Social Security Shocker - $6B August Deficit

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DrKrbyLuv's picture
DrKrbyLuv
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Social Security Shocker - $6B August Deficit

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The Social Security Trust Fund reported an August net deficit of $5.865 Billion. This is the largest monthly deficit in nineteen years. Base on recent years data it was not surprising the Fund ran a deficit in August. But the magnitude of the shortfall was a surprise to me. This deficit is now the seventh in the past twelve months. That pace has never been seen before.

We deal with very big numbers these days. 100rds of billions and trillions are how we measure things. So a $6b monthly deficit for the Fund would appear to be a ho-hum. That is not correct. This is an important number.

While there is a political case that we have to prioritize health care as an issue, it is wrong on a purely economic basis to ignore the exploding problems at the Fund. Every month that the status quo is allowed to continue makes the cost of the ‘fix’ that much larger. Based on the past twelve months performance I now estimate that the Net Present Value of future committed liabilities is in deficit by $7 trillion.

  • In August the US Treasury had to borrow an additional $6 billion in the public market to finance the cash shortfall of Social Security. We already have too much paper for sale to fund the budget deficit. SS added to the supply problem last month.
  • The 2037 Future Value of the August deficit is -$17b based on a 4% return. What this means is that there will be a very significant revision in the 2037 drop-dead date. Based on current trends the go broke date is closer to 2025.
  • This is not just a bad month. The net decline in the Funds assets for June/July/August comes to $7 billion. In 08 that period was in surplus by $5 billion, In 07 it was +$7b and in 06 it was +$13b.
  • The decline in payrolls is hurting the Funds’ top line. January-July 2009 payroll tax receipts were down from 2008 by $5 billion or 1%. While the monthly declines in payrolls will fall over the next six months it is unlikely that there will be much net increase either. It will be a very long time before we see monthly gains of 250k. Without that kind of growth the Fund will quickly fall into annual deficits.
  • The expense side is exploding. The September monthly benefits cost will be $56.6b up from $51.5 in 2008, a 10% increase.
  • In 2007 the SSTF produced a surplus of $191b that it invested in the US economy. This year it will be closer to $100b. Based on the current trends that surplus will be gone by 2012. Six years earlier than the Trustees forecast in June of this year.

SS is the mother of all systemic risks. Even the debate on this topic brings risk. It will expose an additional $7trillion unfunded liability. Another reason for holders of dollars to worry.  There is no fix to this. Raising taxes is a dead end. Age warfare is a possible social consequence. The really bad news is that no one will touch this for another year. By then it might be too late.

This is more than a fiduciary failure, I think it may be fraud by any reasonable accounting practice.  Social security, like medicare, pensions etc. are public trusts that are constantly borrowed by our governBank. 

When they borrow "our" benefit funds, we simultaneously become debtors and creditors.  They have borrowed our money and we have to repay it - is it just me or are we being fleeced out in the open?

Larry

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Re: Social Security Shocker - $6B August Deficit

Absolutely right, Larry.  And, I'm still trying to get someone to tell me how many (how much) in I.O.U's are in the SS fund -money borrowed to waste on other government expenditures.  My personal feeling is that all the money should be repaid, first taking it directly out of the pockets and assets of those who voted to "steal" it in the first place.

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Re: Social Security Shocker - $6B August Deficit

Great find, Dr Krby. We Luv you, man!

Every recession does tremendous damage to Social Security's finances. Like all economists, the Soc Sec actuaries assume that the economy will grow at a steady-state 2 or 3% forever. Each recession takes them totally by surprise.

The 1973-74 recession, followed by the 1980 and 1981-82 "double dip" recessions, did so much damage to Soc Sec that Alan Greenspan was called in, in 1983, to "fix" it by raising FICA taxes. He said his tax increase was a permanent fix. Like everything else the Idiot Maestro ever said, it was flat wrong.

The economy is going to bounce back, but some portion of Baby Boomers who lost their jobs in the past couple of years are never going to work again. This causes permanent damage to Soc Sec finances.

Unlike private-sector pension plans, Soc Sec is not obliged to comply with the ERISA Act of 1974, which requires corporate pension plans to set aside adequate reserves under GAAP accounting to meet their projected future obligations. As a result, Soc Sec is grossly unreserved. And the puny reserves it has consist of unmarketable IOUs. No corporate pension plan invests entirely in fixed income -- the returns are just too low -- but that's what Soc Sec does on our supposed behalf. Estupidos!

As the dismal August deficit warns, Soc Sec is in its last years of running cash surpluses. But on a GAAP basis, Soc Sec is in deep deficit, and has been for decades. In reality, there is no specific "drop dead" date, since the so-called "Trust Fund" is just a four-drawer file cabinet in Pennsylvania stuffed with unmarketable IOUs. Under proper GAAP consolidation accounting, the "Trust Fund" simply disappears as an inter-subsidiary obligation. Properly accounted for, the "Trust Fund" is a meaningless fiction that doesn't exist. Repeat after me -- THERE IS NO TRUST FUND. Therefore, ignore it. It's B.S.  "Money for dope, money for rope," as John Lennon used to say. From here on out, cash flow is all that matters.

Instead of providing cash flow for KongressKlowns to steal, Soc Sec will soon transition to another permanent, rising budget drain. The shortfall will be met with a combination of borrowing and printing. This is the essence of a Ponzi scheme -- promising future benefits which have to funded by "contributions" from other, unwitting victims. Soc Sec's problem is that there just aren't enough young victims to swindle no more. Sorry, AARP -- your grey-haired, "entitled" beneficiaries made an elementary error -- entrusting your future to venial politicians. Sillies!

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Re: Social Security Shocker - $6B August Deficit

RetiredBen wrote:

I'm still trying to get someone to tell me how many (how much) in I.O.U's are in the SS fund -money borrowed to waste on other government expenditures.

Me too, I haven't found a good report showing what we have instead of money, and the few times I find are vague.  Maybe machinehead can help.

Hello machinehead,

Thanks for the info.  You mentioned that the " puny reserves it [SS] has consist of unmarketable IOUs."  I couldn't find a table I understood, that showed what assets were in the SS trust.  Check this link, from the www.ssa.gov.  It suggests most of the money is in bonds.  But then it says "Special issues, available only to the trust funds."  Are these bonds marketable?  What's "special" about these bonds, are they sticking it to us?

Larry

 

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Re: Social Security Shocker - $6B August Deficit
DrKrbyLuv wrote:

Thanks for the info.  You mentioned that the " puny reserves it [SS] has consist of unmarketable IOUs."  I couldn't find a table I understood, that showed what assets were in the SS trust.  Check this link, from the www.ssa.gov.  It suggests most of the money is in bonds.  But then it says "Special issues, available only to the trust funds."  Are these bonds marketable?  What's "special" about these bonds, are they sticking it to us?

Yes, Larry, those "special" bonds in the Trust Fund are not marketable. That's important. Consider the alternative case, if they WERE marketable bonds.

When the government sells a $1,000 T-bond to you or me, it receives $1,000 cash, and we receive a bond. To put this marketable bond into the Trust Fund, the government would have to reverse the transaction. It would have to spend $1,000 cash from FICA taxes to buy back the bond, and hold it as an asset. In other words, it would actually have to set aside cash, or bonds purchased for cash.

But in real life, the government is simply spending the FICA taxes, and putting an IOU called a non-marketable bond into the Trust Fund. It has not actually saved any money by using cash to buy an asset. Instead, it spent the money, and promised "I will pay the Trust Fund back later." This promise to pay later can only be funded by FUTURE borrowing which hasn't taken place yet. There is no actual cash on hand to back up this promise.

Imagine if GE filled its pension fund with non-marketable promises from GE to "pay later." In reality, such a pension fund is not funded at all. It would have no assets -- in the same sense that you can't make yourself a millionaire by writing a million-dollar IOU to yourself. The value of such a circular, unfunded promise is zero.

Until the ERISA Act of 1974 came along, corporations actually did promise to "pay later." Then some of them went bankrupt, and there were no assets to fund the pension obligations.

From a GAAP accounting point of view, Social Security is a 100%-owned subsidiary of the U.S. government, and should be consolidated with it. When subsidiaries are consolidated, parent-subsidiary obligations cancel out. For example, say USgov has a $4 trillion liability to the Soc Sec Trust Fund. The Trust Fund has a corresponding $4 trillion receivable from Usgov. That's if you pretend they are separate entities. But since it's all the same owner, in consolidation the $4 trillion receivable and the $4 trillion liability cancel out, equaling zero. This is why i say the Trust Fund is a fiction.

How do they get away with not consolidating Social Security? According to U.S. Supreme Court rulings, Social Security does not have any legal liability to beneficiaries. Beneficiaries have sued for Soc Sec benefits in federal court and LOST. The court ruled that Social Security is a welfare program, which Congress can reduce or eliminate at any time. Unlike a private-sector pension or annuity, you have no contractual rights to Social Security benefits, regardless of how much FICA tax you've paid.

Practically speaking, ending Soc Sec would cause a popular revolt. But under the legal fiction of the Supreme Court ruling of "no contractual entitlement," Usgov simply ignores the vast negative net worth of Soc Sec, on the ground that it is NOT LEGALLY OBLIGED TO PAY.

if this makes you feel insecure, it should. Claims to private-sector pensions are contractual. Yet the U.S. government exempts Soc Sec from its own strict ERISA standards for reserves, and made it noncontractual to boot. i view this as immoral and evil. Frank Roosevelt was the four-flushing charlatan who done this to us. Most contemporary politicians hail him as a hero. Draw your own conclusions.

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Re: Social Security Shocker - $6B August Deficit

By the way, Peter Ferrara taught me everything I know about Social Security. In 1980 -- three years before Sir Alan Greenspan claimed to have 'fixed' it with his FICA tax hike -- Ferrara's book Social Security: The Inherent Contradiction said that Social Security had inherent structural flaws which guaranteed future trouble. Nothing has changed in the 29 years since then, except that Peter Ferrara wrote more books to expand on his point. 

i doubt whether even one in a hundred Members of Congress has read Ferrara's masterful books about Soc Sec. Most of them lack the financial background to understand them. So the system lumbers on toward disaster. Even the most basic legal safeguards, such as an independent Board of Trustees representing the BENEFICIARIES rather than the sponsors who are stealing the reserves, does not exist. The system is rife with moral hazard, and Congress is fully exploiting its vulnerability by embezzling the reserves in broad daylight and replacing them with worthless IOUs, right in front of our gawking faces.

Here's where Peter Ferrara hangs out these days.

http://www.ipi.org/IPI/IPIPersonnel.nsf/Peter%20Ferrara%20bio?OpenPage

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Re: Social Security Shocker - $6B August Deficit

Sorry for chain-posting, but an article at Safehaven quotes the government's own words concerning the non-marketable bonds and the accounting consolidation issue. It's not a secret -- the government publicly admits it -- but no one's paying any attention.

http://safehaven.com/article-14448.htm

Let me quote a couple of conclusions from the authors, Daniel Aaronson and Lee Markowitz:

The special-issue Treasury securities that Social Security owns are no different than IOUs that an individual might issue to himself. Self-issued bonds are not assets because they are an obligation of the same entity. Instead, Social Security should have invested the cash received each year into assets other than Treasury bonds - foreign bonds, corporate bonds, equities or gold.

The Government ran out of money long ago. As a result of its insolvency, the Government is tapping any source of cash it can access, such as Social Security's surplus funds. This is not a healthy or sustainable situation. People recognize that Government spending has the US on a crash course, but markets still behave as though the day of reckoning lies so far ahead that there is no need to address it now. However, the Government's attempt at solving the current financial crisis through the assumption of trillions of dollars in additional debt has only moved the day of reckoning closer.

I love the sly "crash course" reference they slipped in. Maybe Daniel and Lee are lurkers here. We're all on the same page of the hymnal. The next song is an old country tune, Holdin' On To Nothin'. Y'all sing along now ...

 

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Re: Social Security Shocker - $6B August Deficit

Machinehead,

     Your post reminds me that even though we are supposedly the most intelligent species on Earth, we are unable to plan for large, life-altering problems that are bearing down upon us at full force. Kicking the can down the road has become second nature. Believing that something will come along to solve the problem is ingrained in our thinking. Society believes there is no alternative to the system we have created and lived by for so long. As individuals, we see the problem and know it's there, but collectively we have lost the ability of critical thinking to solve the problems. Herd mentality rules the day.

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Re: Social Security Shocker - $6B August Deficit

Thanks for the detailed explanation machinehead, I learned a lot about the mechanics of SS.    

machinhead wrote:

How do they get away with not consolidating Social Security? According to U.S. Supreme Court rulings, Social Security does not have any legal liability to beneficiaries. Beneficiaries have sued for Soc Sec benefits in federal court and LOST. The court ruled that Social Security is a welfare program, which Congress can reduce or eliminate at any time. Unlike a private-sector pension or annuity, you have no contractual rights to Social Security benefits, regardless of how much FICA tax you've paid.

This was a bit of a shock as I thought that the government had a legal obligation to pay.  I've always been suspicious of their ability to repay the loans but it now appears that they never intended to deliver (unless the government got lucky and won the mega lottery or something). 

Do you, or anyone else, know if government pensions are being handled the same way - no funding, 100% unmarketable IOUs?

Larry        

 

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Re: Social Security Shocker - $6B August Deficit

Larry,

Federal employees themselves, concerned about their CSRS/FERS pensions, have been asking the same question on forums. Here is how one of them answered it:

http://tinyurl.com/p6wwow

Or to quote from Wildavsky, Boskin and Abellera, The Federal Budget: Economics and Politics --

"The apparently healthy status of the CSRS Trust Fund for the most part obscures what is a sizable and growing burden on taxpayers. Most of the CSRS Trust Fund "income" is simply a bookkeeping, intragovernmental transaction."

[quote found on Google books]

So, yeah -- it's the same scam as the Soc Sec Trust Fund. Walter Williams rips the cover off the lies told since the very beginning of the system:

Another big congressional lie is Social Security. Here's what a 1936 government pamphlet on Social Security said:

"After the first 3 years -- that is to say, beginning in 1940 -- you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year ... beginning in 1943, you will pay 2 cents, and so will your employer, for every dollar you earn for the next 3 years. ... And finally, beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year."

Here's Congress's lying promise: "That is the most you will ever pay." Let's repeat that last sentence: "That is the most you will ever pay." Compare that to today's reality, including Medicare, which is 7.65 cents on each dollar that you earn up to nearly $107,000, which comes to $8,185.

The Social Security pamphlet closes with another lie: "Beginning November 24, 1936, the United States government will set up a Social Security account for you ... The checks will come to you as a right." First, there's no Social Security account containing your money, but more importantly, the U.S. Supreme Court has ruled on two occasions that Americans have no legal right to Social Security payments.

 We can thank public education for American gullibility.

http://economics.gmu.edu/wew/articles/09/Washington%27sLies.htm

Don't believe Walter Williams? Here, read it from Soc Sec's OWN SITE:

Section 1104 of the 1935 Act, entitled "RESERVATION OF POWER," specifically said: "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress." Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor

In this 1960 Supreme Court decision Nestor's denial of benefits was upheld even though he had contributed to the program for 19 years and was already receiving benefits. Under a 1954 law, Social Security benefits were denied to persons deported for, among other things, having been a member of the Communist party. Accordingly, Mr. Nestor's benefits were terminated. He appealed the termination arguing, among other claims, that promised Social Security benefits were a contract and that Congress could not renege on that contract. In its ruling, the Court rejected this argument and established the principle that entitlement to Social Security benefits is not a contractual right.

http://www.ssa.gov/history/nestor.html

The ludicruous, laughable result is that -- again quoting the linked SSA page -- "The idea that Social Security benefits are "an earned right" ... is true enough in a moral and political sense." [But not a legal sense, as Flemming v. Nestor established.]

So, if you want to stake your financial future on a "moral, political" guarantee [sounds like an oxymoron, don't it?] from that highly moral institution, the U.S. Congress -- BE MY GUEST!

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