Saturday, September 29, 2012

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.



  1. Bruce….. Do you think the real intent of the 90’s Boskins Commission was to keep from Social Security skyrocketing even further by having to pay higher cost of living adjustments to seniors?

  2. juggalo economist says:

    The Exponential function, how does it fucking work?

  3. SS is bankrupt ALREADY like the government. There is NO interest “income”, as if there is some production or economic activity backing the revenue stream. No, there is only money printing. QEinfinity has nothing to do with creating jobs. It is all about money printing to keep the government floating. Interest “income” and the “trust fund” serve only one purpose. They are POLITICAL claims on the loot of printed money.

    So the conclusion is that the Fed will be printing for the foreseeable future. Bruce, given these facts, especially Fed printing, how do you see this playing out? Price increases due to this monetary inflation seems obvious. However, I worry about demand destruction caused by the misallocation and resultant business failures (e.g. natural gas boom). This leads to recession and falling demand. That’s what worries me about investing in commodities. WTI seems like an obvious play on this, however, look at gasoline demand and the reduction in Chinese output, and you are also seeing demand destruction. I think gold is probably the best way to play this, but I’m still scratching my head looking for a way to arb the Fed.

  4. Jim,MtnViewCa, USA says:

    I’ve been paying in to this sucker for decades. I’ll be getting paid back, right?

    • Of course you’ll get paid. Every penny. However the whole amount will buy you exactly one cup of coffee.

    • The question is, How old are you?

      If you are under 55, you will not get what you think you will get today.

      If you are successful in your life, and have saved for retirement you will not get much either. They will means test SS. They have to.

    • Even if you are 55-65, it is unlikely you will get your SS “contributions” back. First, the crooks on the Supreme Court long ago said that the SocSec **TAXES** are taxes, not contributions. The “trust” fraud is a meaningless accounting entry that doesn’t earn any interest on any of the fictional “bonds” that Bruce lists — the trust fraud is nothing but an accounting entry, which is why it doesn’t matter what bonds they cash out first, second or last. While Mr Krasting has drawn attention to the SS fraud, Bruce did a real disservice alleging that the SS administrators were “cashing out” high or low coupon bonds — there are no bonds, no coupons. Its just a file drawer in Ohio filled with IOUs from Congress.

      As with many Congressional frauds on the American people, Congress has exempted themselves and Federal “workers” from Social Security. If SocSec were any good, Congress would have put themselves on it. They didn’t. They didn’t put themselves on ObamaCare either, same reason.

      Its all just empty promises from politicians. The lie has been going on for many decades; its just that the baby boomers are now reaching retirement age, and every ponzi scheme requires exponential growth of new suckers to keep going.

      They will try to keep paying the nominal amounts for as long as they are able — but the COLA won’t even come close to reality. They will implement means testing, essentially defaulting on political promises made to the “wealthy” (everyone making more than $30K in current dollars), but inflation will push almost everyone into the “wealthy” category. They have already started seizing SocSec payments and diverting them toward Medicare premiums — that is just going to get worse.

      Ultimately, all the social spending programs are just empty political promises from a Congress that has a long history of screwing over taxpayers. They are all ponzi schemes, and they will all be terminated no later than 2040.

      Everything will end by 2040. That’s just simple math. Its either that, or the US government collapses. Bureaucrats will look after themselves first, not the people. Read a few history books — its always been this way, and the US will not be different.

  5. Greg:
    You are exactly on point.
    The interest earned by the bonds is relevant, only from the standpoint of lengthening the life of the trust fund if the interest is high, or lowering the life of the trust fund if the interest is low.
    From a cash flow perspective, however, the life of the trust fund is over.
    If that were not the case, the interest used since 2010 to make up the cash shortfall would simply be liquidated, assuming it was pore-funded, and left intact. Instead, the interest, and eventually the principal, was redeemed the same way the trust fund will be redeemed at exhaustion to make up for the cash shortfall: by raising new general revenues, the same way we pay all pay-as-you-go expenses, like Medicaid.
    Don Levit

    • This is a tough topic. There are two realities:

      -There is no Trust Fund and there are no assets.

      -There is a Trust Fund and and it holds interest bearing assets that have the same credit quality as any other debt obligation of the federal government.

      Both of these things are true.

      It is for this reason that I only focus on cash. SS is running a cash deficit today, and will for the next 50 years. Those who think there is a piggy bank of money to pay for the shortfall are flat out wrong. The shortfalls MUST come by borrowing more debt from the public.

      • @Bruce Krasting …. sorry but I have to call you out on your last comment. Simply false.

        The Supreme Court ruled back in 1960 that SS was *NOT* an obligation, and the “debt” does not have any backing at all, never mind “full faith and credit”. The case remains law today.

        The court ruled that entitlement programs are, legally speaking, exactly like all other government programs — they are whatever Congress says they are. Congress can change their minds at any time, without any need to compensate alleged “shortfalls”. The case before the court concerned whether Congress could give higher awards to one group (those born later) than to other groups — and the court ruled YES. The court ruled that older SS recipients were not “owed” anything (there was and is no debt). SS recipients, like welfare recipients, are entitled to receive whatever Congress decrees, nothing more or less.

        Importantly, the Court ruled (way back in the 1960s) that Congress can change eligibility requirements at any time, making the “new” entitlements more or less generous.

        The case is Fleming v Nestor. Look it up.

        As a matter of law, Social Security is not a debt or obligation at all. It is a spending program, currently authorized by Congress, paid for with a current tax. The tax, the benefits and the eligibility requirements can be changed at any time. There is no contractual obligation of any kind.

        That is why the crooks in government are not on Social Security — they have a pension which (legally speaking) is supposedly an obligation.

        As for whether government bureaucrats would lower benefits, increase taxes, or restrict eligibility? Grow up man. They have already done all three at various times.

        Bruce, you normally do very thorough research on your blog posts, but you are dead wrong on this. There is no contractual obligation to pay Social Security at all. There is no trust fund. There are no “bonds”. There are no assets and no liabilities.

        Social Security is only a political promise … Read my lips, the politician that just bent you over and yanked down your pants is not planning on making you happy.

        Legally speaking, you are dead wrong Bruce. Politically speaking, Congress will continue to lie for as long as they are able to fool the proverbial sucker born every minute … but Congress is broke, ergo they are not going to pay in real terms. By 2040 (if not sooner) the whole thing just becomes elderly welfare, available only to desperately poor retirees.

        If Social Security was money good, Congress would have put themselves on it. Remember Deep Throat? Follow the Money!!! Federal bureaucrats (including Congress) do not participate in Social Security. Never did

        • @Bruce — PS… another legal precedent is “odious debt”. You should look that one up too.

          In layman’s terms, if a parent goes spends like a drunken sailor and said parent also “decides” that their offspring are obligated to make good on the parent’s debt … the legal precedent dating way back to British Empire times (and upheld many times since) is that the debt is “odious”. The children didn’t ask for the debt, did not *directly* benefit from it, and therefor have no obligation to repay it.

          To put it more bluntly, empty unfunded political promises made by the baby boomer generation, for the benefit of the baby boomer generation, is not an obligation of generations X, Y, or millenials.

          And since those generations are under-employed if not unemployed, they can’t pay the baby boomers’ debt even if they wanted to.

          Baby boomers already defaulted on Social Security — check out the national savings rate for the last 40-50 years. Check out the housing “ATM”, withdrawing equity at every chance.

          Political promises, including social security and medicare, are made to be broken.

  6. Bruce, nothing in the campaigns about impending DI fund problems. I am beginning to think that they will just reallocate to increase portion going to DI fund. Ultimately, when trust fund zeroes, SS and DI benefits will either be “means tested” or reduced to level of current contributions.

    “Means testing” is objectionable to left because it makes SS a poverty program.

  7. There are 2 sources of money that government doesn’t talk about much one is off budget accounts called Comprehensive annual financial reports (CAFR’S) ALL of government investments over last 200 years are providing a return of 25 to 35% every year 2/3 of all revenue comes from these sources the rest comes from taxes. The other source could be off screen black budget accounts which has numbers that probably has never been seen before. So the real question is why the squeeze. On budget talk is just to keep it all destabilized and for crowd control of the masses. All cities/counties/state gov./fed gov. have these CAFR’S so do you think it is time to find out whats being done with our investment money,just conservatively speaking the federal government is sitting on 110 trillion dollars but do you think they are going to tell you about it? The state of california parks department just got busted for a secret 65 million dollars account squirreled away. Kind of makes you suspicious of cities going bankrupt doesn’t it.

  8. Here is the simplest of solutions. Just force our lawmakers out of the cushy taxpayer-paid lifetime pensions and equally cushy taxpayer-paid government-run lifetime socialized medical care they give themselves and all the financial problems – both real and imaginary – of both Social Security and Medicare will disappear overnight to be never heard about again.

    Just how much our lawmakers love their own socialized medical care which they steadfastly deny to the rest of us is illustrated by this example:

    • Hi Ulysses, I don’t think I follow you. You’re saying if we add even more mouths to feed on top of an already bankrupt system, that will fix it?

      As poster ‘Greg’ noted above, there is no trust fund and there are no bonds. Benefit checks are paid for with payroll tax receipts, with the shortfall coming out of the general fund, which is currently 40% borrowed money. If you have heard the expression ‘unfunded liabilities’ and understand what it means, your comments seem out of place. The cumulative underfunded amount, including interest, is now over a $100 trillion, (including Medicare), hence the can kicking and no real solutions are even being discussed, because there are none.

      The only question is whether we wait for a financial accident to expose the problem to the uneducated (financially speaking), or we do a restructuring first. Just guessing, but I think the plan of the masters seems to be to hold COLA increases significantly below the rate of inflation until benefit payments are manageable. But this is failing because too many people are just signing up for food stamps and other benefits, defeating the purpose. So they will have to hold food stamp benefit increases below the rate of inflation, which will be very easy with food prices soaring.

  9. If re-elected, the first Executive Order from the pen of Obama will be the confiscation of IRA’s and 401k’s and their re-direction into the Social Security Vortex.

  10. If the Government screws with our Social Security, they will be overthrown!

    • 1) they already messed with your social security while you were in ‘nam … where was your big revolution then? Or in the decades since?

      2) a million geriatric patients is a solid voting block for elections, but younger generations have both power of the purse and the rifle (and they have the rule of law on their side). In short, you had better get a more practical attitude, or you will end up winning every battle yet losing the war (same outcome as ‘nam!)

  11. I’s paid about $250,000 into the fund, want my money but I’m willing to trade. Give me 10,000 acres of federal land, I get to choose location.

  12. thanks