This page has been archived and commenting is disabled.
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.
»
- advertisements -
Good point. One of the least covered (by the media, bloggers, commentators) impacts of ZIRP has been the screwing of savers by imposing artificially low interest rates for 'an extended period.' It's been yet another way to benefit banks and governments on the backs of everyday people. It's especially visible for retirees who actually have a couple hundred thousand dollars saved (there actually are quite a few of these people) and who had planned to get an income from interest on relatively safe instruments like CDs. These people are fucked -- they either have to go way up the risk scale to get, say, four or five percent or they have to spend their principal. Neither of these 'solutions' is going to end well for them.
I'm fighting the ZIRP right now with the family trust. We've taken 40% of it out of country, but even there we aren't doing a whole lot better than 5%. Now subtract out a global inflation rate of 3% plus and then a tax rate of at least 15% and now our portfolio isn't doing anything but breaking even, even though we are diversified and relatively sophisticated. What the hell is Joe Plumber going to do with maybe a 100 grand invested while he watches it rot on the vine? There is no way this doesn't eventually become a civil war. http://www.futurnamics.com/civilwar.php Because of Twist, this ZIRP situation is likely to last indefinitely, absolutely killing savers. You are almost better off just spending the entire wad on groceries, land and ammo, because otherwise it will just be pissed away by the Bernank. Oh yeah, some gold too while they let you buy that.
We are Going Galt as fast as we can. http://www.futurnamics.com/goinggalt.php
Yes! Go Galt!
I am planning to go Galt too eventually.
Through various trusts and astute financial planning I will qualify for the new means-tested social security and medicare in 2027.
It is unfair that we incentivize poverty by giving the poor benefits that the hard working, thrifty, productive types dont get.
All of us should engage in the appropriate financial planning so that we can appear poor too.
These something for nothing types are going to get a big shit sandwich when the productive decide it is time to become idle. We wont be forever played for chumps. Incentivize poverty and you will get more of it.
There should be no government benefits, or there should be benefits for everyone regardless of income.
Otherwise you are incentivizing peoole to be idle and stay poir.
ZIRP hurts pension funds, insurance companies and everyone else who wants interest income. There is a double whammy for people who have to buy insurance, since rates have to go up to offset reduced income. It is inconceivable that Ben, Timmy and Barack don't realize the horrors that ZIRP will bring.
Joe the Plumber should, as suggested, become Joe the Farmer. He should dedicate part of his farm to a vineyard. Better to drink one's grapes than let them die on the vine. Alternatively, buy a boat and learn to fish and eat seaweed.
It's not ZIRP that's to blame (besides, can we really expect money to multiply itself? that's not being "productive," that's parasitic!). What should be blamed are our unreasonable expectations.
I got out of expecting any sort of "retirement" a LONG time ago. My previous dentist was still practicing in to his 80s. I, as Joe the Farmer, hope to continue to "farm" (mostly livestock) until I fall into the earth.
When you set your expectation at unreasonable levels the only thing that you can realistically expect is the "unreasonable." And this is exactly what I hear everyone crying over- everything becoming "unreasonable."
ZIRP is happening because there's no longer a way to create real growth: I suspect that it's really been that way for quite some time now (at least going as far back as 1971 when US oil production peaked and the USD came totally unhinged from earthly things).
Pension growth etc. is going against thousands of years of history. It's only a recent phenomenon, one that was only possible by a massive increase in work via fossil fuels. Compared to how the majority live today, and how people have historically lived, we're kings, up until now that is.
+55
Ben is forcing them into more risky assets, and those assets are risky for a reason, eventually they will get crushed.
Sstf is not a bank so Ben don't care...
True dat, sstf won't be offering Ben a 7 or 8 figure salary when he leaves the FED.
Bruce,
You don't mention the FICA tax cut set to expire at the end of 2011.
Are you assuming that does or does not get extended?
The FICA tax cuts have nothing to do with the actual results at SS. I have been monitoring this. Every month Treasury transfers to SS an amount of money (about $8b) to cover the shortfall due to the FICA tax cut. So there is no consequence to SS now or in the future.
As to your question, I think that the 2% cut for workers will be extended for another year. BUT, I don't think Obama's plan to increase it to 3% and to include employees is going to fly. That conclusion, is in part, why I think that SS will under perform in in 2012.
Excellent article (again), Bruce. Just want to add that the FICA tax cut does effect SS politically. There's a reason FDR established a separate fund...he knew funding would be screwed with (read "cut") if left as part of general gov't revenue. Guess what this tax cut does? Long-term, SS funds slowly become part of the general fund and Congress can decide repayment to SS can't be done or can only partially be done. Then privatization is offered up as the solution to a badly underfunded SS program. Or something like that.
I agree with you comment that the FICA cut will undermine SS. At some point the rates have to go back up to the 6%. When that happens 160mm workers will hate it.
SS taxes put a big dent in worker's take home. Everyone would get a 12% raise. That would make a difference.
Many comments here about Cain's 999 plan. I'm not sure it works. I have not seen the numbers. But if it did, and as a result FICA was eliminated it would be the best thing that could be done for the economy.
It would be the same as a $700b stimulus every year. But there would be no increase in debt. It would have no current cost at all.
Except for the problem that it's unconstitutional. The constitution provides only for direct or apportioned taxes, and a national sales tax is neither.
Excellent work as usual Bruce.It is truly amazing to watch as the Bernank destroys everything....
A spectacle of financial devastation with a concomitant enormous human cost...thanks a lot Ben.
can you doubt the efficiency of the gargantuan machine...as it runs socialzed debts to magnitudes unforseen, all the while allowing cronies to privatize profits to the last drop?
...yah, these kleptocrats are a bunch of fukkin mad scientists...so clever they keep mixing one potion with another until KABOOM.
Sadly, it's the ONLY thing they know, that thing that's been passed down from generation to generation of TPTB- growth keeps them elevated, creates a buffer that is the middle class from the lower class's "got nothing to lose" threats.
The game was set a LONG time ago. Some may get it that it has nowhere to go but KABOOM, some may not. Doesn't matter, it's wired in... let's just hope that we're able to thwart any Dr. Stragelove types from getting their hands on the real KABOOMs: nukes; John McCain could easily have been such a person; unless we disarm/disable now it's pretty much guaranteed (the religious end-of-dayers would have it no other way).