Social Security - At the Crossroad?

The 2009 Social Security Trustees Report has received a great deal of attention. The report clearly shows deterioration in the footings of the Fund. This was to be expected as their income was going down due to the recession while their costs are ballooning with the baby-boomers becoming eligible for retirement. In it’s summary the Trustees were very clear that this matter must be addressed sooner versus later.

The Trustees missed a great opportunity. If they truly wanted to accelerate the debate on the future of the system they would have highlighted the urgency of the problem. The Trustees chose to focus the attention of the media on two less important dates:

- 2037 is now the year that the Social Security fund will be depleted.

- 2017 is the revised date that the Medicare fund will be exhausted.

These dates are irrelevant. The focus of attention by the Trustees, our leaders in Washington and the American people should be on the more imminent date where Costs Exceeds Tax Income (“CETI”).

CETI is important to us now, as that will be the demarcation point for a very long slide in the dynamics of the Fund. At that point, the pain will start to be felt. Every month from then on, the pain will get worse.

For nearly 70 years the American economy has been the beneficiary of the SS system. The Social Security Trust Fund has been a major source of savings. Those savings have been reinvested back into the economy through the purchase of U.S. Treasury securities. As of year-end 2008 the Fund held $2.4 Trillion of Federal IOU’s, the largest single holder of our debt. Those holdings represent 1/4 of the entire National Debt.

In the period 2000-2008 the Fund purchased a total of $1.34 trillion of additional government bonds. The Fund has provided the liquidity for the entire costs of the Iraq/Afghanistan War, 911, Katrina and a significant portion of the remaining deficits.


This powerful engine of our growth is decelerating very quickly at this point. The Funds capacity to buy any new Treasury securities will be eliminated in a few years following achieving CETI.

The Trustee report provides a range of estimates as to when CETI will be achieved. They suggest that there is a 2.5% probability that it will be reached in 2009 and a 10% chance it will happen in 2010. I love long odds. I will take ten to one that CETI is achieved in 2010. I think it is an even money bet. The following graph shows the range of probable outcomes. My wager is on the lines at the bottom of the curve that are marked 2.5% and 10%.


The next graph describes more clearly the range of possible outcomes. I believe that the Fund is currently performing below the bottom line marked III. Also make note of the ‘blip’ at the year 2008. Notice that the line not only levels out but also appears to be turning negative. That blip is a result of the 2008 economy. The lines all turn upward after the 08 period. These ‘up-trends’ are based on the projections used by the Trustees. I maintain that these projections overstate the level of recovery in the economy over the next 18 months.


The key short term economic assumptions in the Trustees WORST-CASE analysis are as follows:

2009 GDP = –3%
2009 UNEMPLOYMENT = 8.5%

It is possible that the economy will recover over the balance of the year such that year over year growth will be near to the level in the Trustees forecast. However, unemployment today is at 8.9% and as a lagging indicator of economic activity it will certainly rise from the current level. Unemployment means less receipts for the Fund. 2009 will bring us very close to achieving CETI. If the economic recovery is anemic, CETI will be achieved in 2010.

One more graph on this topic. This one plots the timing of CETI based on the Fund’s Base Case assumptions. Note the gap that opened from the 2008 to 2009 reports on the far left. This revision in assumptions reflects the damage from 2008. Note also the upward trend that immediately follows. Here again, that up-trend is based on economic assumptions for 2009 and 2010 that will not be achieved. The bold line is based on the revised 2009 assumptions; it suggests that CETI will be achieved by 2015. It will certainly happen sooner than that.



A review of the first three months of 2009 data confirms that the Fund’s internals are continuing to deteriorate. This final chart shows the raw monthly surplus numbers for 2006 – 2009. There is a 40% drop in the surplus so far this year versus the average of the prior three years. This number should be growing, not falling, if that upward blip in the Trustees forecast is to be realized. Note also that February 2009 is a deficit cash flow month. I anticipate at least three additional negative cash flow months in the summer and the fall of this year. These negative months began appearing in 2008. Prior to that there have been no negative months for more than a decade.


The foregoing has been an effort to create a sense of urgency regarding the SS problem. I maintain this issue is staring us in the face. If I am correct the positive effects of SS are evaporating as you are reading this.

The Trustees have proposed significant increases in withholding taxes or reductions in benefits to ‘cure’ the problem. Tax increases are simply off the table in 2009. That leaves cuts. The approach by the Trustees is to identify a solution that would entail the ‘least’ amount of cuts. I would like to see a proposal that created the ‘largest’ amount of cuts. Perversely, the larger the cuts, the better off we will all be.

The SSTF has both the intellectual and the computing capacity to provide the country with a range of options to consider. I would like to have an analysis that answers the question:

“What benefit cuts are required to achieve a 50% reduction in payroll taxes?”

Substantial cuts will be necessary to achieve that goal. It would require a ‘means’ test for both existing and future beneficiaries. The benefits for younger workers would be substantially eliminated. The actuaries at the Fund could be more specific on the parameters that would be required.

In exchange, America’s 110 million workers would get a permanent 6% pay increase, a sounder basis for the long term economy and a substantially improved health care system. This change in tax policy could lay the ground for renewed and lasting prosperity.

The Obama Administration needs to raise taxes. They have indicated that these new taxes will be levied on high income earners. Although undesirable, that is necessary in the current environment. The best way to tax wealth is to create an eligibility means test for Social Security retirement benefits. It will be more palatable than an increase in the top tax brackets, the capital gains tax, or worse, an increase in withholding taxes that hits all workers.

Full disclosure: I am 60 years old. I already have my SS letter describing when and what checks I will receive. I would give that up in a heartbeat if in exchange I got a valid promise of health care at an affordable cost. A significant portion of the Boomers would agree with my position. On balance, we thrived as a generation. Now it is time to give back.

One more estimate. If we delay in addressing this problem it will cost us more. I will put a number on that. $10 billion incremental cost for every month that goes by without addressing this problem. About the same monthly cost as the Iraq war.

Comments

[capitalisthero.com]

Unfortunately, SS benefits will have to be means tested for the program to survive. Even with a means test SS benefits will be at subsistence levels only. If you are unlucky enough to fail the means test, expect to spend your golden years with a roommate in a studio apartment.

I guess the lesson is not to expect the government to provide for you and plan accordingly.

2009 May 18 04:25 AM

[fireball]

crossroads? it's in a steep ditch. the drivers have killed it. their spending addictions killed it long ago. don't call an ambulance. call a hearse. bury the dead and quit making americans pay the dead program so we can face reality and prepare our own retirement with no more government handicap to our efforts.

2009 May 18 09:09 AM

[Caveat M. Tor]

Excellent article. The SS system has not been on an actuarially sound basis since Congress began diddling with it, just a few years after it was originally passed. The income from the tax is used by the federal government as received, and the additional accrued liability to pay future benefits isn't included in the official figures for the national debt.

This is, essentially, one big Ponzi scheme. If a private company were to handle its bookkeeping related to its retirement fund this way, its executives would be thrown into jail.

2009 May 18 09:17 AM

[CaptainJJack]

Expect benefit cuts, especially on future retirees, as well as tax increases.

But the BIG issue is Medicare, and here is a flash: there WILL be rationing.

If you want to worry, watch the Health Care sausage being made in Congress, right now. Obama is right, if we want to fix Medicare, we have to fix the entire health care mess -- fixing Medicare is like locking one car door.

It is clear that the private managed care plans are trying to co opt the current legislation, and they may well succeed in the short run --- but time is running out very fast. Ultimately, they will fail because the problems are systemic, and competition among providers does not exist --- for starters, you and I have no idea whether we are getting good value -- or we are simply paying a lot.

The ultimate answer will be a government health plan. The US economy cannot afford to be paying twice for health care than the rest of the world -- and sooner or later, we will have a National Health Plan.

The argument will be made that the US government will be "interfering" with the sacred doctor-patient relationship -- and this is true.

However, it is not as if the managed care plans don't do this in a worse form already, and at least the National Plan will likely follow Britain where a team of top specialists will decide whether the benefits are worth the costs, and not a doctor hired by the Managed Care plan who gets a bonus (of course, it is not described this way) if they can find a way to deny a new service or drug.

By the way, I have never seen a national poll done in a country with a single payer plan, including Canada and Britain, where the population did not OVERWHELMINGLY support the government plan. While it is true they complain about the cost of the plans, they are spending on the order of HALF what the US consumer is paying.

There may be some hope, though. It seems to me, the opponents to National Health are saying on the one hand that National Health will put the government between the patient and the doctor -- presumably this is a bad thing and people will not want it.

On the other hand, the opponents do not want a National Plan as even a voluntary option because too many people will elect it, and it will drive out the private plans (The polls show that more than 70% of the population would choose the government plan even if the costs were the same as the private plan)

I cannot imagine they can have it both ways, and I think they will have to allow the government option.

2009 May 18 09:18 AM

[EEB]

I agree that means testing is a good idea, but I think that the retirment age will need to be raised. That is another way to reduce expense in SS. Another way to increase taxes is to increase the cap on wages taxable by SS. Basically, there are a vareity of options when it comes to SS. The real problem, as the author highlighted, is that the goverment will need to start paying back the money that it has borrowed from SS.

2009 May 18 12:43 PM

[milkchaser]

Fed Gov't has messed up Social Security and Medicare. Now let us hand over the whole health care system to them, too. Watch them drive that into the ditch, as well. That makes a lot of sense.

Obama had us borrow $1.8T in this year's deficit alone. How far would that have gone toward weaning us off of the broken SS system toward personal retirement accounts (that the Fed Gov't could not co-opt for short-term spending)?

2009 May 18 01:07 PM

[User 28706]

It's not surprising that Canada spends a lot less than the US per person on healthcare. Our hospitals on the Canadian border are full of Canadians for whom healthcare was denied or delayed by their government. I injured my knee last year and within a span of about 6 weeks I saw my regular doctor, got an X-ray, got an MRI, saw a specialist, had minor knee surgery and was beginning physical therapy. That process took over a year for a friend of mine in Canada with a similar problem and he says that is not unusual.

2009 May 18 02:10 PM

[fireball]

for a picture of federal healthcare examine the disaster tenn-care.
blue cross blue shield tried to coerce the dentists into accepting tenn-care patients.by saying they would not use dentists who did not accept the cumbersome state patients. the dentists banded together and defeated the strongarm tactic.
also examine the competition between veternarians.
government intrusion and giveaways along with ridiculous lawsuits and expensive malpractice insurance have been two of the main culprits in driving up healthcare. lawyers making laws that benefit lawyers again.
does anyone really want a government employee as a doctor. have you been in need of service from a government employee or bureaucrat.
if you are over fifty try to remember your doctor as a kid. there was still some competition then.
a little private competition goes a long way in cutting cost and improving service. things like the divinci and cyber-knife are expensive machines but they are a one time expense plus maintenance.
just trying to look from a non-government perspective.

2009 May 18 02:12 PM

[henarl]

The author wrote:

"For nearly 70 years the American economy has been the beneficiary of the SS system. The Social Security Trust Fund has been a major source of savings. Those savings have been reinvested back into the economy through the purchase of U.S. Treasury securities. As of year-end 2008 the Fund held $2.4 Trillion of Federal IOU’s, the largest single holder of our debt. Those holdings represent 1/4 of the entire National Debt.

In the period 2000-2008 the Fund purchased a total of $1.34 trillion of additional government bonds. The Fund has provided the liquidity for the entire costs of the Iraq/Afghanistan War, 911, Katrina and a significant portion of the remaining deficits."

I would suggest that "reinvested back into the economy" is not an apt description of the robbery the govt. has perpetrated upon the S.S. Trust Fund. Financing unnecessary wars, and wasteful social programs is not "investing" in the economy. That Trust Fund money that the govt. replaced with IOUs is gone and there is very little to show for it other than an overwhelming debt.
The only benefit to the economy has been the S.S. payments so far made to past and current retirees and future retirees cannot expect the same benefits. The greatest Ponzi scheme in history is coming to it's inevitable end

2009 May 18 02:30 PM

[Frohickey]

Do not expect government to provide a solution that requires less government.

2009 May 18 02:35 PM

[ain't no fortunate son]

The 50 million+ people in this country who don't have health insurance may argue with you on that "hand over the whole health care system to them, too" line - they would perhaps think ANYTHING is better than being uninsured and facing shortened life spans, grievous untreated illnesses and potential bankruptcy under your present "whole health care system" that makes them live lives of fear and desperation in this, the "greatest" country on earth... especially since the US is the only country in the industrialized world that doesn't have enough compassion for its citizens to make AFFORDABLE and ACCESSIBLE (not free but AFFORDABLE and ACCESSIBLE) health care available to them.

I take it YOU have a swell health insurance plan?

But yeah, we should've let Dubya and Dickya move us all toward personal SS retirement accounts right at the top of the housing/credit bubble in 2005-2006 when they were touting it with all that political capital they had amassed (maybe they should have given some of that capital to their friends the financials - seems THEY coulda used it). That would have been a sweet deal for all workers, but particularly for those of us in our 50's and 60's who are nearing retirement, and I'm sure Merrill, Lehman, Bear, MS BAC, C, and most especially GS, etal, would have guided us all into extremely safe, conservative plans despite the gathering storm clouds they were detecting in their own subprime, MBS, ABS, CDO, CLO, CMO and CDS markets, they being such upright and ethical corporate citizens.


On May 18 01:07 PM milkchaser wrote:

> Fed Gov't has messed up Social Security and Medicare. Now let us
> hand over the whole health care system to them, too. Watch them
> drive that into the ditch, as well. That makes a lot of sense.<br/>
>
> Obama had us borrow $1.8T in this year's deficit alone. How far would
> that have gone toward weaning us off of the broken SS system toward
> personal retirement accounts (that the Fed Gov't could not co-opt
> for short-term spending)?

2009 May 18 02:46 PM

[DougM]

SS is the major engine of saving in the economy?!? And just where do you think all the extra tax money you feel should be extracted from the economy will come from, especially targetting people with the highest propensity to save and invest. What you really seem to want is less private savings and investments, and more government spending, particularly on transfer programs that simply fund consumption, that will be called "investment".

2009 May 18 03:33 PM

[Caveat M. Tor]

Wakeup, while I agree with you about the bankers, my point is valid. The fact is that every company making payments into its retirement fund, counts those payments as an expense, not as income. Only the US government treats payments into its pension fund (i.e., SS tax receipts) as income.


On May 18 02:46 PM WAKEUP wrote:

> "This is, essentially, one big Ponzi scheme. If a private company
> were to handle its bookkeeping related to its retirement fund this
> way, its executives would be thrown into jail." {Quote, from Caveat
> M. Tor, today} Oh, REALLY??? Then why are America's bankers and other
> assorted flim-flammers not in jail, hmmmmm???

2009 May 18 04:01 PM

[fireball]

it takes a lot of research to find decent investments. so far my retirement account has not suffered. it has nothing to do with advisors or govt.. there are decent high interest returns out there. they are hard to find.
i have one that i would love to share with sa posters. i am not allowed by the company's own rules and by the u.s. convoluted legal system.
however if we end up in hyper-inflation it will make little difference. gold and silver are the back-up.
do not look to government to solve these problems. republicans and democrats have brought us here over a span of decades. lawyers are low-lifes. when they find a way to sink lower they become politicians. they are not going to help. they are a major portion of the problem. the media is part of the apparatus of misdirection. probably you can count the public servants in the federal machine.
a good place to start would be the federal reserve to realise how deeply rooted the scam is.
i liked post missle crises jfk and pre-assasination attempt reagan. neither was perfect but they were a start. neither lasted long.

2009 May 18 04:05 PM