Social Security, June 2009 Report: Ongoing Deterioration

It is my contention that the Social Security Trust Fund (SSTF) is experiencing a slow motion ‘Tipping Point’. The surpluses of the SSTF are invested back into the economy through purchases of Treasury securities. At $2.4 Trillion the Fund is America’s largest single creditor. The annual surpluses that have funded our deficits since WWII are rapidly drying up. This could not be happening at a worse time. Our deficits are exploding. Our need for investors is rapidly increasing. The SSTF is on track for reducing its purchases of Treasury debt by 6% this year. That is the first YOY decline in history. In 2007 the Fund provided the liquidity for half of the entire federal deficit. That number will be less than 10% this year. It is possible that as early as 2010 the remaining surpluses will be eliminated.

June is a very big month for the SSTF. All long and short-term holdings mature on June 30th. They roll these funds along with the current year surplus into new Treasury IOU’s. The new investments have a maturity ranging from 1 to 15 years. The June report contains information that confirms that the tipping point has been reached.

The interest rate is set on these new long-term holdings by an arcane formula that was developed in 1960. The formula establishes a single yield for all of the maturities. The June 2009 reset yield is 3.25%. The lowest level in over 30 years. The effective and average return on the portfolio over time is as follows (click to enlarge):


That interest rates have been steadily falling is a reflection of Macro conditions and Fed policy. The unfriendly interest rate environment coupled with the slowdown in employment has had a significant impact on the SSTF. Some numbers (click on all charts to enlarge):




As you can see the year to date comparisons show a significant deterioration in the critical surplus number. The surplus is down 40% from 08 and 35% from 07. This number should be rising not falling based on the Funds projections. Note the negative months. May (the most recent report) is yet another. These negative months began occurring in 2008. Negative months significantly impair the Future Value of the portfolio. Based on the YTD numbers my forecast for the full year 2009 surplus is $115 billion. If that proves to be correct it would represent a fall of 50% from the 2007 peak.

The other revenue component for the Trust Fund is tax receipts. The following chart shows the first 7 months results for 07-09 (click to enlarge).


Tax revenue is meaningfully lower in 09 over 08 in all of the months other than February. It may be that there was some ‘special’ adjustment to explain that monthly pop in receipts. Even with the February number the Fund is running at a rate that is equal to 2008 and only 1% higher than 2007. The Fund is supposed to be collecting ever-higher amounts of tax income. That is not happening. The tax receipt side is being impacted by unemployment. This negative factor is not going away anytime soon. It is unlikely that there will be any meaningful increase in employment before 2010.

The expense side is exploding. After years of growing at 6% the 2009 increase is at 10%. This is the impact of the baby boomers. Their numbers are just kicking in. The number of beneficiaries will double in the next decade. More numbers (click to enlarge):




The June SSTF reports clearly show the deterioration in the footings of the fund. Their interest income is declining. The tax receipts are falling. The disbursements are soaring. The annual surpluses are dwindling and will continue to do so. The engine that stoked the economy for 60 years is failing.

It has been easy to forestall the debate on Social Security while the Fund has been purchasing 50% of our annual deficits. By 2010 their purchases will be approximately 5% of the funding requirement. By 2011 they will be a non-factor in financing the deficit. This changed status should accelerate the timetable for confronting this issue. If it is no longer a positive, it is most certainly a negative.

NOTE: The June SSTF purchase of new T notes came to a total of $312 billion. The yield on the entire 15-year strip was set at 3.25%. That is a very good deal on the one-year piece. (A pick up of 270 basis points on $11.5 billion). However, pricing the fifteen-year piece at 3.25% puts it underwater to the market by 65bp. The 15-year piece is for $153 billion so this costs the Fund $1 billion each year. The net of all flows comes to an NPV of $11 billion in favor of Treasury and at the expense of the Fund. With the numbers involved that is a rounding error. It does raise the question as to how many other 'rounding' errors there are.