The Social Security Trust Fund reported an August net deficit of $5.865 Billion. This is the largest monthly deficit in nineteen years. Base on recent years data it was not surprising the Fund ran a deficit in August. But the magnitude of the shortfall was a surprise to me. This deficit is now the seventh in the past twelve months. That pace has never been seen before.
deal with very big numbers these days. 100rds of billions and trillions
are how we measure things. So a $6b monthly deficit for the Fund would
appear to be a ho-hum. That is not correct. This is an important number.
Actuarial analysis of the Fund is misdirected. Their focus is based on the
future value. It should be focused on the here and now. In the June annual report the Trustees concluded that the
Fund would be broke in 2037. This conclusion is so far into the future
that it is easy for everyone involved to say, “this is a next year
problem, health care comes first”. Stephen Goss the Fund’s head honcho
said as much in a recent interview.
While there is a political
case that we have to prioritize health care as an issue, it is wrong on
a purely economic basis to ignore the exploding problems at the Fund.
Every month that the status quo is allowed to continue makes the cost
of the ‘fix’ that much larger. Based on the past twelve months
performance I now estimate that the Net Present Value of future
committed liabilities is in deficit by $7 trillion. To plug this sized
hole would require a significant increase in payroll taxes. That isn’t
going to happen. Raising payroll taxes by 4% would kill the economy. No
White House economist would advocate that. The alternative of cutting
benefits would be very unpopular. There are currently 52 million
beneficiaries of the system. A lot of them vote. To shore up the fund
would require across the board cuts greater than 20%. While that may
not be a hardship for some it most certainly will be for others. The
only way to address this inequity will be a means test.
The August deficit reconfirms that the Funds foundations are wobbly. Some observations:
August the US Treasury had to borrow an additional $6 billion in the
public market to finance the cash shortfall of Social Security. We
already have too much paper for sale to fund the budget deficit. SS
added to the supply problem last month.
-The 2037 Future Value
of the August deficit is -$17b based on a 4% return. What this means is
that there will be a very significant revision in the 2037 drop-dead
date. Based on current trends the go broke date is closer to 2025.
is not just a bad month. The net decline in the Funds assets for
June/July/August comes to $7 billion. In 08 that period was in surplus
by $5 billion, In 07 it was +$7b and in 06 it was +$13b.
decline in payrolls is hurting the Funds’ top line. January-July 2009
payroll tax receipts were down from 2008 by $5 billion or 1%. While the
monthly declines in payrolls will fall over the next six months it is unlikely that there will be much net increase
either. It will be a very long time before we see monthly gains of
250k. Without that kind of growth the Fund will quickly fall into
-The expense side is exploding. The September monthly benefits cost will be $56.6b up from $51.5 in 2008, a 10% increase.
2007 the SSTF produced a surplus of $191b that it invested in the US
economy. This year it will be closer to $100b. Based on the current
trends that surplus will be gone by 2012. Six years earlier than the
Trustees forecast in June of this year.
SS is the mother of
all systemic risks. Even the debate on this topic brings risk. It will
expose an additional $7trillion unfunded liability. Another reason for
holders of dollars to worry.
There is no fix to this. Raising
taxes is a dead end. Age warfare is a possible social consequence. The
really bad news is that no one will touch this for another year. By
then it might be too late.