April 25, 2012

U.S. Social Security 2012 Report: An Utter Disaster!

By Bruce Krasting

The Social Security Trust Fund (SSTF) 2012 report to Congress is now out (link). It’s 242 pages and contains a great deal of information. I have reviewed a number of sections in the report that I consider to be key measures of SS’s health. Not one of those variables showed any improvement. Some highlights:

-The Net Present Value of the unfunded liabilities at SS is now a staggering $20.5 Trillion.  One year ago this was $17.9T ($2.6T increase - 15% YoY). This yardstick grew at more than double the rate of the entire national debt 12/31/10 = $14T, 12/31/11 = $15.2T, total increase = $1.2T).

This deterioration is staring policy makers in the face. The burden that SS will put on future generations is growing exponentially.


-The “Drop Dead Date” where the SSTF is exhausted has been moved up three years to 2033. This is a number that the MSM will focus on. It is a bogus deadline. The SSTF must maintain at least one year’s worth of benefits. The year that TF assets will equal one year of payments will be ~2026. This means that anyone who is age 53 today can expect to get 75% of the value that a baby boomer will get. (Under current law, when the TF is exhausted, benefit payments must be cut.)

Fourteen years is not a very long time for people to plan and adjust for what's coming. The Politicians will have to address this reality sooner versus later. It is already passed the time where it is unfair to those who will be affected.
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-The Drop Dead Date for the Disability Fund has been changed from 2017 to 2016. This is important as the TF has confirmed that the next President will HAVE to bailout one component of SS. It is crucial to ask the candidates what they will do if elected. They better have an answer. When the debate on the future of Disability Insurance (DI) gets going, it will be marked with a sharp divide of opinions. It could easily be a factor in the election.
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-The SSTF creates  Best, Base and Worst case scenarios for 2012 through 2021. The Base-case is for SS to run an $800B cash deficit for the period. The Worst-case analysis is for a $1.8 Trillion cash shortfall. I’m firmly convinced that the Worst-case is most likely.
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-The critical assumptions used to develop SSTF’s assessment of the future include:

i) CPI will average only 2% in years 2012 – 2015. From 2015 – 2021 inflation will average 2.5%. Utter hogwash.

ii) Real GDP will average 3% a year for the next decade. There will be no recessions according to the TF. More hogwash.

iii) The TF uses these estimates for Real GDP:

2012 – 2.6%
2013 – 2.9%
2014 – 3.5%
2015 – 4.0%
2016 – 3.8%

These results simply will not happen. Is the SSTF not aware that the USA will face the biggest cut backs in spending, and the largest increases in taxes in the country’s history,  eight months from today?

iv) The TF uses the following estimates of ten-year interest rates:

2012 – 2.4%
2013 – 3.4%
2014 – 4.4%
2015 – 5.0%
2016 – 5.1%

These are important as the TF is sitting on $2.6T of IOU’s. The interest it earns on this surplus is critical to the short-term results. Possibly the TF is unaware that the Fed has promised to keep ZIRP in place until 2014. This interest rate outlook is based on the assumption that the economy will be zooming along without any interruptions. Nothing could be farther from the truth.

I stick with my prior forecast for SS. The TF will “Top Out” in 2017 and will have a maximum surplus of $2.75T. That’s five-years earlier than the TF forecast in its report today. It is $1T light of what the TF says the Maximum TF balance will be. I’m please to report that the SSTF’s High Cost (Worst-case) scenario is now ahead of my own forecast. They have the TF topping out in just two years. The TF will not exceed $2.75T. 

If anyone in D.C. wakes up to this reality, they would have to yell, “Fire.” Given that it’s an election year we probably won’t hear a peep.


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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