September 1, 2011

Should The U.S. Refinance The Social Security Trust Fund? (Guest Post)

By Bruce Krasting

In Washington, almost every report is late. The exception is Social Security. They have their numbers for September posted as of today. The folks in D.C. run their clocks on a fiscal year that ends in September. The following are the results and YoY comparisons for fiscal 2010 and 2011 for Social Security (SS).


Both the top line revenue and benefit expenses rose over the year. It’s not surprising to see that the pace of payouts is continuing to outstrip the rate of revenue growth.

It should be noted that the $24.3b of increased payments is not a result of a COLA (inflation) adjustment. There has been no inflation adjusted increases in the past two years for SS. The higher 2011 payout is exclusively the result of more retiring workers becoming eligible for benefits. The number of new beneficiaries is now growing by 10,000 a day, 7 days a week. That number is going up in fiscal 2012. It will go up every year for the next 14 (The boomers are coming on fast and steady).

I believe that there will be a COLA adjustment for 2012. I estimate ~2%. The inflation adjustment and the aging population will result in an increase in benefit payments next year of ~$40 billion (5.7%). With revenues rising much less than that, the red ink at SS is going to rise next year and for as far as I can see into the future.

What matters (to me) is cash flow. On the critical measure of FICA tax revenues minus Benefits the number comes up negative. For 2011 it will be $57.9 B in deficit. That compares to the red ink a year before that was (only) $47.2B.

The other Cash components that I am estimating for fiscal 2011 include:

  • Tax on Benefits = +$23b
  • RR retirement = -$5b
  • Overhead = -$7b

The sum of all the cash components brings the annual number to -$46.9b versus 2010’s -$36.2. Clearly, things are continuing to head the wrong way at the SSTF

Interest Income is a component of the picture that is not paid in cash. It is paid in script. I expect this number to be $114b. When the "paper" is included in the calculation it will look as if (and be reported as such) that there is a net surplus of $67.1b. I think this is deceiving. The Headline will read “Surplus”, but the reality is that SS is just a drain on us today. It is just a larger promise that has to be kept tomorrow.

For those who “Cheer” a surplus that includes phony interest I point out that in 2006/2007 the surplus was $190b and in 2008 (just 3 years ago) it was $180b. 2011 shows a significant slowdown. The Surplus will have fallen by 2/3rds from that recorded in 2007 (before TSHTF). In a matter of a few short years (and way ahead of the current forecasts) there will be no surplus at all. Not even one made out of confetti.

There are significant adjustments that have been made to the 2010/11 numbers. These represent re-statements of prior years estimates. The adjustment amount in 2010 came to a -$26b. So far in 2011 only $14bn has been recorded. Of the $13.6b of improved tax receipts in 2011, approximately $9b comes from changes in YoY adjustments. In other words, the apples to apples comparison of revenues is only +$4.0b (0.6%).

The annual adjustments to income cloud the results at SS. My conclusion is that on a straight comparison basis there is very little YoY change in revenues at SS. The implication is that there is little growth in total payrolls and there is little growth in wages. That’s not surprising at all. I expect that this will show up in the next few months of NFP numbers. I would, as a rule, take the “Under” on all those estimates.

There is one interesting thing to consider with SS. They have this paper surplus called a Trust Fund. That Trust Fund earns paper interest. Lots of it. At the end of the year that fund will total $2.65 trillion. It will have an investment average maturity of 7 years. The rate of interest paid to SS is currently 4.25%.

Now consider that the Treasury yields today for 7 years is a measly 1.58%. The difference of 2.67% comes to a whopping $70 billion a year in “excess” interest being paid to SS.

If one applied this same thinking to SS’s sisters, (the Military and Federal Workers Funds) it comes to ~$4T of principal that we are (over) paying interest on. The excess interest on the whole mess that is referred to as the “Federal Pension Obligations” comes to a very important $100+ billion. Every Year!

I’m not sure what to make of this. Clearly society is providing a significant ON BUDGET subsidy to these programs (this alone is 7% of the deficit). At a time when everything else is getting ReFi-ed at lower rates (and savers are getting creamed on their holdings), there should be a discussion of the biggest ReFi of them all, the federal Trust Funds.

About The Author - Bruce Krasting had worked on Wall Street for 25 years--"For 25 years I woke up thinking, "What am I going to do today to make some money in the market". I don't do that any longer. But I miss it."  Nowadays, Bruce blogs about his take on financial events at Bruce Krasting.  (EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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