The Social Security Trust Fund annual report to Congress is due out this week. It will be discussed in the Press for a few days. Some of the things that will come up:
- The NPV of the unfunded liability will go up by approximately $2 trillion, to $23 trillion. Every year this horrific number is discussed, and then ignored. What does this number mean? The 2012 increase in new liabilities is double the reported increase in federal debt. If this number were added to the existing debt, it would bring the total nut the country faces to $39T - 250% of GDP.
The problem is that the calculation measures the present cost of the infinite future. Who cares about something that might go wrong 50+ years from now? Hopefully, the scary NPV number to be released will focus attention on SS. The fact is that SS is PayGo. It has a revenue base, it spends more than it takes in, the Treasury makes up any shortfall by issuing more debt. If this reality were the basis of looking at SS (versus goofy TF accounting), then there would be no infinite future issues.
- The date of exhaustion of the OASDI TF will be shortened by 2 years to 2031. This means that anyone 47 or younger is paying "full price" for a benefit that will be worth only 75 cents on the dollar. That is how the law is currently written; I keep wondering when younger workers will wake up to the realities of what they are paying for.
- The SSTF will recommend that either payroll taxes go up by 2.5%, or that all current and future benefits get cut by 2.5% (or some combo). These recommendations would require an immediate change to achieve the desire long term stability of SS.
There is note a chance in hell that anything like that will happen. Washington can't agree to a change in benefits that amounts to .3% a year. There is no way that an across the board cut could be agreed on. More payroll taxes are not going to happen either. They are regressive, so liberals don't like them and conservatives will just say "no" to higher taxes. Either of the options would be a drag on the economy, so nothing will happen.
- The "drop-dead" date for the Disability Fund will be revised to the 4th quarter of 2015. In 30 months all DI benefits will be cut by 30%. Again, that is current law.
I think the TF report will make it clear that a fix for the problem with DI must be addressed ASAP. Nothing will come from that plea; the fix on DI will be resolved a week before the drop dead date.
- There will have to be significant downward YoY adjustments in interest income that the TF will earn. It's the Fed's policy to starve SS. ZIRP and QE will "cost" SS $500b in lost income in the 2008-2018 period. The deterioration at SS in 2012 will largely be attributable to the realities of the Fed's policies.
- The combined OASDI Funds will "top out" in 2017, the peak of the Funds will be ~2.85T. This milestone is coming much sooner than had been anticipated a few years ago. The maximum size of the TF will be smaller than what has been assumed.
The reality is that the Baby-Boomers did not "save" enough to cover their cost. The Boomers will come up 'short' by at least $1T. The day that they will be hitting the principal of that 'savings' is coming 5 years sooner than hoped for.
- The Report will contain all sorts of economic projections. (There might also be changes in mortality rates.) There are dozens of ways to push numbers back and forth. One of the more significant variables is the Labor Force Participation Rate (LFPR). In May of 2013 the USA is facing the lowest LFPR in decades. The SSTF has assumed that this will reverse course and move substantially higher over the next five years, and remain at higher levels forever. If the SSTF does revise downward its assumptions on the LFPR it will have significant consequences to the long term health of SS. I do not think that the necessary changes will be made, an unrealistic assumption will be used again.
I expect an overall "Blue Skies" set of assumptions in the SSTF report to Congress. There will also be an analysis that is referred to as "High Cost". This set of numbers will be ignored by the main stream media, but these numbers will be closer to what is coming for SS.
-There will be ZERO discussion in the TF report to Congress on the most critical short-term issue that SS faces - Immigration Reform. I study these things, and I can't give you an idea what will happen to the economics at SS when there are new immigration laws. There is no data available to draw a definitive conclusion as yet. The TF report should address the uncertainties (or at least provide some numbers that could be studied), but it won't.
The consequences to SS regarding changes in immigration range from good, to neutral, to bad. SS has previously disclosed that it has collected hundreds of billions from illegal SS cards. My estimate on the amount involved is +$300B that has been collected and retained by SS. What will the resolution of this be?
* The new immigration laws could say that any prior contributions are lost - that is the "penalty" that must be paid. This would be a windfall to SS.
* The law could be written in a way that would recognize those prior contributions, and allow them as "credits" to the individual's benefit calculations. This would result in significant additional liabilities for both the DI and the Retirement Funds.
For wonks like me, the annual report is something to look forward to. For the 99.0% of Americans who have no idea what is at stake, it will be another ho-hum. SS is the largest source of government spending and the biggest source of tax revenue. It's not financially sound - the report will reconfirm that. The upcoming report will make for some splashy headlines for a few days, and then it will be forgotten. D.C. has neither the guts nor the desire to take on what is America's biggest economic problem.
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