking about this kind of outcome. So I expect to get flack from the usual suspects that my numbers are not reliable. To that I would respond that my numbers are consistent with the SSTF’s own numbers.
What I think is coming is worst-case outcome (stagflation), but one close to the parameters of what SS considers reasonable. These are the numbers for the key variables from SSA and the ones that I use:
Benefits
2011 SSTF annual report, High Cost scenario for 2012 Benefits = $769
Krasting Estimate: $769
Variance: $0
FICA Receipts
2011 SSTF annual report, High Cost scenario for 2012 FICA = $711b
Krasting Estimate: $685
Variance - $26B (-3.5%)
My outlook is worse than the SSTF High Cost estimate for revenues. I maintain that this is justified as SSTF has built in a much stronger economic recovery into their model than than I (and Bernanke) consider likely.
(#2)
ZIRP, QE the Twist (and other actions) will be with us for years to come. SS (like every other investor) will have to suffer with low yields on investments as a result. Over the next five-years a substantial portion of SS’s high yielding portfolio will run off. It will be reinvested at sub 2% returns. This is my argument for a rapidly declining net % number at SS. A look at the portfolio and what is maturing:
(#3)
For 2012 SS will run a cash deficit in 9 out of 12 months. SS will have to fund these cash shortfalls by selling a portion of the TF notes. Think of this as having money in a bank CD, but being forced to borrow from a CC to cover a monthly nut (a reverse Repo).
As a result, net interest income gets hit.
Yields on the TF securities are set by a formula that has benefited SS for many years. We have been in a 20-year cyclical decline in interest rates. The SS formula takes an average of prior years long-term fixed rates (it excludes short-term rates in the calculation). As a result, the interest income at SS has been “smoothed” and artificially maintained at higher % rates. That said, time and the formula are catching up with the Fund.
In 2007 the SSTF invested 15-year money at 5.0%. For 2009 it was 3.5%. In 2011 they only got 2.5%, half of what it was just 4 years ago.
There is a part to this that gives me a chuckle. In month where there is a shortfall the Fund must sell bonds. The discount rate used for these routine transactions is also set by the formula. As the formula excludes short-term rates the Repo rate is set at an artificially inflated level. In August the TF had a deficit of $8.4B. They reverse Repo’ed that at a cost of 2.25% for 4 months ($55mm in interest expense for just the August shortfall). This will add up and get bigger.
I love it. Every dirt bag bank in the country is borrowing money from the Fed at ¼%. At the same time the largest holder of USA government securities in the world is borrowing short-term at 8Xs that.
The Fed’s policies are hitting the Social Security Trust Fund two ways. Inflation costs are high and interest income is falling. At the same time, SS can’t finance its inter-month shortfalls at today’s zero interest rates. Three ways a loser.
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+55
The intergenerational Ponzi will crash and burn when the Treasury fails.
This is the worst of all worlds for all. Zimbabwe Ben's inflation is causing SS outlays to rise BUT the CPI is continuously manipulated to underrepresent true cost of living, thus people are getting net reduction in benefits even while the fiat dollar amount rises.
The reason for all the monetary and trade games that are destroying (or have destroyed) the US and other countries is to overturn society into some image the oligarchs want to see happen.
"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency." -Lenin
They want anarcho capitalism, just as soon as they own everything.
Like folks even know what "anacho capitalism" means.
For fucks sake, people, THEY ALREADY OWN EVERYTHING, WHY WOULD THEY WANT TO CHANGE THINGS?
THE "problem" is is that they cannot hold on to what they have because that requires GROWTH, and growth is no longer possible, doesn't matter what change is or isn't made (unless the change is based on zero-growth).
The only reason they can't hold on to what they have is because of upkeep costs, majorly taxes ... once you remove taxation from the picture merely owning enough natural monopolies (the obvious one being land of course) is self sustaining wealth.
You get rent, you pay no taxes .. win win, that's the essence of feudalism (which is an edge case of anarcho capitalism).
Social Security is really a spending program with earmarked tax receipts (in essense). The deficit is caused by tax receipts falling below expenses which will add to the federal deficit. The government paying interest (to itself) is kind of funny--doesn't really help the overall deficit situation.
We need to terminate this program and pay everyone 50 and older (lump sum deposit into SS trust); and let everyone 49 and younger have their FICA/Medicare taxes Mandatorily deposited into an IRA type account and let everyone fend for themselves. The government doesn’t need to hold people’s hands any more than that. A better solution would be to end Social Security and Medicare for everyone 49 and younger, stop withholding FICA/Medicare, annuitize with a lump sum deposit the amount required to pay everyone 50 and older for the rest of their lives through Social Security/Medicare and be done with the whole program as its currently constructed (Ponzi like scheme).
Do you work on Wall St.?
After all, the borkerages have been salivating over the SSTF for decades. The 401K scenario is becoming more a disaster by the day.
It's just a matter of time before government steals our 401(k) money anyway. See Argentina.
We need to terminate this program and pay everyone 50 and older (lump sum deposit into SS trust); and let everyone 49 and younger have their FICA/Medicare taxes Mandatorily deposited into an IRA type account and let everyone fend for themselves.
I agree 100%................
They would never do it, because they will not kite the checks to Americans who paid in the funds.
Send me a check for what you took,and cash my ass out.
But the SOB's will GIVE AWAY billions, upon billions, (likely well over trillions) by now to foreigners,over seas soverigns, and overseas banks.
Plus, your screwed either way......................NO WIN situation.
I STRONGLY suggest folks w/ several hundreds of thousands in IRA's,401k's, that are close to retiring, or are retired,to move the funds out of US banks,and anyhwere they cannot be tracked.(because the NEXT step will be(it;s the Commie/Progressive way), is to DENY benefits to those SAVERS.
If your a welfare Ho, and a fourth Gen one, you get the Prudent, and Savers funds AGAIN for free.
I SEE NO WAY OUT OF this when it collapses, except a Civil War, that will make the last one look tame.
The US standard of living has been massively subsidized by foreigners since the 70s, that is the truth of the status quo ... the paper money being giving away to foreigners to maintain the status quo isn't even putting a dent in the current trade deficit. You get cheap oil and products, everyone else gets paper ... money well spent in a way.
Rich and poor alike in the US are wellfare hoes in a way because of 4 decades of trade deficits ... nothing has changed since Nixon, we are just closer to the edge.
What little bit of IRA I have I plan on cashing out when my income drops and I take less of a hit. But... I treat it like other speculative investments, as pure speculation (though others I have are a much surer thing).
This is all going to be a bigger hit on the youth, as they'll not only be squeezed to pay more, but they'll also have more competition in the job market (from older folks who can no longer manage on their pensions).
Ah, the bummer about positive feedback loops! Failure to understand what accompanies "what goes up"...
If I get my ss distribution, I'm putting all into BAC. Cramer said It's the best! /sarcasm: off/
Pay with what funds? A big handful of IOU's? You really dont think that there is a liquid fund that could be used to simply write a shitload of checks?
There is no easy way out at this point. It is a ponzi scheme. As soon as the next level of suckers stops paying in, it collapses.
Yesterday is a memory. Tomorrow is a hope. The collapse is as inevitable as death. There is no escape and there is no way out. So I will continue as I have until I can’t. The sun is shining, the birds are singing, there is a fresh dew on the grass. Today is good. I will change the things I can change. Accept the things I can’t change and pray for the wisdom to know the difference. After all, on a long enough time line we are all dead.
'CPI-W 4th Q 2008 = 215.495'
Surely you meant '2010', not 2008, for the COLA calculation.
Thanks for an eye-opening analysis. While SSTF 'top out' in 2015 i/o 2025 means SS is in worse shape than most thought, I question whether it is of much practical significance.
Since the SSTF simply DISAPPEARS in consolidated accounting (given that SocSec is a 100% owned subsidiary of Usgov), the so-called Trust Fund is just an accounting mirage to start with.
All that really counts is SocSec cash flow. It's negative, and it's going to get more negative. Usgov will keep making up the deficit from general revenues until a Treasury auction fails. Then the Boomer bagholders can eat sh*t.
.
machine,
+55.
All that matters is cash flow, the rest is accounting bullshit. Bruce does not understand that yet and probably never will. I made some posts saying the same thing as you, after yours, only because I just saw yours now.
The way this works is that there is no COLA increase unless there is a YoY increase in CPI-W.
In 2009 there was no increase, no COLA. Again in 2010 there was no increase from the 08 benchmark. So no COLA. This year CPI-W will exceed the 08 level. So yes, that is the proper comparison.
But they told me Social Security was sound. Who am I to believe - an analyst who deals with factual assumptions and actual numbers or a politician who could give a shit. Decisions, decisions, decisions. Some days it seems it's just not worth gnawing through these leather straps to get up.
Did you mean to write 2010?
Should be scrip, not script.
Sorry for the quibbles -- this is an excellent analysis.
08 is the correct comparison. See answer to this above.
Scrip.... Thank you for that.
One could make a point that this is all play acting and kabuki so 'script' is an appropriate term.
the people on social security aren't rich bankers, so ben doesn't give a fuck
If SSA recipients were issued the benefits via an EBT card, just like unemployment rather than by direct deposit then the churn to JPM would be HUGE and Ben would care a whole lot more
Great analysis and presentation.....straight and to the point. Social Security will, based upon the most conservative approach, implode into flames as some point. The restructuring will start with an ever increasing benefit age, a reduced starting benefit and increased taxation of the benefit itself once received. The fairest adjustments to the system would be to start to implement a income based formula when you retire.... for example, Retiree X earns $100,000 through private pension might get $0 social security and Retiree Y is getting $0 from private source might get the full allotment.
@Bruce - Based upon your caculations and assuming a fixed rate of inflation compounding, when do you see SS running out of money? What do you think they, our supposed representatives, will do to try to extend the system over the next couple of election cycles? Thanks
They have already runout of money, the cash flow is negative, the shortfall must be made up from new debt. The 2036 date is bullshit accounting games with no real meaning.
The "running out" date is estimated by the SSTF to be 2036. To get to that SS has relied on some very rosy assumptions. One of which is that there will be no recessions for the next 25 years. Inflation will be tame, the economy strong and unemployment at 5%.
That's not what the future will bring. The answer to your question is beyond my scope. I can only look at SS and overlay realistic macro assumption out 2 years. After that it's a blur. As a guess I would say 2025.
We will never get there. Something will go bust and SS will get reconfigured. That should have happened two years ago. It's harder to change things now that the beast is wounded.
bk
It also depends on the political stomach of the CONgress (and the people) to pay on those 'special' SSTF bonds, no?
I mean they are usually assumed to be regular high grade debt instruments but, at the end of the day, it is just another un-funded entitlement... left pocket, right pocket.
Splitting hairs here Bruce because, as you said, the S hits the F in earnest within 2 years... that's when CONgress says, "Trust Fund? What Trust Fund?"
"The Obama administration said it is unable to go forward with a major program in the president's signature health care overhaul law — a new long-term care insurance plan."
problem solved! this was intentionally done to end payments to dead people!
Social Security will be safe as long as the Fed keeps secretly purchasing our Treasuries with printed money (an inflated balance sheet that is). This is the only thing that is keeping our country afloat. There will be a point in the near future, however, when they will decide to crash our bond market by pulling the plug on US Treasury purchases. Then, all entitlements will cease, and we will all be broke.
The banking system did it to our economy in 1929 and 2008, give everyone easy credit and then pulling the plug on it. The Federal Reserve can very easily do the same thing. Prop up the bond market and stock market, and then pulling the plug on it. When the plug is pulled, everything crashes.
Don't think it can't, or won't happen because it can, and possibly will happen. These people are not our friends.
Fed buying up treasuries is provably not the only thing keeping the US afloat, it's still getting product for nothing ... it's still in trade deficit.
ZIRP and "Print" button, are save the criminals and kill the country. Bernanke is doing an excellent job (for his masters).
Too many Riders, not enough Horses.
"Three ways a loser"
Democrats
Republicans
Federal Reserve
We should be so lucky as to only be three-way losers. I would continue the list, but whats the point.
Didn't Paul Simon write a long-ago pop song, 'Fifty Ways to Screw a Loser'?
I'd like whack that young whippersnapper Bernanke with my cane!
plus there has been a big uptick in SSDI over the past 5 years......the negative outflow only goes higher from here
This analysis clearly shows why rates cannot be supressed forever. The SSTF suffers the same fate as the individual investor who can't (or won't) participate in the equity or bond markets anymore. Our system is caught between a rock and a hard place. Nowhere to turn.......
Mr. Regression
Does "between a rock and a hard place" equate to SSTF meets SHTF? Maybe the president - whoever that is at the appropriate time - can declare it unconstitutional and say it will be discontinued. Didn't the current occupant of that office decide not to enforce certain laws on similar grounds?
As for me, I think I'll start collecting SS in 2012 and get as much back as I can. Meanwhile, I urge everyone working to earn more and pay more FICA so I won't have to worry so much while sitting on the beach.
The SS situation strikes me as being very similar to the pension system that "needs" 8% returns to actually pay out the promised benefits. Well, guess what? You aren't going to earn 8%/year when rates are at zero.
Ben Bernanke needs to be removed as soon as possible if this country is to have a legitimate future.
There IS no future (for the entire System, and I speak of all that we know to be represented by "economics"), as "returns" are based on growth. Are people getting it yet? NO GROWTH means NO INCREASE IN ANYTHING; and when the system demands growth, well... duh!
But, yes, your comparison is correct. Everything is in the same impossible boat. Blame, however, isn't going to fix a thing, nor is anything else, not in the sense that happy times can be magically restored.
Well said. It's exactly the same.
Pensions are contracts, the insurance companies are fucked ... government can unilaterally increase taxes AND reduce benefits without even breaking contract (which is why SS liabilities are not debt). They can always make ends meet if there is sufficient political will to do so.
Of course their will doesn't extend beyond maintaining the status quo as long as possible while TPTB buy up farm land, energy companies, more gold than any of us, and everything else of value before everything is allowed to collapse (everything except property rights, TPTB totally believe in anarcho capitalism ... just as soon as they own everything).
Sounds like sour grapes for YOU! Sounds like you don't think that YOU have enough. If you don't, then who's fault is that?
I am sick of people jumping on folks for making good decisions. While everyone was buzzing along in their SUVs, stuffing their McMansions with crap, buying iJunk, I was riding a bicycle to work, renting (after having sold my ONLY house when I realized the bubble [when people told me I was crazy]) and saving money. I am, and have been for quite a while now, aware of what the future holds, and instead of running around telling everyone what they should and shouldn't do I am trying to start up SMALL-scale farming in order that I can feed as many people as possible.
I and just about everyone else here is, by statistical comparison (2/3 of the world's population lives on $3/day or less), "wealthy."
The point/aim is to seek sustainability.
Judge not lest ye be judged. I judge the System(s), not people.
Sounds like ad hominem and misdirection to me.
What exactly does your diatribe have to do with the fact that implenting anarcho capitalism in a situation of vast wealth inequality will lock in that wealth inequality due to rent seeking and natural monopolies? Your children might be able to subsistence farm on your farm, but most people's children will be forced to be serfs for TPTB ... after all, there is only limited land and they will own most of it.
Ben has a solution. Soylent green.
I'm more afraid of the olive drab green solution.
I fear that you are correct. It's a race to control the masses while there is still some ability to control without overt force left. It's a race to kick the can far enough down the road to postpone the arrival of the black helicopters for another election cycle.
As each move grows larger, so too does the size of the next shoe to drop.
They really are at the end here.
Excellent work, as always, Bruce.
SS may be the Black Swan event that catches everyone off guard as we watch the Euro-Drama and play Musical Banks.
"It's a race to control the masses"
Huh? That's been a done deal for a LONG time! And, like it's some secret?
But, it's a fight for diminishing resources. Better to understand the inevitable (whether "They" force it or not it'll happen) and adjust willingly to a more sustainable way of living. And the sooner we do so the sooner we can preempt them coming up with some "solution" in which they pacify the masses (which will most likely include demonizing the likes of us): when people SEE examples of things working, rather than being told what works on paper, is when people will start adapting (and joining).
Do me a favor, 'huh?'. If you are going to quote me, quote the whole f'ing sentence -- not just the part that suits you. Are you a graduate from CNBS?
Here is the quote again for those (you) too lazy to read all the way to the (.)
"It's a race to control the masses while there is still some ability to control without overt force left."
No disrespect intended Seer -- you've had some great posts. This one, however, has been weighed, measured, and found wanting.
Last I checked, there is no overt force being used today in the good ol' US of A to control the masses. The usual control grid has held up for 100 years here in 'Merica. The post prior to mine resonates... how long until the MSM/Education/PAS grid breaks down and olive drab or goons in black riot gear appear? THAT has NOT been done EVER here in the U.S... Not yet.
Plus, there are many who supplement their SS on fixed income instruments, 401(K) etc. This year has not been a good one.