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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?
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Actually, no, but I understand that folks like you think in black and white terms and have trouble with nuance and complex ideas that conflict with your ideology. There is plenty of money to pay for parks, schools, etc if we dismantle the military industrial complex and the police state apparatus and stop giving trillions to bankers and oligarchs and end the Fed. Contrary to the view of many libertarians, we don't need to have zero government in order to work together as citizens and govern ourselves effectively.
...There is plenty of money to pay for parks, schools, etc if we dismantle the military industrial complex and the police state apparatus and stop giving trillions to bankers and oligarchs and end the Fed.
Much as I agree we should do all of these things, they in themselves will not be enough. Europe is full of countries that have no large MIC or police state and even before they bailed out the banks they were headed for bankruptcy.
Just because the government presently provides particular services (public schools, for instance) is not some kind of evidence that, were government to withdraw their provision, no such service would arise from private demand.
You guys are all locked into the idea that tax levels cannot be raised because it will negatively affect the "job creators," which is just so much bullshit. Trillions are being pulled out of our society right now to fund the extravagent lifestyles of the oligarchs. The reason things like health care are so expensive is because the health care system is designed around wealth creation for insurance companies and hospital CEOs. Moreover, if wealth were more evently distributed there would be less need for charity. Do you all think it's a coincidence that the ultra conservatives 40 years ago floated the idea of creating an unsustainable budget deficit in order to convince the masses to roll back the social programs they hate? Think outside the ideological box, guys. And answer me this -- what did Jamie Dimon do to deserve a 40 million dollar salary plus bonus this year? Don't whine at me about redistribution of wealth. These guys are just plundering.
The reason healthcare is expensive jackass is because medicare and medicaid make up +50% of the entire system in addition to gov mandates that force insurance companies to provide services I do not need. The government is the problem.
I rode on a 90 foot yacht of a mid-level nobody anyone has ever heard of health insurance VP a few years ago because I knew a guy and I got invited. The twin diesels needed repair and started smoking so we had to cut it short. Everyone needs health care except a lucky few who are healthy until 90 then drop dead having sex.
http://www.zerohedge.com/contributed/social-security-january-2012-and-beyond#comment-2056781
From below...read it. The take away is the trust is broken.
You can blame LBJ, war on drugs, war on terror, war on poverty or too many bridges to nowhere or any other damned thing you want.
The bottom line is, they stole it. Just as predicted.
On this we agree. We just disagree about where to go from here.
P.S. I voted for Ross Perot, Ralph Nadar, and Obama. I regret the last one.
I regret your last one too...lol.
The thing is, the state needs to take a back seat to us. Just get out of the way.
No one wants polluted water or air. The regs are already there. Enough with the regs. Its gotten to the point you have to bribe someone or be connected to government to get anything done productive that winds up helping everyone in the long run.
Of course, the debt accumulated will have to be repudiated. No one has the ability to repay it anyways. And its immoral to dump it on the next generation.
You take care of yourself ;-)
Ummm...
"...and end the Fed."
If you end the Fed, it is the end of everything you just said makes your perfect society. You need to think that one through a little more.
Without the Fed, the 47% who end up paying no taxes would, in fact, be paying taxes to support this level of spending.
You should be in favor of ponzi-nomics not against it. But you already knew that ;-)
Wrong. We do not need to give private bankers the right to create our currency. Congress can do it without owing interest to bankers.
So you're saying its not how the money is created, its where the money is created?
I don't recall having a vote on the Federal Reserve being created in the first place...because I didn't. That was done by the government, who you seem to entrust with every aspect of your life.
Yep, just keep attributing concepts to me that will help make your point because you cannot argue the merits. If you ever read what I say, I believe the government is grossly overblown and that we now live in a police state. How could that possibly be translated to believing that government should be entrusted with every aspect of my life? Black and whilte thinking, nmewn. We are our government. We need to take it back, not give it up and let the fucking oligarchs rule the world in the unicorn land of free markets.
"Yep, just keep attributing concepts to me that will help make your point because you cannot argue the merits."
I thought people like you didn't believe in "merit". How is it merittorious to build a society based on more of society needing more welfare case workers?
These are your words...
"The vast majority of social programs are not "charity," but rather part of building a society."
The implication here is force of government.
"We have public schools that allow those of modest means to become literate and capable of entering the middle classes and up."
Who a sizable portion must take remedial courses in reading comprehension, spelling and math to enter university.
"Those people buy goods and services and start businesses."
If they finally decide to knuckle down and are quick studies they enter universities and become the debt slaves to the state you abhor.
"We have public roads and bridges that we all use."
I have yet to see a pencil pushing bureaucrat get his hands dirty. They were built by private companies with funds confiscated from the real economy.
"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."
We pay whether we use them or not. No choice in the matter.
"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)."
Social Security is insolvent as it relies on a bankrupt Treasury's debt issuance...see earlier post.
"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."
They inhabit the same chairs to this day. Some are just too blind to see.
"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."
Delusional Rand rambling.
"As for true charity such as welfare, I would rather that people not be starving on the streets in my town."
Charity is something given of ones own free will. Welfare is not charity. It is the state forccefully taking from a productive member and giving to another less productive member who is then termed to be a ward of the state by his or her acceptence of the state handout.
"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."
An emotional appeal follwed by >>>a statists view<<< of what a free economy looks like to them. A country controlled by Islamic gang members high on drugs, raping whoever they want, shooting off RPG's & AK's at passing ships.
Which bears no resemblence at all to free trade, peace and fair dealing among equals.
I am a business owner. I believe in merit. I believe in free enterprise. I do not believe in Wal-Mart or Fox Conn. I think Rand was a self-absorbed idiot. She actually wrote that smoking is important because she smoked.
Yup, entrust Congress to handle monetary matters. LOLOLOLOLOL
You mean our elected representatives? Better than oligarchs.
I've read enough of your comments to know that YOU are the one who sees things in black and white. You are incapable of understanding what the free market is all about, and continue to demonstrate this ignorance through comments like the above.
Don't get me wrong, you strike me as a solid limited government ally, but you lose me when you start attacking anarchists. Anarcho-capitalism IS possible - just because you don't believe it doesn't mean it isn't true.
Show me an example where it has worked in a complex economy. Ever.
This is typical jackass behavior, and par for the course for intellectually lazy individuals.
Besides, you've stated your position: anarcho-capitalism does not work. Your position is an absolute (ironic for someone with a user name like yours, but I digress) Why should I spend time trying to convince someone whose narrow mind is already made up?
The old saw applies: never argue with an idiot....they'll just drag you down to their level and beat you with experience.
I guess you are rubber and I'm glue, huh? Surely such a brilliant, elegant and simple theory as yours has worked somewhere in the entire history of our planet, but I suppose it is a lot of trouble for you to type a sentence or two explaining where and when. Well argued, McPants. Nicely done.
OK, I'll humor you...sort of. I'll respond with a question.
If what works on the micro level doesn't work on the macro level.....where does it break down, and why?
I'm thinking in terms of existing voluntary organizations - small economies such as cooperatives, or voluntary organizations such as alcoholics anonymous. On a larger scale, private enterprise thrives because of voluntary contracts & cooperation.
Yet according to your "logic" at some point a government must exist in order to....what? Better serve the public? I honestly don't know.
So my question (again): if private enterprise thrives for the reasons stated above, and if government is necessary, when does government become necessary?
It ALWAYS breaks down because there are bad men and women who will take control, and most people who live on this planet are susceptible to their control. There is a reason that throughout our entire human history there are kings, queens, tribal leaders, warlords, etc who run things. That is part of the human condition. How did Hitler rise to power? How did Stalin? In your worldview, people should know better. But they don't. So we create checks and balances. Our democracy is an imperfect but brilliant answer to this problem. It is seriously fucked at the moment because big money has taken control, but the concept is valid. We the People just need to take it back.
I knew it. You are a troll.
FYI, governments - those benevolent "checks and balances" those institutions that allow nice folks like Hitler to come to power - killed almost 200 million people last century. War could not exist without the state because it is not profitable (http://www.antiwar.com/orig/molyneux.php?articleid=8468)
And you are worried about small conflicts if the state didn't exist. Seriously man, zoom the fuck out & examine your position. You are stuck in the same braindead loop that folks obsessed with the blue/red paradigm are: namely, that BECAUSE this is the system I've known my whole life....it MUST be the only system capable of addressing (conceivably) large-scale problems. Meanwhile no thought whatsoever is given to the chance that government may have caused these problems you bitch about. Nope, stick with the devil you know....vote the lesser of two evils, blah blah blah.
Looking back I'm not surprised you didn't answer my question because you are incapable of entertaining alternative explanations/solutions because they do not fit inside your neat little box of pre-ordained worldviews.
Oh no, I'm a troll. I guess you got me there again, McPants. Well played.
Given that you don't like my answer, let's go back to my question to you Mr. Smarty McPants. Where has your favored system worked in a complex economy throughout thousands of years of history? Ever.
According to your logic, man would never have taken to the skies. After all, until first flight, it wasn't possible. And lil ol' LTER would have led the charge against those believing otherwise.
To answer your question, look at Iceland's history. There's an example for you.
Your problem is that you cannot zoom out far enough to see that government is the source of your oppression. You placing blame at the feet of oligarchs addresses symptoms....not the disease. Absent an extremely powerful, fascist state those oligarchs would not have a fraction of the power they enjoy today. In other words, you haven't properly connected cause and effect.
My apologies to Bruce, I didn't mean to sidetrack your very good article.
Well done Pants.
Keep fighting for the truth, my friend. Zoom out, indeed.
Me too!!!!!
Give me an R!
Give me an A!
Give me an...
Nevermind. Ignorance is indeed bliss, eh?
The US rose from nothing to a world power in the 1800's with no income tax, no social programs, and no welfare.
And then the private Fed was created and the 1930's happened. And there were major depressions throughout the 1800's where lots of people starved. Details that are beneath the enlightened job creators such as yourself.
Many more would've starved if your socialism would've been implemented. People might've even started emigrating from the US instead of immigrating to it. The reason people came here was to get away from big government.
Sounds like Bush/Obama/Romney: "but more jobs would have been lost if we hadn't given the bankers trillions...."
There is a better way than people moving to a country where slightly fewer people are starving, my silver friend.
Yeah, to make sure your own government is squandering the country's resources.
Okay, I undersand your point that there's a first time for everything, and thank you for making a cogent one. Iceland isn't a bad example of the benefit of standing up to the bankers, but I don't see it as an example of a pure free market. Enough already on this thread. Enjoy your evening and remember -- vigorous debate is the lifeblood of a free society, until Obama takes away the right.
Never let reality ruin a beautiful theory, right?
And if someone rains on your parade, accuse that person of what your doing yourself: black and white thinking, trouble with complex ideas. And if the big picture is dire focus on the nuances instead.
I think it was laid out often enough in ZH, that you could cut every single dollar of military expenditures as well as many other things and still not balance the budget, for example.
I don't think LetThemEatRand has looked at entitlement spending. It's enormous. And it's set to grow even more enormouser.
I must have missed the section in the Constitution about charity.
TheSilverJournal.com
Of course the Constitutional scholars over the last 100 + years through multiple Supreme Courts who have upheld your improperly characterized "charity" as Constitutional under a variety of provisions including the General Welfare clause are idiots and you are the last word. Like I said above -- you are an ideologue who sees in black and white. The Constitution does not contain the word "charity," and you charactize all social programs as charity, so it is unconstitutional. Must be nice to see such simple concepts when the rest of us see complexity.
if someone killed someone you loved would you see it in black and white? or would you be able to see the shades of gray...maybe he had a bad upbringing.
Excellent point. When raw and primitive emotion is involved, black and white thinking is to be expected.
Is it going to be black, white, or gray when all of those dependent on government programs all of us sudden get upended when the US goes broke and they get zero funds?
Mostly red, I suspect. But probably overseas red when they start wars to cover it up.
Good division, but wars don't feed people. Resources feed people and government messing up the flow of resources makes sure less people get fed.