SS and the Beach

Social Security (SS) will race through another milestone in October. For the first time in its history, SS will pay out more than $65 billion in a single month.



Other than the fact that this is an incredibly big number, there is nothing eye-opening about the payout. SS missed hitting the $65b milestone by a fraction in September. In November, it will be higher again. $70b will be hit by December 2013. The ladder to higher payouts never stops.


$65b is a very big number:


-The monthly SS payout is bigger than the market cap of some well know companies, including: Amex, 3M, US Bankcorp, Amgen, eBay and Caterpillar. Goldman Sachs is worth a measly $54b. SS could buy the whole thing with just three-weeks worth of payout.


-The annual cost for SS is greater than the ridiculous monster market cap for Apple. If SS used its muscle to buy big cap stocks, it could buy up all of the shares of Microsoft, Wal-Mart and Google in less than a year.


The annual SS payout is about the same as the GDP of the Netherlands. It is well larger than the output of either Turkey, Switzerland or Saudi Arabia. In 2013 SS will spend more than the GDP of Indonesia, a country of 250m people.


The yearly SS checks are now equal to the GDP of Florida. The payout beats the entire economy of Illinois.


The monthly SS burn rate is greater than the annual GDP of New Mexico and Hawaii. Vermont, the smallest state (by GDP), has a yearly economic output of only 30B. SS is 26Xs larger than the Green Mountain State.


The 2012 bill for SS will exceed the cost of the military, that’s the first time this has happened. The annual tab at SS is four-times greater than all of the military spending by China.


I could go on.


Of course SS has a dedicated revenue stream from FICA and SECA taxes to cover its big monthly nut. Unfortunately SS will come up a bit short in October; about $16Bn short:



The good news is that SS has other sources of income. In October 2012 it will rake in about $8bn from seniors who are collecting monthly SS checks and who also are still working (or have passive income).


I think of this revenue for SS as, “A tax on a tax”. It’s double taxation, not unlike the double taxation on dividend income. This tax is paid by the seniors who are clipping big coupons down in Boca; it is also paid by those seniors you see stocking the aisles at Wal-Mart (double-dippers).


SS needs cash money to back up the checks it sends out. To cover the shortfall in greenbacks, it will be forced to sell a chunk of its Trust Fund (TF) assets. That’s not a problem for SS. The US Treasury is happy to redeem the TF’s special issue bonds at par.


The Treasury has no money lying around, so it has to go out and sell an extra $8b to the public to cover the October shortfall. Given that the Federal Reserve is QEing, ZIRPing and TWISTing (all at the same time) the extra Debt Owed to the Pubic is no problem at all.


I say that Treasury is “happy” to hock those TF assets at par with good reason. The rules for the TF require it to sell a portion of its high yielding portfolio to cover any monthly shortfall. The TF does not realize a gain from the sale of high-yielding bonds in its portfolio (a win for Treasury). Consider what happened in October 2011; the net cash shortfall was $6.7B.



To cover the cash miss, SS sold (at par) a total $5B of older, high coupon paper. New investments earned SS only 1.6% in 2011 (1.3% today!). Note: SS must maintain a minimum average life of 7.5 years on its portfolio. This forces them to liquidate “winners” (high coupon) and hold “losers” (low coupon).



What’s happening with SS is like beach erosion. Every month more grains of sand go out to sea. The waves that keep eroding SS’s beaches include:


-The never-ending recession that brings low employment (low payroll tax receipts).


-The rapid aging process that the country is now going through (and will for the next fifteen years).


-ZIRP, QE and TWIST (and any other silly thing the Fed comes up with) is killing interest income at SS.

Because of the “ZIRP till 2015” commitment by the Fed, coupled with a rate setting formula for SS that looks backward three years, it is now certain that interest income will decline every year for the rest of the decade. It will fall below $50Bn in five years ($114B in 2011).


Again, nothing unusual or unexpected will occur at SS in October. All of the things I discuss here are "programed" to happen. Some grains of sand will go out to sea. It won't be noticed. But come back in few years, you'll be surprised by the damage.