The following is a graph that tracks percentage changes in GDP and the
growth of SS payroll tax revenue from 1990 through 2010. While there is
not a perfect correlation between the two data sets one can see that
the lines do track each other. The exception is 2010. The economy has
made a recovery from the 09 recession. But SS payroll receipts have
actually fallen during fiscal 2010 (ends 9/30).
This is the dilemma facing the US economy. We are not creating enough
new jobs. Based on history one could expect that job creation is not
far off. But 2011 is unlikely to look like the past. I can’t think of a
single economist or government-forecasting agency that believes we will
see any significant job growth over the next twelve months. There is a
very real (and growing) potential that we will actually see more net job
losses.
The SS Trust Fund does not share this outlook on job growth. They think
things are about to ramp up in a very big way. The following graph
updates the prior one and shows a line in green that represents the
Fund’s expectation for payroll tax receipts for 2011. They are expecting
a YoY rise of $60b. This comes to an increase of 9%. That percentage
increase has not been achieved in any year for the past 20 years. A
slide using the projected data for 2011 from the SSTF 2010 Annual Report
to Congress:
The data table from the 2010 SSTF report:
SS payroll tax is 12.4%. Therefore the $60b increase in 2011 receipts
translates into $485b of increased total payroll. The question is how
many jobs will this convert into. The answer is dependent on the average
salary that all of the new workers will get. Average income in the US
is $35,000 today. Using this number you back into the new jobs for the
period 10/1/2010 to 9/30/2011 implied in the SSTF forecast is 13.8mm or
about 1.1mm net new jobs a month.
The Trust Fund Report to Congress gave an overall rosy view of the
future. By their calculation the net health of the Fund improved from
2009 to 2010. To arrive at that conclusion they relied on the recently
passed health care legislation and a set of economic assumptions that
are overly optimistic.
The TF is looked at under a 75-year microscope. I can’t look beyond a
few months with any confidence. I don’t understand actuarial science. It
makes me dizzy. But I do know that if you trip up on the first year of
a 75-year compounded calculation the magnitude of the miss grows
exponentially over time. Small miss today, big headache 25 years from
now.
Should those jobs not appear as SS is anticipating and we find ourselves
in 12 months with no net new job growth it will translate into a miss
of $50b on the Fund's bottom line versus plan. The 2011 cash flow
deficit would therefore be approaching $100b. This shortfall would have
to be financed by Treasury. It would not increase total US debt, but it
would cause the Debt Held by the Public to increase dollar for
dollar (9% increase) with the SSTF shortfall. Just a bit more work for
Tim Geithner and the Federal Reserve. Should be no problem, at least for
a few more years.
SS hit a nexus point this past spring. It went cash flow negative at a
trajectory that made it impossible to avoid a YoY cash flow loss. The
first for the fund since Alan Greenspan “fixed” SS in 1983. The Fund
estimates that this is a temporary phenomenon; that we have many more
years of surpluses in front of us.
I don’t think those 14mm new jobs are going to be there over the next
year. I believe that the TF will suffer another big cash loss in fiscal
2011. I don’t think we will ever again have a true surplus at SS unless
they raise taxes and do it fast. That is not going to happen.
The Trust Fund did us a disservice by using an overly aggressive
forecast. The evidence is clear to me at this point. It will be a matter
of record in six months. So whom might you blame for this “blue skies”
view? I would start at the top and blame the Managing Trustee. Guess
who?
