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Sunday, February 10, 2013

CBO – The Coming Raid on Social Security

 

Every politician in America knows that Social Security (SS) is a third rail. Any Pol who tries to mess with the country’s largest and most popular entitlement program is going to have the likes of the AARP coming after them. It’s not possible to win an election on a platform that advocates cutting back SS.

With that in mind, I find it interesting to report that a very credible source is now predicting that Obama AND Congress will take action over the next 24 months that will substantially undermine both the long and short-term health of SS. The legislative raid on SS will certainly total in the hundreds of billions, it could top $1T over the next fifteen years.

So who is this “credible source”? And just how is this raid going to happen? The source of this information is the Congressional Budget Office (CBO); the following is how it will play out:

 

SS consists of two different pieces. The Old Age and Survivors Insurance (OASI) and Disability Insurance (DI). Both entities have their own Trust Funds (TF). OASI has a big TF that will, in theory, allow for SS retirement benefits to be paid for another 15+ years. On the other hand, the DI fund will run completely dry during the 1stQ of 2016. By current law, the DI benefits must be cut across-the-board by 30% on the day that the DI TF is exhausted.

This would mean that 11 million people (most of whom are very sick) would get slammed from one day to the next. There is no one in D.C. who wants this to happen. I don’t think the American public wants this outcome either. So what are the fixes?

 

1) Increase income taxes on +$250k of income to pay for the DI shortfall. Maybe, but this will not happen with the current Republican controlled House.

2) Increase Payroll taxes to cover the DI shortfall. I see zero political support for a permanent Payroll tax increase.

3) Cut benefits by 30%. This would be insane – it will not happen with Obama running the show.

4) Kick the can down the road and raid the OASI TF for the annual shortfalls at DI.

 

Of course #4 is the path that will be taken. #s 1, 2 and 3 are not politically feasible.  I have been wondering what will happen with the DI conundrum. I was surprised to see that the CBO spelled out what will happen in its report on the Budget and Economy – SS Trust Funds.  The report has this footnote:

 

CBO projects that the DI trust fund will be exhausted during fiscal year 2016. Under current law, the Commissioner of Social Security may not pay benefits in excess of the available balances in a trust fund, borrow money for a trust fund, or transfer money from one trust fund to another. However, following rules in the Deficit Control Act of 1985 (section 257(b)), CBO’s baseline assumes that the Commissioner will pay DI benefits in full even after the trust fund is exhausted.

 
 
 
The “loophole” to drain the OASI insurance is already law – so Congress doesn’t have to do anything to raid the retirement fund. The “do nothing” plan is always the best option in D.C.

The footnote goes on to provide an estimate for the size of the raid:

 

For illustrative purposes, below are the cumulative shortfalls in the DI trust fund beginning in 2016. Those shortfalls do not include interest expenses.

 

DI Trust Fund Cumulative Shortfall

($s in Billions)

2016 -15

2017  -55

2018  -94

2019 -133

2020 -173

2021 -215

2022 -260

2023 -307

 

Wow! At this rate the raid tops $1T in 2029. This is is a big dent in a Trust Fund of $2.8T.

 

There is an import “tell” from the CBO. In the footnotes it highlights the fact that there is a discrepancy, and uses this an excuse to avoid establishing an adjusted end date for the OASI Trust Fund. (It’s not a complicated calculation)

What the CBO fails to state is that the raid on OASI will result in a significant reduction in the End Date for the retirement Fund. In its report to Congress last year SS forecast that the Retirement fund would be exhausted in 2033.  The DI drain (and other negative revisions by CBO) will bring the End Date to below 2030 in the upcoming SS report to Congress. That would be a very significant development. The CBO does not want to be the one who puts a new SS end date “out there”. To me, this was a cop-out by the CBO.

 

Given that discrepancy between the trust funds’ operation and the baseline’s assumption, CBO is not providing DI or combined trust fund totals for the year of exhaustion and thereafter.

 

The timing of this story is interesting. The question in my mind is will the “fix” come before or after the bi-election. If Obama was a gambler, and he believed the Democrats could re-take the House in 2014, then he might defer action on DI until 2015. This scenario creates the opportunity for option #1, a tax on the rich to supplement DI. Of course that is gambling, and there would be a small window of time to push through a new income tax to save DI.

Then there is the Republicans. Do they want to push this before, or after 11/2014? I could argue both ways, but in the end, it gets back to the fact that no one wants to “do” anything with SS. It’s better to do “nothing”; that makes #4 the most likely outcome.

 

I hope that some of the big Defenders of SS pick up on the information from the CBO regarding the coming raid on the retirement fund. This is a huge constituency (60m beneficiaries – 150m contributors – every politician in the country – all of the Press). If that group catches on to what is about to happen to the retirement fund, there will be a great chorus of, “Don’t you dare touch my money!”

 

I’m trying to stir the pot on this one. I want DI’s terminal condition to come onto the table sooner versus later. I’m hoping that if and when it does come up for discussion, it opens the door on the broader issue of what the hell America is doing with entitlements. Basically, I’m trying to pick a big fight. For the good of the country, wish me luck.

 

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Comments

  1. There’s only one sure thing.

    They will keep piling up debt until the market makes them quit.

  2. OT: Frank-Dodd Wall Street bill changed FDIC insurance from $250k for each account to $250k per tax id. Which is pointless considering there is approximately $10 trillion in banks vs. $10 billion in FDIC insurance coffers. 1000 to 1. Yeah, that’ll fix things.

    Experts are on it, we’re in good hands.

  3. Bruce, DO ‘pick a big fight’ — show these real price histories NOW:
    http://www.showrealhist.com/RHandRD.html

  4. I agree Bruce, I’ll be one of those people shouting “don’t you dare touch my money”. I’m now 66, freshly retired, and have been paying (forcibly) into SS since I was 15. The simplest solution would be to remove the income cap for all workers and have the business matching portion capped at some – pick a number – higher level. It would also be nice if the congresscritters would stop stealing our funds for their wars and pet projects, but don’t hold your breath on that one; still remember SNL making fun of Al Gore’s “lockbox”, but he was onto something there.

  5. This was NOT one of your better posts… No matter what they do, no matter how hard they try, Congress cannot damage the health of a pyramid scheme like SS.

    The system was always a ponzi scheme, but officially became a ponzi scheme (as an official policy, even if Gore and your other readers are too stupid to read) when Alan Greenspan chaired the “reform” commission in the late 70s/early 80s to make SS a “pay as you go” system.

    Actuarily speaking, Social Security was (past tense) bankrupt in 1978 — the trust funds were already inadequate when Jimmy Carter was President. Rather than admit the truth, the Feds made it a pay as we go system — they already kicked the can down the road

    Shame on you Bruce for pretending like Congress is “raiding” a non existent trust fund, and double shame on you for suggesting the system is viable even with significant tax increases.

    And FUCK YOU to all the dead beat baby boomers who think they deserve a retirement after running the entire country trillions and trillions of dollars into debt. Retirement is for people who bothered to save for it — your generation did not

    • SS is not “pay as you go”. It’s just another tax, that’s all. And SS/Medicare is just another entitlement.

      • @tom — you are an idiot

        the tax is just the revenue source — the system is pay as you go. The money from this year’s theft / taxes pays this year’s benefits, since there is no trust fund to raid.

        It is also **NOT** an entitlement. It is a benefit. Congress can modify or end the benefit at any time — for example when the pyramid scheme collapses and/or starts to jeopardize the solvency of the government as a whole.

        Whether enough baby boomers attempt to retire (ending the pyramid expansion) or Obama runs the government bankrupt first is still in contention — but even the morons in Washington now concede SS will not survive to see the 47th US presidential term (SS obviously ends if the US government goes Greek / Argentina).

  6. Bruce:
    You are writing as if the SS retirement trust fund will be raided for the first time.
    It has been raided since 1983 in order to pay for other government expenses.
    Now, it will be raided again to pay for DI benefits.
    Had can you steal an entity which does not exist?
    Don Levit

    • Hi Don. You’re right.

      I wear two hats in the SS discussion. One hat is like yours and say’s, “There is no TF – there is no money saved- SS is paygo and it’s running a deficit.”

      The other hat is the one that plays along with the accounting charade about the TFs. Why do I do that? Because it is the current law.

      I do that because most people who understand SS, and are interested in what I have to say (including CBO and SSTF) think, write and live in the TF world that is the law of the land. I’m trying to address that audience when I wear that hat.

      Basically, I go both ways…..

      Thanks for your regular contributions to this blog.
      bk

  7. Hates Selfish and Greedy Boomers says:

    “It would also be nice if the congresscritters would stop stealing our funds for their wars and pet projects.”

    Wrong, idiot. The wars and other expenditures aren’t “their” pet projects. It’s selfish assholes like you who force them to act as they do because of the way you vote. In democracy, you get what you vote for, and people like you have preferred to vote for jerks who ignore reality–because you don’t want to hear it.

    So hear it now, Mr. I’vePaidSSTaxesAllMyLifeSoIWantEveryDimeComingToMe. Your taxes in the past were always lower than they should have been because “your money” in the so-called trust fund was used to reduce the deficit because the money was spent at the time as part of general expenditures in return for meaningless, non-negotiable securities. In effect, you got your cake then, and now you want somebody else to foot the bill for an irresponsible and unsustainable Ponzi scheme set up for your benefit.

    As one of the previous commenters said so eloquently: FUCK YOU.

  8. As a disabled person who is dependent on Social Security to live, this whole issue not only scares the hell out of me, but also makes me very angry. If our so-called “leaders” in Washington hadn’t been robbing the Social Security trust fund for years, we wouldn’t be in this mess.

    It’s really easy for these wealthy legislators to screw around with what is basically other people’s money. What do they care if millions of American disabled and seniors are left with absolutely no way to pay our bills? After all, it’s no skin off their asses if we all starve.

    If President Obama and his fellow party members in the Congress allow Social Security to be drastically cut, and millions of us hurt by their actions, he and his fellow Democrats will be guilty of betraying the very people who helped get him reelected last November. I really hope that they are better people that this. If they aren’t, millions of us will have our lives devastated beyond repair.

    • Blane, Sorry you are on DI. I don’t think that your benefits will be cut. As I said, that would be an insane outcome.

      We are talking $50B a year as the problem. That is a huge number, but in the scheme of things, it is manageable.

      I see your problem as being the OASI program. I assume you are going to be taking advantage of that soon? If so, I anticipate that there will be cuts in your check.

      If you are now on DI, and soon you will be eligible for OASI, I don’t think you should see any cuts during your life. There are ways to address the problem so that across the board cuts in either DI or OASI are not necessary. To achieve that, requires that SS be converted into what it already is – INSURANCE.

      You need the insurance. I don’t. Yet we both get paid. (actually, I don’t collect SS-but I could). This is the problem. And it it is this problem that I’ve been trying to get fixed for quite a few years now. When my benefits are legally cut to zero, it will insure that you get (at least) 100% of what is currently payable. To do that requires new laws. That’s what I’m shooting for.

      • Bruce – You are shooting for new laws that will do what exactly?

        And this SS insurance concept conversion…..it should be voluntary pay in, or mandatory in your view?

        • I have said all along that the Boomers did not “save” enough through SS. Over the next 15 years the boomers are going to gut SS. This willlLeave a busted system for those that follow (and pay for the boomers).

          My solution is to force most of the cuts onto the boomers (not the next few generations). To achieve this a serious Means Test based on BOTH assets and income is required.

          SS should not pay benefits to Warren Buffett. But it does. That is crazy. Where is the line in the sand on this?

          I think it has to hit any senior with $200k of income AND OR real assets in excess of $3m.

          Something like that would fix the immediate future. I’ll leave it to the next few generations to figure out what comes next. In my view, when the boomers are dead, there will be no problem with SS.

          • Bruce, why do you keep framing the issues with SS in such a way as to pit generation against generation? The problems with SS do not have to do with generations, they have to do with incompetence in government. I guess if you want to blame the boomers for something, blame them for the politicians they elected, but hell, by that measure all “generations” are to blame for the government we now have.

            • Are boomers at fault? Not because they were born, but they were poor stewards for the economy. It’s not fair to say there is “no blame” by the boomers.

              Sorry to say it, but we are facing an age war. And yes I do see generations pitted against generation.

              I’m a boomer, and this makes me very sad. It’s why I keep trying to move the needle on this topic.

          • Ok, thanks for the detail.

            Comment and another question:
            If something similar to what you suggest were to come about….for sure, some people would be money moving around (out of trackable financial assets into physical metals, art & antiques, etc. or finding ways to reduce reportable income) so, do you think there would actually be enough people at the thresholds you suggest to make a sufficient dent?

      • I receive DI because of a lifelong disability that prevents me from working. It will be a few years before I receive OASI, because I am only 57 years old. I have only been receiving Social Security for less than two years. Before that, I received only SSI. For some reason that I really don’t entirely understand, the Social Security Administration put me on DI about two months after my father passed away in April 2011. I think maybe I’m receiving whatever money was left over from my dads benefits, but I didn’t really know that because the SSA never explained anything to me. Even though I receive over $1100 a month, compared to $865 I was receiving under SSI, I still have a very hard time getting by. That is the major reason why this possibility of Social Security be cut costs me since great concern.

        After reading your reply, I am somewhat reassured by what you say. Thank you!

  9. Bruce, thanks for pointing this out. It is important.

  10. the USA did O.K.prior to various benefits usig OPM. Now, that train is at the end of the line.

  11. I’m really sick of hearing proposals that are processes that “should” be implemented by the elite or the walking dead (is there a difference?) Market monetization of precious metals, bottom, up will support economic liquidity and thus allow existing debt based dollars to find the hands that need them to service existing debt and return it to the very nothingness it was created from. FIXED gold never experienced enough distributed liquidity to satisfy the economy. Real-time (floating) gold, however, can extinguish increasing amounts of debt on the basis of a rising trade value but the market is charged with creating this solution. The elite cannot overtly support gold-as-money in real-time context because of the vulnerability of a crash in the legacy sytstem (USD) in the process of migration. The market must create the migration in an organic and market driven fashion.

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  13. The REAL raid won’t be on Social Security; it will be on the 401k’s and IRA’s to get at THAT money so Social Security won’t HAVE to be “raided”. ( for a while longer, anyway )

  14. You can all thank President Johnson for putting SS on the general budget instead of its own budget. He needed the money to pay for all his programs and the Vietnam war. Not many of us voted for that man.

  15. What cracks me up is Bubba Joe with his asinine answer to all..The way he talks and his debasment of others makes me wonder if he’s not more worried then he seems…Fuck off Bubba Joe! Your demeanor is shout first and point next, so I have to talk to you so, plus it’s the internet, which has to be your excuse……Please tell us idiots what lies next nostradamus…..

    I worry about pti and dti, amnesty, water and peak oil, not inflation..not taxes…. you worry about everyone else’s opinion and thoughts…

    The people paid into it, means test it and it’s solvent for many years,..Warren Buffett and everyone on Newport beach bluffs to Manhatten doesn’t need it at all, it just shows income….

    Greed is whats wrong with America, or is it bubba joe?

    Debtpushers are worse than drug pushers..

  16. What cracks me up is Bubba Joe with his asinine answer to all..The way he talks and his debasment of others makes me wonder if he’s not more worried then he seems…Fuck off Bubba Joe! Your demeanor is shout first and point next, so I have to talk to you so, plus it’s the internet, which has to be your excuse……Please tell us idiots what lies next nostradamus…..

    I worry about pti and dti, amnesty, water and peak oil, not inflation..not taxes…. you worry about everyone else’s opinion and thoughts…

    The people paid into SS, means test it and it’s solvent for many more years,..Warren Buffett and everyone on Newport beach bluffs to Manhatten doesn’t need it at all, it just shows income….

    Greed is whats wrong with America, or is it bubba joe?

    Debtpushers are worse than drug pushers..

  17. How about cracking down on the phony disability claims? Around here people use social security disability once their extended unemployment benefits run out. You can find a doctor who will sign off for a couple of hundred bucks and if your claim is denied, there are operations that specialize in appealing those and getting your claim approved. There is an entire industry that has grown up around fraudulent social security disability claims.

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