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Sunday, June 2, 2013

On the 2013 Social Security Report to Congress

 

The Social  Security Trust Fund has come out with its annual report. Some have looked at it and concluded that the relatively stable conditions at SS the past year is evidence that all is well. There are many headlines like this these:

 

USnews2

huffpost

 

I don’t see all the “good news” that folks are writing about. A few examples:

 

- The 75 year unfunded liability grew to $9.6Tn, from to $8.6Tn a year ago.

- The unfunded liability for the infinite future grew $2.6Tn (+12.6%), to $23.1Tn.

What do these numbers mean? They are large and growing quickly. The calculation is based on the NPV of future liabilities, meaning that these are the numbers to consider today if one wanted to “fix” SS. These present values are an indication of what future generations will have to fork out to support the promises that have been made. As it’s impossible for the USA to write itself a check for these big amounts, the conclusion has to be that at some point in the future, benefits have to be cut, or major tax increases have to be enacted.

 

- The SSTF calculates that in order to bring SS into balance some combination of benefit cuts or tax increases is required. To address the imbalances that exist one of two things must happen IMMEDIATELY:

 

- Payroll taxes must go up by 2.66%, or

- Benefits must be cut by 16.5%.

 

Either of these outcomes (or some combo that equals the same thing) would have a devastating and lasting consequence on the real economy. I see no support today for benefit cuts of this magnitude (or large tax increases), so this problem will have to fester for a few more years before action is taken. Every year that brings us no action will result in higher and higher costs to “fix” the problem.

 

- The Trustees added a new type of “fix” that should scare the crap out of anyone who is close to retirement age. The solution would be keep benefits as they are today for those who are already getting SS checks, and to reduce them for anyone who reaches retirement after 2013. This would mean that all future beneficiaries would see a cut in their scheduled benefits of 20%. There are 60Mn seniors (and those on disability) who now get checks; and they all vote. The idea that new beneficiaries take this big hit is politically viable. This potential outcome will force more and more people into getting their benefits early in an effort to avoid the proposed cuts.

 

- The following chart tracks the cash flow deficit at SS based on the intermediate (Base Case) analysis. Over the coming decade the cash shortfall is projected to be $950Bn. Every penny of this shortfall must be financed with additional Debt Held By The Public.

 

cash flow

 

 

- Interest income was revised lower by a lumpy $111Bn over the next decade. SS has woken up to the fact that the Fed has taken actions that will permanently reduced income at SS. I believe that the $111Bn downward adjustment is still understating the consequences of the Fed’s actions.

 

- The 2021 TF balance is now anticipated to be $2.9Tn. That’s $145Bn less than the expectation of $3.05Tn a year ago. I’m willing to wager that even these results will not be met.

 

- The TF report relies on a set of economic assumptions to achieve the results that were presented. A few of the key variables:

- There will be no recessions at all over the next decade. In fact, the TF assumes there will no economic downturns between now and 2090. Rubbish!

 

- Real GDP will be increasing rapidly for the next few years. These are the plug numbers estimates for Real GDP:

2013 – 2.2%

2014 – 3.4%

2015 – 4.0%    - Not happening…

2016 – 3.8%    - Not happening…

2017 – 3.4%

2018 – 3.0%

2019 – 2.6%

2020 – 2.3%

2021 – 2.2%

2022 – 2.1%

 

- The SSTF assumes that a rapidly rising economy will force a significant increase in interest rates. As SS is a saver, interest income is a big component of it’s total revenue, so high interest rates are essential to keep SS afloat. I don’t think these expectations for ten-year yields have a chance of being realized (if rates get this high, then we’re in for a hell of a recession).

10-Year Interest Rates

2013 – 1.2%

2014 – 2.4%

2015 – 4.6%    - Not happening…

2016 – 5.6%   - Not happening…

2017 – 6.2%  - Not happening…

2018 -2021 – 6.5%%  - Not happening…But if it does, there will have to be a recession. The TF forecast is at odds with itself.

 

- The TF report relies on an optimistic assumption regarding unemployment. In just a few years we will be back to the ‘good old days’ of 5.5% unemployment. We will not see these results:

2014 – 7.8%

2015 – 7.2%

2016 – 6.6%

2017 – 6.1%

2018 – 5.8%

2019 – 5.6%

2020 – 2090 – 5.5%   Seventy years of perfection??? Using these numbers insures that the SSTF “looks” solvent long-term. But the reality is that this result will not be realized.

 

 

A year from now the 2014 SSTF Report will be released. There will be another big downward adjustment in future interest income. I believe those revisions will total at least $60Bn. This will result in the TF reaching its highest balance ($2.85Tn) in 2016. This is a critical milestone for SS, it will come 5-years earlier and $75Bn shy of the data that SS presented in its 2013 report.

So don’t believe those Press headlines that paint a rosy picture for SS. There’s no good news in this report card.

 

Good-News-Art-F1

 

Comments

  1. Great work.

  2. Gord - Vancouver says:

    Gawd, this is everywhere (US, Canada, Europe, Japan, etc.). Denial is such strong human emotion; out of sight, out of mind.

    But really, what government idiot managing the author(s) of this report actually allowed their department to publish anything with a set of financial statistics projecting to 2090?!

    Come on! If businesses have had events of the past 7 years make them re-define “5-year Business Plans” of yore to “3-year Business Plans” to become more agile to survive or thrive, isn’t it time that the politicians and bureaucrats WE choose to be put into positions of power over us be forcibly told to stop spending our borrowed money on such fiction and GET REAL.

    I’m trusting no one to “look after me” as I near my 60s; I see too many old, grey, grizzled men and women on the street right now depending on shopping carts and garbage bags full of pop bottles they have to cash in just for tonight’s meal.

    Great work as always, Bruce.

    • I totally agree – making assumption about what the world will look like in 50 years is a fools game. But, SS is required, by law, to provide projections for a 10&75 year forecast as well as the “Infinite Future”.

      This requirement clouds policy making decisions today. The only thing to look at is a ten-year horizon. Even that is impossible to predict – (look at 2008-2011- not on anyone’s radar).
      bk

  3. The Trustees added a new type of “fix” that should scare the crap out of anyone who is close to retirement age. The solution would be keep benefits as they are today for those who are already getting SS checks, and to reduce them for anyone who reaches retirement after 2013. This would mean that all future beneficiaries would see a cut in their scheduled benefits of 20%. There are 60Mn seniors (and those on disability) who now get checks; and they all vote. The idea that new beneficiaries take this big hit is politically viable. This potential outcome will force more and more people into getting their benefits early in an effort to avoid the proposed cuts.

    Bruce, is this a proposal or set in stone as we speak?

    • There are dozens of theoretical “fixes” to SS. Cutting benefits and raising taxes is what they amount to.

      The idea of “Those that are ‘in’ get a pass, and those that are not yet in get screwed” is new in the TF report.

      Nothing will come of this idea. I don’t think there is a politician in D.C. that would have the balls to back this plan. We are 18 months away from an election. Nothing will happen of significance with SS until after the next vote.

      • However……By people joining SS now, or earlier than planned, it opens up the workforce to “new hires”, which, based on rosy predictions, would help pay for those new accounts while lowering the unemployment rate.

        Don’t get me wrong, I don’t believe it would work……

      • Is that list of alternatives in the Trustee Report or did they provide the list elsewhere?

  4. Jimmy "Stepfather of the Constitution" Madison says:

    “We are 18 months away from an election. Nothing will happen of significance with SS until after the next vote.”

    What? This means it’s only six months since the last election. I’m pretty sure that by this logic the “right” time to do something in terms of the electoral cycle is… never.

  5. just use means testing and it won’t affect 90% of the seniors or will it affect the majority of the other voters. It was designed as insurance against poverty, not as a pension system or a bonus check for wealthy people. How can a rich person file a claim of poverty and collect on their insurance ? it’s fraud !

    Consider the shape of the country the wealthy old people didn’t earn a cent from younger workers, they left a mess and $20 trillion of government debt at the federal, state and local level and didn’t save a penny for their retirement in some fairy tale trust fund that doesn’t exist.

    Anyone who claims there is a trust fund or rich old people EARNED a monthly check is financially illiterate.

  6. If the rich old people cough up $20 trillion to pay off the government debt and the trillions stolen from the mythical trust fund than they can claim it’s their money and they deserve to get a monthly check. They spent their money, it’s gone and another $20 trillion on top of it.

    We live in a country of paper hero’s. People that got good papers and wave around their fancy college degree’s while having no clue about lots of things.

  7. But What Do I Know? says:

    Great stuff as usual, Bruce, especially the part about the rosy assumptions. Hard to believe anyone could think that interest rates will rise to those levels in the next few years. . .

    I will take exception with your statement–“As it’s impossible for the USA to write itself a check for these big amounts” The federal government can, with the complicity of the Federal Reserve, simply write checks in whatever size it wishes. What the recipients can buy with those checks is another question, but writing them is not a problem. . .

  8. social security

    “The asset reserves of the combined OASDI Trust Funds $2.73 trillion.”

    If the fairy tale trust fund existed it would last 3 years without new money flowing into the Ponzi scheme. The rest of what people paid in was stolen by prior generations who saved nothing for their own retirements. People parents and grandparents took the money paid in.

  9. In all probability, we’ll see an election in 16 months. However, I would be surprised if there is a meaningful election in 2016 simply because it will be surprising to see the USA still in one political piece in 2016. Thus, talking about the trust fund is modern day equivalent to centuries-ago talk about how many angels can stand on the head of a pin.

  10. Hey Young People lets play a game i like to call just the tip just for a sec.

  11. What really puzzles me is how a report can ever be released with such ridiculous growth/unemployment projections. Seems to happen everywhere (greek gdp growth predictions during their debt restructure). Where does this go wrong? Do the people making these forecasts actually believe these numbers?
    And as you so clearly point out, the numbers are pie in the sky, why do the users of these reports accept them. It kind of boggles the mind really.