Monday, May 6, 2013

SS Report Due Out This Week


The Social Security Trust Fund annual report to Congress is due out this week. It will be discussed in the Press for a few days. Some of the things that will come up:


- The NPV of the unfunded liability will go up by approximately $2 trillion, to $23 trillion. Every year this horrific number is discussed, and then ignored. What does this number mean? The 2012 increase in new liabilities is double the reported increase in federal debt. If this number were added to the existing debt, it would bring the total nut the country faces to $39T – 250% of GDP.

The problem is that the calculation measures the present cost of the infinite future. Who cares about something that might go wrong 50+ years from now? Hopefully, the scary NPV number to be released will focus attention on SS. The fact is that SS is PayGo. It has a revenue base, it spends more than it takes in, the Treasury makes up any shortfall by issuing more debt. If this reality were the basis of looking at SS (versus goofy TF accounting), then there would be no infinite future issues. 


- The date of exhaustion of the OASDI TF will be shortened by 2 years to 2031. This means that anyone 47 or younger is paying “full price” for a benefit that will be worth only 75 cents on the dollar. That is how the law is currently written; I keep wondering when younger workers will wake up to the realities of what they are paying for.


- The SSTF  will recommend that either payroll taxes go up by 2.5%, or that all current and future benefits get cut by 2.5% (or some combo). These recommendations would require an immediate change to achieve the desire long term stability of SS.

There is note a chance in hell that anything like that will happen. Washington can’t agree to a change in benefits that amounts to .3% a year. There is no way that an across the board cut could be agreed on. More payroll taxes are not going to happen either. They are regressive, so liberals don’t like them and conservatives will just say “no” to higher taxes. Either of the options would be a drag on the economy, so nothing will happen.


- The “drop-dead” date for the Disability Fund will be revised to the 4th quarter of 2015. In 30 months all DI benefits will be cut by 30%. Again, that is current law.

I think the TF report will make it clear that a fix for the problem with DI must be addressed ASAP. Nothing will come from that plea; the fix on DI will be resolved a week before the drop dead date.


- There will have to be significant downward YoY adjustments in interest income that the TF will earn. It’s the Fed’s policy to starve SS. ZIRP and QE will “cost” SS $500b in lost income in the 2008-2018 period. The deterioration at SS in 2012 will largely be attributable to the realities of the Fed’s policies.


- The combined OASDI Funds will “top out” in 2017, the peak of the Funds will be ~2.85T. This milestone is coming much sooner than had been anticipated a few years ago. The maximum size of the TF will be smaller than what has been assumed.

The reality is that the Baby-Boomers did not “save” enough to cover their cost. The Boomers will come up ‘short’ by at least $1T. The day that they will be hitting the principal of that ‘savings’ is coming 5 years sooner than hoped for.


- The Report will contain all sorts of economic projections. (There might also be changes in mortality rates.) There are dozens of ways to push numbers back and forth. One of the more significant variables is the Labor Force Participation Rate (LFPR). In May of 2013 the USA is facing the lowest LFPR in decades. The SSTF has assumed that this will reverse course and move substantially higher over the next five years, and remain at higher levels forever. If the SSTF does revise downward its assumptions on the LFPR it will have significant consequences to the long term health of SS. I do not think that the necessary changes will be made, an unrealistic assumption will be used again.

I expect an overall “Blue Skies” set of assumptions in the SSTF report to Congress. There will also be an analysis that is referred to as  “High Cost”. This set of numbers will be ignored by the main stream media, but these numbers will be closer to what is coming for SS.


-There will be ZERO discussion in the TF report to Congress on the most critical short-term issue that SS faces – Immigration Reform. I study these things, and I can’t give you an idea what will happen to the economics at SS when there are new immigration laws. There is no data available to draw a definitive conclusion as yet. The TF report should address the uncertainties (or at least provide some numbers that could be studied), but it won’t.

The consequences to SS regarding changes in immigration range from good, to neutral, to bad. SS has previously disclosed that it has collected hundreds of billions from illegal SS cards. My estimate on the amount involved is +$300B that has been collected and retained by SS. What will the resolution of this be?


* The new immigration laws could say that any prior contributions are lost – that is the “penalty” that must be paid. This would be a windfall to SS.

* The law could be written in a way that would recognize those prior contributions, and allow them as “credits” to the individual’s benefit calculations. This would result in significant additional liabilities for both the DI and the Retirement Funds.


For wonks like me, the annual report is something to look forward to. For the 99.0% of Americans who have no idea what is at stake, it will be another ho-hum. SS is the largest source of government spending and the biggest source of tax revenue. It’s not financially sound – the report will reconfirm that.  The upcoming report will make for some splashy headlines for a few days, and then it will be forgotten. D.C. has neither the guts nor the desire to take on what is America’s biggest economic problem.





  1. But What Do I Know? says:

    Nice overview, Bruce. Let’s see what happens. . .

  2. Bruce,
    I seem to recall that SS has a requirement to maintain a balance of one year’s worth of expeditures at all time and that the benefit reduction is triggered when that drops below the threshold, rather than total TF exhaustion. Any idea when that will be anticipated to occur?

    • MGK – There is no requirement to maintain a one year cushion under current law. But a one year cushion has been advocated by Steve Goss, the Chief Actuary of the TF. The one year minimum is needed (IMHO) as the program would become a political football without a cushion.

      If there were such a requirement it would significantly shorten the 2031 “Drop Dead” date. So I don’t see how this can happen, even if it makes sense to do it.

  3. I read an article today in which the BEA is redefining GDP, in regards to retirement accounts. Heretofore, GDP was increased when businesses actually contributed to these accounts. Now, the GDP wil be increased when the money is promised to be contributed to these accounts.
    The money for Social Security resides in the Treasury’s general fund.
    The FICA taxes go to the Treasury’s general fund (as do all taxes), and not to the SS trust fund.
    Once in the Treasury’s general fund, the fIca taxes are indistinguishable from other monies.
    This means that any money in the Treasury’s general fund is used to pay SS benefits. The idea of a dedicated FICA tax to di so is a misnomer.
    Thre idea of a dedicated FICA tax ius a misnomer.
    The trust fund, the excess FICA payments, holds no cash.
    There is no cash available to pay for Social Security, other than the revenues available to pay all governmental expenditures.
    Every dollar used to pay benefits is strictly a promise to do so.
    The dollars are no more “reserved” to pay SS benefits than they are reserved to pay for battleships.
    Don Levit

  4. H.D. Thoreau says:

    BK, in your line: I keep wondering when younger workers will wake up to the realities of what they are paying for.

    what do you recommend we do? Campaign for 3rd party candidates? Demand to be paid in cash, stop paying taxes, etc? Avoid the situation altogether by making a killing on the yen carry trade and then move to a remote SE Asian island and renounce our citizenship?

    • There is nothing you can do.
      Your are a debt-enslaved robot and there is not a damn thing you can do.

      Whatever you do, keep working very hard and continue to vote in the “left vs right” paradigm and NEVER wonder why your losing.

      It is not Left vs Right, It is government vs YOU!!
      Gov’t. vs Christians
      Gov’t vs Gays
      Gov’t vs Guns
      Gov’t vs Pot
      TSA vs Citizens
      Social Security vs SOLVENCY!!

      I truly believe that the citizens are getting exactly what they deserve for not paying attention.

      “if the citizens of this country, who are it’s OWNERS, allow the EMPLOYEES, represented by politicians, to destroy this country; Then we have no one to blame but ourselves”. me

      “The few who understand the system will not oppose it. But the majority incapable of comprehending it, will bear it’s burden”. Lord Rothschild.
      So true.

      Now, know your place, shut your face, back to work, robot-debt-enslavded!

    • The much larger question is when will younger retirees break ranks from the AARP. If Bruce is right, someone who is 67 expects to be affected by the Trust Fund shortfall – mind that is in a GOOD economy.

    • The US economy would soar and unemployment would fall back to 5% if SS taxes were eliminated. On the other side of the ledger this would mean that there would be little or no income security for older people.

      So there are some very hard choices to make. The Fed is following policies that are driven to achieve short term results at the expense of long term stability. If the USA is willing to make that bet, then I think it should be willing to do the same for SS.

      But that won’t happen – so the Fed has to do all the work – the result will be more bubbles that burst.

      • Bruce, the question I have for you is, could there ever be a point where SS is eliminated? And would younger voters ever just put someone in who would advocate elimination?

        • In 2012, if you blend census data with the projection that Social Security would last as long as 2033, a majority of voting aged Americans expect to retire after the Trust Fund is gone.

          My guess on the long-term prospects of Social Security is that it will become a welfare program which is means-tested and will get even greater subsidies from high-wage people. Those subsidies are really taxes, on which contributors get no economic value.

          Taxes are a matter of political priority. As a voter, I can tell you that my priority for taxes is to pay down the debt. Someone else’s priority will be to increase funding for Head-Start or other education programs. Yours might be Social Security. In that case, Social Security survives exactly to the extent of the political will.

      • Bruce, I am not entirely with you about the economy soaring. I have parents that would come to live with me. So I am not going to be spending more. I will be spending less.

        When we give seniors money, we create short-term demand by shifting financial resources people who have longer time horizons to people with shorter time horizons. I don’t have substantive research, but Social Security seems to me to be stimulant to the economy. If we get rid of it, we will simply unwind the stimulant.

  5. Yes, jdub is correct. There is not much anyone can do other than vote with his/her feet.

    I have been on the SS dole for years. Haven’t gotten the purchasing power that was taken, but better than most. My guess is that the system will topple over simply because it’s excessively top-heavy.

    Now, what to do? Live frugally, gain a marketable skill, save some money (money, not just currency), and take whatever honest & appropriate opportunities present themselves. And keep your head when others are panicking.

    • Most research says that if you have been retired for years, you have collected more than you contributed in purchasing power. If you were married with kids, your economic returns are substantially above what you contributed. You can look at estimates at SSA in the moneys-worth studies, and at the Urban Institute which produces the reports monthly. These reports show you investment adjusted returns, what you collected above or below 2% real returns.

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