This page has been archived and commenting is disabled.
Social Security - January 2012 and Beyond
The January 2012 numbers for Social Security (SS) show a mixed picture. The results mirror what is going on in the economy. There is clear evidence that revenues at SS are recovering; there is equally clear evidence that America’s social expenditures are rising at a rate that exceeds the rate of recovery.
The following numbers are adjusted for any consequences of the 2% payroll tax deduction for 2011 and 2012. As a reminder, the Treasury pays into to SS every month an amount equal to the 2% shortfall. The country ends up more indebted, but there is no net consequence to SS. Some YoY comparative data on the key numbers:
Clearly, the problem is that benefit payments are increasing more rapidly than revenues. There are two contributing forces pushing up costs, (1) 10,000 additional people sign up for benefits every day of the week and (2) inflation (COLA) is rising. The January 2012 YoY increase in benefit payments was $4.1B. Of that amount, approximately $2.1B is attributable to inflation; the balance of $2B is due to more folks getting checks.
We crossed a big corner at SS in 2010 when the first annual cash flow deficit was reported. SS will never again see a cash surplus. The only question is how rapidly the deficits will rise. It’s a bit early in the year for me to provide a credible 2012 forecast for SS. My read of the January numbers confirms my suspicions. The improvement in the economy will be trumped by increasing benefit costs. Net-net, a modest deterioration in the cash position is my base case. I think SS will produce a $56B cash shortfall in 2012 (2010 = -49B, 2011 – 47B). The changes in the net cash position at SS over the past seven years show the extent of the deterioration:
The expense side of the SS equation can’t be altered. The only variables that make a difference are interest rates and the economy (jobs).
The interest rate side of the equation is easy to contemplate. SS’s income from interest is going to decline in 2012 and beyond. Ben Bernanke’s ZIRP, QE and Twist have seen to that. Ben has made it clear that interest rates will remain at historical lows for well into the future. SS is America’s biggest saver ($2.6 Trillion), it will therefore pay a price as the low interest rate environment is endlessly extended.
In June of this year, SS will re-invest its maturing bonds (and any cash it has) in a new strip of securities that have maturities from 1 to 15 years. The interest rate for these Special Issue Treasury Securities is set by a (stupid) 60-year old formula. This year, the formula will produce a yield for the new investments that is the lowest in history. Take a look at the historical interest rates that SS has received on its surplus:
The following shows the maturities and the interest rates on SS's holdings of Treasury securities. Note that in the next few years, all of the high coupon bonds will be rolling off. The old bonds will be replaced with much lower yielding assets.
This is the expectation for interest income at SS based on its 2011 report to Congress:
Here is the forecast on interest rates on which the above interest income forecasts were made.
This simply does not add up. SS will have to significantly revise downward its projections for interest incomes (there is no way the Fed is going to back off ZIRP anytime soon).
The economy is much harder to ponder. As of today, there is a case than can be made for continued job growth. But for how long? America has a bad habit of slipping into a recession every four years or so. The last one was in 2008, so we’re due. I think that the US will muddle through the first part of 2012 with continued modest job growth. However, a slowdown looks to be in the cards by the end of the year. As of today, there are a dozen economic headwinds that will kick in as of 1/1/13 - all of the Bush tax cuts, the SS payroll reduction and a substantial cutback in government spending (the sequestered amounts).
If we experience a recession in 2013, and the Fed maintains its low interest rate policies, it will be a very bad year for SS. The cash deficit would explode under these conditions. It could easily exceed $100b. The wheels will come off of SS’s cart. As we are seeing now, it is extremely difficult for SS to bounce back in good times. it will be impossible if we hit another economic slow patch.
This is precisely the scenario I’m anticipating for 2013. It will be a decisive year. If we end up going down an economic road as I have described, then SS will fall into full deficit (operating cash deficit + interest income). That would happen circa 2015. The Social Security Trust Fund is forecasting this event but it believes it will happen in 2021. When people realize that the Trust Fund has topped out, and the implications are understood, significant changes at SS will follow.
I point readers to a raging debate going on in Japan. To cover the growing deficits at Japan’s equivalent of SS, consumption taxes are being increased from 5% to 10% on everything purchased in the country. This massive tax increase is far too low to cover the problem. To bring balance to the system, VAT taxes have to rise to 17%.
Japan is in a different situation than the US. Its population is even older (and aging more rapidly) than ours. As in many other examples, the US is about ten-years behind Japan. But we are catching up quickly. In just a few years, America will have a similar raging debate on SS. We too will be faced with a dilemma. Either taxes have to raised, or benefits have to come down. The alternative is that the US follows Japan into the land of 200% debt-to-GDP. Unlike Japan, The US can’t survive at that rate. We will blow up before we get to 200%.
We won't see any reforms in America’s entitlement programs in 2012. The election will see to that. The immediate priorities of 2013 will not include SS. The other problems facing the economy will be more pressing. But by 2014, the jig will be up. By then, there will have been so much damage to SS that a very significant set of changes will be required to minimize what will then be seen as a systemic risk.
Note: I get the occasional beef about using graffiti in my articles. "Phooey" is what I say to that. This one by Banksy is perfect for this piece. No?
.
»
- advertisements -
"As long as interest rates stay low and inflation is under control, there is little reason to think the US can't handle 200+% debt to GDP. I'm not smart enough to know but it seems to me the problem only develops when inflation picks up."
LOL! I guess you haven't gone shopping lately or own a car. Food prices are going up about 11% a year, and Gasoline is at ~ $3.50 a gallon.
The US debt to GDP is already close 200% if you substract Public sector expendures (Federal Govt + State Govt) and trade deficits. Real US GDP is about $8.8 Trillion.
Ah.....I think Italy and Spain may have found their bond-buyers!
i dont want to hear that COLA is to blame , they screwed COLA the past 2 years which saved them Billions !
This is all good news, anticipated and will be used to "means test" future ss benefit payments. This is just another tool to redistribute wealth. Obama knows deficits work to his advantage. Something has to be done. Ok, put a tax on all retirement accounts and "means test" medicare and ss. Its really very easy to balance the budget.
Yeah, that's good all right, if you have the means to pay in, you'll be the first to be cut out.
Somehow I don't see this working out to well. (not that any Ponzi can)
Good analogy
Means testing is on it's way. Australia brought it in years ago - despite how much you paid in over the years if you were too sucessful you are now unable to claim. If you made over $60,000 year you became ineligable to claim for unemployment benifets despite paying into it all your life. They then for good measure they introduced a medicare levy on top of your tax rate.
The onus now reverts back to the individual to plan for his welfare (health, retirement, unemployments etc...) something I'm sure many of us here agree with. The unfortunate part is that you are still forced to fund the state for that privilage.
SS, pensions and the like are "all-in" on the ponzi market out of desperate need for yield. Essentially, they are temporary cover for shadow banking system. Hence, the funds are "dead money walking." When the point of diminishing returns is reached - or some sort of trigger is initiated - these funds will be vaporized. All other analysis is simply akin to guessing exactly where and how cracks form and propogate in the hull of the Titanic prior to it violently snapping in half.
Exactly, Argentina.
The harsh reality of the SS Ponzi was that when it went into law, the average American did not live long enough to collect. Now the average life expectancy is around 78. Can you imagine the outcry if the retirement age was raised to 80?
They have a plan to deal with that life expectancy thingy. Unless you're very wealthy and have the proper political connections, you may need to die younger.
Another great post on subject of crucial importance. Thank you, BK.
Agree. Nobody depresses me more about the SSTF fiasco than Bruce.
I aim to please....
The interest the SS trust fund earns is paid in additional debt, not cash.
The entire trust fund (principal and interest) is unfunded debt.
That is why the shortfalls of cash income versus cash outgo must be paid with general revenues when the trust fund is tapped - AS IF THE TRUST FUND DID NOT EXIST!
It is the same way we pay all pay-as-you-go expenses, with or without a trust fund.
Don Levit
This...
"The interest the SS trust fund earns is paid in additional debt, not cash."
is spot on. Confirmed by Geithner in August.
As an aside...
"But they are guilty of more than deceit. When they imply that the reserves thus created against both these policies will be stolen by some future Congress, diverted to some wholly foreign purpose, they attack the integrity and honor of American Government itself. Those who suggest that, are already aliens to the spirit of American democracy. Let them emigrate and try their lot under some foreign flag in which they have more confidence.
The fraudulent nature of this attempt is well shown by the record of votes on the passage of the Social Security Act."
http://millercenter.org/president/speeches/detail/3307
Well, the case is now closed.
Despite the appeal to nationalism, the reserves were stolen afterall, by the very ones who the "deceivers" said they would be stolen by.
The government.
perfect post...
only to add that interest on SS principal is ponzi w/in ponzi, cause
USA federal budget counts SS interest as general revenue thus federal budget deficit is less..
alx
Correct Don. I try to look at SS on a cash basis. I think that is the only way to look at this now.
This is central to the SS debate. Those who love SS look at all that paper and say,"No problem here, we're rich!". You and I look at the same paper and say, "We're broke"
Yet we have untold trillions to give to our war machine, to the police state apparatus, and to the bankers. The SS system is broke yes, but it is broke by design. We've all been had. Of course the sheep will no doubt accept that they and their pitiful SS check have been the problem all along and they just need to switch to cheaper cat food.
Don,
+55. I wrote my post just above before I saw yours. Great minds think alike!
SS can just cash in those IOU's Congress put in when they raped the trust fund. If The Fed can print money for everything else they can print money to keep SS going. Screw a bunch of numbers.
Greenscam said it best: "We can guarantee your Social Security payment, but we can't guarantee what it will be worth".
As for the interest income, merely an accounting gimmick. Fed.gov has to make up the difference between payments and receipts by borrowing, the interest income is meaningless. It can accumulate at 1% or 100%, it affects nothing.
I intereset rate were changed, and one day to the other SS got new bonds paying 10% it would mean an additional ON BUDGET INTEREST EXPENSE of $250B every year.
It would bust the budget. The deficit would balloon. The interest the country pays to SS is a very significant #.
They could pay for the $250B by cutting military expenditures. Or they could just print some more USDs.
They are printing, inflation.
Inflation hits the retired SS recipients harder than any other group, since they're the ones on fixed incomes with below market, negative real interest rate savings. Therefor the ones receiving the SS benefits are the ones paying for the deficits that are being made up by printing more money. There are, naturally, administrative expenses taken from this money circle, so they don't get as much in benefits as they lose in purchasing power.
Yep. In Germany, 1920s, the retires got their checks, and stared to death.
At least the Germans could burn their currency to help stay warm. Americans' money is only digital now -- not many BTUs in that.
Again, Bruce, merely accounting. The Fed.gov only pays the difference between collections and payments, what the debt owed to SS is means nothing. It could be a quadrillion dollars, they still only need to borrow and pay the amount to make up the difference..
You know, a lot of smart folks said the same thing about Japan....well before it reached 200%. And a lot of smart folks said the same thing about the US...well before it reached 100%.
Now that both of these lines have been crossed---without a blow up (and with near record low yields on UST's and JGB's)---please lay out your argument as to why US gov. debt to GDP can't keep climbing, well above, 100% without a blow-up.
(Note that there's no argument that EVENTUALLY a limit will be breached, but rather that most experts have been very wrong about what that limit actually is).
We will see this year that the 200% of japan becomes a problem. Yes, they have gotten away with it so far, but not for much longer.
I do not think the US could function properly with 200%.
Sadly, we are going to find out the answer to that question in the next five years or so. We are headed to 200%. I say we never make it. Something will snap before we get there.
I concur. Homogeneous, ageing, island nations tend to do that over time.
Thanks, but I'm still hearing "gut feel" on this call.
If Ben can shove rates even lower, then 200% in the US could be reached. Although I was successful calling and betting on a ramp down in the US 10-year from ~3.5 to about ~2.5 (yet missing the entire move down to 1.8), I wouldn't make the call/bet against yields dropping a lot more. At this point, I'm simply blown away at what can be 'achieved' in the Treasury market.
So a 1.0 yield (Japan levels) on the US 10-year is how I see the possiblity of 200% in the US. And at our current (annual defict) rate (~$1.5 trillion per year) it wouldn't take very long.
Bottom line, is that NOBODY saw 2% yields being even remotely possible, as little as a year ago. Now that we've reached---and held---these levels, what's to prevent Ben & Co. from engineering a further move down another 80-90bps?
Yep absolutely on 'gut feeling'. I was trying to run various scenarios in my head/on paper to see what it might take and came to the conclusion that as rates approach 'zero' the amount of debt can in theory grow astronomically. The upshot I came to is that the current financial crisis is not just related to the amount of 'debt' but in reality the shortage of 'cash' to service that debt. This is why rates had to come down, because if one is having problems servicing the current debt payments and are creating new debt (even at lower but not quite zero rates) one is net adding to the amount of cash required to service the 'total debt'. Only when one rolls the debt (i.e. paying off debt at a higher interest rate with a lower rate) does one actually relieve the debt servicing cash crunch. As far as I can see the overall debt load by the miracle of compounding interest and unabated spending is growing exponentially. Nothing is being written down!
How low can the interest rate limbo go? How many crappy bonds, MBSs, etc. can the FED and other agencies put on their balance sheets expecially when they become 'non-performing'.
One conclusion I came to is that near zero rates of return will effectively lock cash? Why? Why in the heck would I keep cash in a place where those assets could dissappear or be frozen if I'm getting 'zero return'? Normally this would force people into 'risky assets' like stocks but given the bubble nature of just about everything now - why would anyone buy anything other than an asset that in the long run creates local production streams of useful things (water, food, heat, electricity, security)? Also I find it interesting that rates are low - but no discussion about how these low rates arn't available to most people.
If I honestly think hyperinflation was the game of the day I'd borrow my brains out since I could pay back $1M in 10 years with dollars worth 1/2, 1/4, 1/10th as much. Buy some PM's or other hard assets and get rich since hyperinflation seems to be the game Ben-wanky thinks will work. Deflation only rewards the prudent, Inflation rewards the foolish, risk takers. It seems like the big boys would rather have a world full of foolish debt laden risk taking borrowing day traders than prudent, cautious debt free saving long term investors.
What will be telling here is what rates do. If they continue to drop then debt will be piled to the celings. If there is any spike in rates then this is when the fire gets lit under everyone since I don't think spikes in rates will be easily controlled. Right now I read on ZH an estimate that all combined the three biggest economies and the bankers popped for roughly 25% of the combined GDP of their nations. I don't see that trend can continue for very long at that rate especially when the govts are adding like 5-6% GDP of debt every year. But hey as long as everyone that counts is in on the PONZI scheme then there is no reason every year we can't party like it's 1999. It will take an outside event to throw our civilization into chaos. Our only problem here - none of us are in on the PONZI so all we can do is whine about it to the others in the same situation.
For the web data trollers. Don't worry! Everything is great, there is nothing wrong with this economy, buy stocks. Worship Ben and above all don't forget to feed your local politicians, they are people too!
l8r,
OldE_Ant
Boston what will happen is when bond investors realize that the US cannot repay the $15 trillion, $17 trillion, and China cannot afford to send their products over here so they can purchase our paper it will be game over.
Japan got away with 200% because they were a net exporter. The US exports paper. When the paper is no longer in demand its over for us, and SS.
When will that confidence be lost? That is the million dollar question, at the latest 2018.
That is very interesting what the low rates did to SS. I had not considered that. It is just more proof that all interventions have blowback which completely undoes any benefit.
Monetary sleights of hand are by definition zero-sum.
good analysis.. only
SS figures for January are only estimates... lets wait for couple months
to see real money..
alx
I look at the numbers monthly. I follow the subsequent revisions. On balance, the revisions are small. I think the numbers SS has out for January will prove correct +/- 1%.
You say the expenses won't change. I can only remember one of the scores of articles I've read on this subject. It argued that just like everything else, those who can most afford to pay will pay and may not receive any benefits, and lower income folks will still receive all their benefits.
Cutting the payroll tax is a first step to bringing it on budget, admitting to higher earners that they were lied to about benefits, and allowing younger earners to opt out. This insidious system is the tool of the warfare state. Grandkids are sent to die in dubious wars because grandpa is dependent on the state and keeps electing statists from both parties.
The phenomenon of SS paying out more than it collects has been expected for a generation. It was designed that way. OK, the actual date arrived a couple years early. Bruce if you want to blog about expected SS "shortfalls" every month, knock yourself out. Maybe you've got nothing better to do with your life.
See ya' later Post Office!
VAT (value added consumption tax) is the big issue in french elections as well, along with taxing the super or even mildly super rich! they call it social tax spread around on all consumers, irrespective of earnings tranche, and further on big economic hitters. What is not know is the projected hike in VAT and personal upper incomes/big corporate profits. It looks like VAT will go, on most products, from 19.6 % to 24% approx. The french tax will reach nearly 25% on all consumption. When you consider that Oil at pump is taxed at around 66% for the french car/truck users...you get the picture thats coming up. Goodbye GDP growth fueled by private consumption!
PS : I love your graffiti, BK.
Actually, VAT is not, srictly a consumption tax (Like Sales Tax) but a tax on value added. It is an input/output system whereby inputs get offset against outputs with the net balance as payable tax. Unfortunately for the consumer, she has no offsets and so is liable for the full amount, whereas, for instance, a retailer will offset the amount collected against the amount paid to suppliers, thereby paying tax only on the value added.
Tks. I think graffiti is fascinating. Banksy is, in my opinion, a real artist.
No, his work is not pretty, but the messages are often striking.
A sad but glad, iconic, irrepressible urge to splurge, touch of popular culture, it blends well with the world of money, money; where a tulip is not a flower but an object of obscure, irrational exuberance, speculative madness, symptom of why poetry and graffiti have their place in this world; point and counter point. You do your job so well its a pleasure to see somebody lucid and grooved into reality. Santé! Skol, or whatever you feel make cheers into bubbly expression of the urge to express freedom of speech.
I love the graffiti!
The articles are okay, too...
;o)
It's always good to point out how broke the US is because we're surely broke. The US is staying solvent by sucking the value out of the dollar. The unfunded liabilities of the US exceed $100T and the revenues are about $2.2T, which means that the US has already promised to pay out 50 years of revenues. Like I said, broke.
Many believe that the US should provide a safety net for the poor. I argue that charity is no place for government. A politician taking money from one person by force and giving it to someone else is not charity and it certainly doesn't mean that the politician "cares" by giving away other people's money. If people want to give charity, then they should give charity.
Besides, getting people hooked on government social programs will be terrible for when the printing presses are rendered worthless. Put another way, when the government can no longer steal through the inflation and the true cost is shown, there will be no "safety net."
TheSilverJournal.com
What's extremely important in your argument is to properly identify "the poor," because in twenty-first century America "the poor" are not people who don't have much, they're people who've borrowed mind-boggling amounts of money, proved beyond any shadow of a doubt that they have no idea how to do anything and have no means (or intentions) of paying it back.
They don't live in ghettos, they live in luxury apartments and summer in the Hamptons. They're people like Rob Rubin, who pocketed $100m or so, while causing the $250B (and counting) trainwreck known as Citigroup.
We lay out safety nets for pricks like him at the expense of people who fully paid into a system that has been destroyed by Wall Street, the Fed and Congress. Now we want to turn around and treat these people like charity cases? While the Fed prints money to save failed businesses and infinitely finance a Congress that refuses to even pass a budget (at ultra-low rates)?
Or what about the morons that bought McMansions they couldn't afford are under water and screaming for more government-backed low-interest loans to bail they're stupid asses out and prop up the "value" of their "investment"?
Do you consider them rich or poor? And how much bigger should their safety net be?
If charity has no place in government, then let's yank the plug on Government-backed mortgages and student loans and only let the the government borrow money at rates a honest, free market would determine. That sounds fair to me. Of course those dynamics change who's standing in the soup line pretty quick.
"Entitlement reform" is a polite way of saying it's more important to kiss the boo-boos of people like Rob Rubin, Jamie Dimon, Jeff Immelt....(I could do this all day) than to honor obligations you have to people who lent the US government money for 40+ years.
When we pay our useless "civil servants" 150% what they're worth in real life, isn't that charity?
I agree that "getting people hooked" on government programs is terrible for the country. The problem as I see it is nobody understands who the real dope fiends are.
The vast majority of social programs are not "charity," but rather part of building a society. We have public schools that allow those of modest means to become literate and capable of entering the middle classes and up. Those people buy goods and services and start businesses. We have public roads and bridges that we all use. We have public parks that benefit the large majority of us and that the majority of us want to have and that we all pay for. Social security and medicare are programs to which we all contribute, and from which we all draw if we live long enough (and if TPTB don't give it all to the bankers first). It is the fabric of our society that permits a middle class that made the West what it is. Before these programs that you describe as "charity," we had feudalism, kingdoms, tribal leaders, etc. The strongest and generally the most evil of men ruled everyone else by force. Regardless of the fairy tales told in Ayn Rand books, that is the system to which we will return if you folks have your way. And the vast majority of Rand's cheerleaders will -- ironically -- end up in the serf class, even if they are too arrogant and self-centered to consider the possiblity. As for true charity such as welfare, I would rather that people not be starving on the streets in my town. Some of the members of our society are too selfish to care about such things, but you can always move to Somalia if you don't like it here.
From all your writing I can only read "the government knows best what I and everyone else need".
And also you encourage the "not my problem" mentality, by not given the slightest mention about who is going to pay how for all that.