Krasting v. Angry Bear on Social Security: ‘Critical’ interest rates

I haven’t given this a ton of thought in the past, but it seems that the effective interest rate on the trust fund as a whole would fluctuate a lot less (and thus interest payments fluctuate less) than the new-issue rate at any given time, since most of the fund is invested in longer term securities that are (mostly) held to redemption. In other words, if the fund is invested in securities earnings 5% but the curent interest rate drops to 4%, that doesn’t make much difference for today’s interest payments.

By the way, for all who want to dig deeper: I have just added a Reference List to my economics blog with economic data series, history, bibliographies etc. for students & researchers.

Andrew and MG are quite right and I have been mulling a follow up post to that effect.

Along with the issue of the portfolio holdover that makes non-maturing Treasuries immune from changes in the bond market there is also a fundamental difference in kind between Social Security and an investment fund.

An investment fund mostly pays out from earnings and so is immediately exposed and sensitive to changes in ROI, bigger ROI, less risk of redemption of principal to maintain any given consumption level. Social Security on the other hand only taps earnings on the TF in a bad year and that only to the degree needed to backfill any gap between income and cost.

If the Commissioner of SS was a householder whose main goal was to pay the bills then the ROI on simple savings (the TF) is secondary to the effective return needed to pay the current bill, a $10 bn gap given a $2.5 tn portfolio means only a needed 0.4% return, no big if the overall return is 4.2% or 4.4%. this logic changes quickly when that gap grows to $100 billiion at which point the difference between 3.8% and 4.2% becomes acute. It just seems that BK believes that 3.8% in and of itself drives the need from $10 billion to $100 billion which argument is I think missing a piece.

forgot the link:

http://www.youtube.com/watch?v=FS0yo8V_LX4

margery–

As an educator, I don’t believe the problem is solely, or even specifically, the American school system.  The crux of the problem is the American notion of exceptionalism, which removes many aspects of our culture, politics, economics, you name it, from the realm of rational discourse.

Of course, I recognize that the notion of “exceptionalism” should be addressed by the educational system, but it is so deeply ingrained and “sacred” that to focus on the schools alone as a solution is fantasy.

Oh I tend to agree, but I do think there also has been a deterioration in what is demanded and taught students in high school. I recall in a small Midwestern town I took two years of Latin (actually it was useful when I turned to medieval history and had to read texts in Latin), and one could study four years of it. Plus four years of Spanish, German and French if one wished. And a good course on the US government system. I don’t think that kind of teaching exists anywhere today outside probably private schools or a few magnet schools in larger cities. Meanwhile TV doesn’t educate at all, but instead foists people like Glenn Beck on the public and O’Reilly. Things have changed. You might say that “back when” the crazies I have mentioned didn’t have the means to warp young minds. Now with TV so omnipresent, they do.

Odd that my post to which you reply has disappeared. As did another linking to a youtube site of a debate between Huffington and Ailes. Strange. Is someone censoring me?

Sorry for the typo’s. It is late….

Can Mr. Webb and I agree on something? A formula.

The Sum of:
((a) Contributions +(b)Tax on Benefits + (c)Net interest) MINUS ((x)Benefits + (y)Admin. +(z) RRB) = Surplus.

I am pretty sure we can agree on that.

Here are some other things that I think we can agree on(If we can’t let me know and I will send you the data page at SS):

I) 2009 surplus = 98.6B
II) 2009 Benefits = 675.6B (x)
III) 2009 FICA/SECA = 669.3 (a)

I don’t have the exact numbers for the following. Can we agree to use the estimates for these from the 2009 TF Report? (they are very small variables and quite predictable) If so, these are the numbers:

IV) 2009 Admin. = 6.1b (y)
V) 2009 RRB = 4.0b (z)

There are two important catagories that are left. The Interest Income (b) and the Tax on Benefits (c). Some thoughts on the % number:

As I have said previously the formula used by the Fund smooths out changes in interest rates. Based on my review of the data I think that the Funds % income for 2009 is less than the $118.1 forecast, but because of the smoothing I don’t think they missed by much. My estimate is in a range of 114 – 116B.

Some interesting numbers pop up when you use any of these estimates. What pops up to me is a big miss in the Tax on Benefits line. If you assume my # of 114B for interest then you can solve for the Tax line.

Those that follow this please check my math. The answer comes out for the Tax line is “0”. I think it can’t be zero. But at the same time I don’t see how the % number could be $24 b off. That is not possible given the formula. My (admitted) guess on this is that MY % calculation is wrong and that the % number could be as low as 110b (it is not likely it is even this low).

Plug in a terrible % # of 110b and you get Tax on Benefits at $5b. Again, I don’t think even that is possible.

The Fund projected $24b for this number. Say it comes out at 4b. A massive miss. That would imply an 85% miss of this important part of the Fund’s income.

The Fund has projected the 2010-2014 Tax on Benefit at $140b. Based on the mega miss in 2009 a significant portion of this has to be in question. There is nothing different happening in 2010 than in 2009.

In order for us to really understand what the Fund may do in the future I (we?) need a better explanation of the variance in the Tax on Benefits line. Based on the 85% 2009 error could we have an error rate of 50% over the four years? That would amount to $70b+. That amount is more than hay. That is a few bales.If it were an error of $100b it would be very significant.

This issue is central to the matter at hand. I do not have an explanation that I feel comfortable with. I suspect that Mr. Webb understands this as well as anyone. I freely admit I don’t and I look forward to his input. Absent an explantion and logic path that puts this income back onto its antipated pace the Fund would have two wobbly legs. The other two, Benefits and Contributions are weak as well. But that is a complicated discussion that will have to wait until tomorrow.

Bruce Krasting

I hear you. I understand you. I know you feel this is irrelevant.

As sure as you are that it is not an issue for SS I am sure that it is an issue that shape our economic future. You have to think outside of the SS box.

IF (and I understand that it is an if in your eyes at this point) I am correct this is a VERY BIG DEAL.

If my expectations move toward reality this will be a front page story in every newpaper on the globe. It will move markets. It will cloud our already clouded future.

Yes there is a monster cushion of cash today. But the point that it was ‘supposed’ to be going negative is thought to be a long way off. When those to realities clash, there will be a very big bang.

Bruce K,

Take a look at the FY2009 number for tax on benefits.  $20.807 billion.  The CY2009 should fall somewhere in that general range. 

It is disgusting that the SSA hasn’t closed out its calendar year data so that one can pull up those numbers.  But one call pull up the fiscal year closeout. 

http://www.socialsecurity.gov/OACT/ProgData/allOps.html

Going a step further, using a more current analysis, CBO is not projecting much of a decline in revenues from taxes on benefits in FY2010.  It’s a drop from $21b to $20b.  Thereafter, the projections ramp back up through FY2019.  

Taxes on benefits, FY2009-2019:

21

20

23

26

30

33

36

39

43

47

51

http://www.cbo.gov/budget/factsheets/2009c/oasdiTrustfund.pdf

This is an interesting discussion, though I am surprised that more attention isn’t focused on the pending SSA cash flow shortfalls projected for FY2010 and FY2011 by CBO.  Going a step further, if one changes the growth projections slightly, there is no positive cash flow after FY2009.  That appears to be the more serious issue for consideration by Members of Congress. 

It is hard to believe that Members of Congress will do nothing to address the projected (and perhaps subsequently known) cash flow shortfall during the next few sessions of Congress.  Frankly, the fireworks may begin after the Administration’s FY2010 budget is released later today. 

It is reasonable to assume that Congress will undertake actions to restore the SSA combined trust funds to a positive cash flow status.  Those actions are likely to occur long before this decade comes to a close. 

I believe that the issue at hand is cash flow from the Congressional perspective. 

This is an interesting discussion, though I am surprised that more attention isn’t focused on the pending SSA cash flow shortfalls projected for FY2010 and FY2011 by CBO.  Going a step further, if one changes the growth projections slightly, there is no positive cash flow after FY2009.  That appears to be the more serious issue for consideration by Members of Congress.     
   
It is hard to believe that Members of Congress will do nothing to address the projected (and perhaps subsequently known) cash flow shortfalls during the next few sessions of Congress.  Frankly, the fireworks may begin after the Administration’s FY2010 budget is released later today.     
   
It is reasonable to assume that Congress will undertake actions to restore the SSA combined trust funds to a positive cash flow status.  Those actions are likely to occur long before this decade comes to a close.     
   
If SSA combined trust funds’ cash flow is the issue at hand from a Congressional perspective, then more attention could be focused on the choices that Congress may undertake.     

Krasting you are not addressing the main point. At all. You claim that interest rates are somehow key to turning a $94 billion surplus into a $7 billion deficit something that requires Social Security to run a cash deficit of more than $400 billion dollars over the next four years.

How do you explain a $125 billion difference in cash flow between 2010 and 2013 when the dollar difference due to interest changes is more like $6 billion? Your response is as follows:

“Mr. Webb suggests that this a minor variable. He is correct. The variables outside of the interest equations are much more significant in the Funds overall performance. I think a case can be made for deteriorating trends in most of the catagories”

But you don’t make any such case and call me “thickheaded”, without care, and ignoring reasonable arguments when there are no such arguments on the table.

Interest rate changes over the short run are not ‘critical variables’, they are not ‘central components’ they are instead marginal effects. Which is why I didn’t pay much attention to your initial argument, it was arithmetically flawed. Rather than apologize you continue to spin and gyrate.

In the context of a program that has close to $800 billion in income as against $700 bilion in annual costs a difference of $10 billion a year based on projections really pulled out of your own head is just not significant.

And I do not know what to do with this:

“The history of the TF is that they have consistently painted a base case that has not be realized”

Yes during the period between 1997 and 2004 their base case was significantly too PESSIMISTIC. You could look it up. I did. In real time.

DI has been in negative cash flow for a couple of years now. Given a combined $2.5 trillion Trust Fund balance why is negative cash flow for the current year even a problem? From the perspective of current beneficiaries anyway. I understand why the people who borrowed the money are reluctant to say pay extra taxes in order to pay it back, but there is a somewhat politically incorrect term for that: they are welchers.

As Coberly points out often negative cash flow was a design feature and not a bug in Social Security finance, otherwise we would not have let Trust Fund Ratios rise above 100 to start with. For better or worse we did and the only way to restore the Trust Fund to true actuarial balance is to enter an extended period of paydown on the principal of the Trust Fund. Under current projections that paydown has to be complete by 2037 and then results in a jarring discontinuity in benefits amounting to a 25% cut. That process can be eased and stretched out over 75 years by some modest adjustments to FICA in the near term with some additional adjustments in the medium term but which in any event will require some cash flow from the General Fund to Social Security to pay down the principal and accumulated interest.

Congress may or may not be driven to address this small but real 75 year cash gap but really nobody is served well by just in effect denying the reality of the $2.5 trillion Trust Fund Balance. In the words of the commercial “Pay me now or pay me later”. But pay me.

“I am surprised that more attention isn’t focused on the pending SSA cash flow shortfalls projected for FY2010 and FY2011 by CBO.  Going a step further, if one changes the growth projections slightly, there is no positive cash flow after FY2009.  That appears to be the more serious issue for consideration by Members of Congress.         
       
It is hard to believe that Members of Congress will do nothing to address the projected (and perhaps subsequently known) cash flow shortfalls during the next few sessions of Congress.  Frankly, the fireworks may begin after the Administration’s FY2011 budget is released later today.         

I am not sure why Movie Guy would be surprised at Congress not taking action. It would be a quagmire once again with Repubs saying no to tax increases and yes to benefit cuts while Dems would say yes to a tax increase and no to benefit cuts. The majority Dems would be too timid to take on the resulting Repub filibuster and we all be entertained by the Congressional show. Quelle surprise maybe?

Neither political side, and Movie Guy to boot, understands there is no short term problem with Social Security as the TF today will accomodate short term slippage in surplus Social Security Witholding tax revenues above payouts. I don’t believe Bruce K wants to admit to the purpose of the SS TF and continues with his false analogies of impending doom. Gee, I guess Congress will have to begin to address the real budget deficit outside of Unified Budget. If the SS TF was down to 1 year of projected payments, then by law, Congress has to take action. Today, it doesn’t have to do a thing as there is well over $2 trillion in the SS TF to be paid back from the General Funds. Quelle surprise,  the cheque has arrived.

The gov has choices. It can begin to address the real budget, as opposed to the Unified budget by raising taxes, to supplement the short fall in General Funds which is not Social Security’s fault. It can print “mo-money” and issue mo-treasury bills which will probably begin to crowd out the Bond market or cause som grieve on Wall Street. Congress can be pushed into a “sky is falling today” scenario forgeting all about the purpose of the SS TF and how the economy plays some horrible short term tricks on us in the near term, which was what the SS TF was designed to handle. It appears Bruce K and Movie Guy are suggesting this to be a real disaster because there will not be any SS Withholding Tax surplus to spend anymore and cover up gov spending. Congess could also handle the problem by raising the age of retirement even though there are fewer jobs out there in which to work and this would also disenfranchise many black males who have a shorter life span. Congress could also reduce current bennies to put the withholding tax revenues once again and greater than payouts thereby generate a surplus again. Whats a few of the elderly begging on the street?

As one of the “thick headed ones” Bruce K, I do not see an impending reason to do anything. You haven’t made much of a case and I do not believe you understand the dynamics of SS or you refuse to accept the dynamics of it. Afterall its all about Wall Street and the Bond Market.

Mr. Webb I ask again,  what are your numbers for the Interest and Tax on benefits #. If the assumption is that Tax on Benefits is $20b then the interest line has to fall to $95b.

Please, do the math and show me your numbers. All of the components are in except the mix of % and Tax on benefits.

I am not making stuff up here. This is plain old math. Adding and subtracting. Nothing difficult about it. Eithere the tax benefits missed by a mile or the % missed by a an even bigger mile. Which one was it? I think it has to be the taxes. But if I am wrong the interest income line missed by more than 20%.

I only ask this audience which one was in the tank. You can answer this question, “They both were”. I would accept that.

Bruce Krasting,

The question is who has the most reasonable assessment. I leave that to the readers.  

None of the above. We’re still in the same fiscal bathtub and what we need is a new source of funds flowing in. In China they have assets that will be like pooring money from the outside into their tub. We’re not like China, we don’t have any new funds flowing in. Its just the front of the tup charging an internal transfer fee to send money to the back of the tub.

“dead wrong”  is dead wrong.

social security was not intended to be a prop to the bond market.  if the bond market has been leaning on it, it needs to sober up and stand on it’s own two feet.

i think i could find a few responsible economistst who would say raising the tax on incomes over 100k per year would not only not kill the economy, it’s the medicine the economy needs if it is going to live.

I maintain that SS is a four legged stool. Those legs are controbutions,interest, Tax on benefits versus benefits paid. (the RR and overhead are both predictable and not large so I do not focus on them)

I maintain that all four legs are weak currently. In my analysis I concluded that this interest rate component could fall by as much as 44b (vs projections) over 4 years. Is that meaningful to the Fund? No it is not. If this were the only variable that is in question than we would not be talking about this topic.

There is an interesting discussion going on below about the Tax on benefits and %. The suggestion by some is that the interest line may have fallen in 09 to $95b. ( I disagree, but am willing to listen to that).

If that were proven to be the case then % would be $23b under forecast. If that is the conclusion then it could easily translate to $100b over the next 4 years. That would be meaningful.

Thank you for contributing to this process.
bk

I want to introduce something that I am sure will be ignored by this audience. I have been trying to make the case that what happens to the SS ratios does have a real impact to the real economy. I think we agree that at some point the Fund will go negative. It was designed to to do that. I think we are in the process of turning negative over the next few years. Webb and Coberly say that does not matter. I think it does. You have to look at the macro picture of where we are. The defict could be as high as 1.6T in the next year. We have to borrow in the global capital markets to do that. If we can’t do that at a cost we can afford it will have significant impacts on our economy.

Now look at this graph from the Federal Reserve:

The fact that foreigners are not buying our debt has at one level nothing to do with the SSTF. But in the broader context it is important. When the Fund goes negative/neutral it will force more public sector borrowing. To some extent the Fund looks like the foreign Central banks. Their holdings are no longer rising. In some cases it is falling. If you fail to see the importance of either the foreign central bank holdings or SS’ holdings in the context of our larger macro picture then I am talking to a deaf ear. Trust me. If SS goes negative in the next 3-4 years it will be a problem for Main Street. You don’t care about Main street. I do. I live on Main street, so do you. We all do.

Okay, I accept that wager. Show me a Blue Chip economist that would advocate a tax increase of $100b per year. I don’t think you will find one. BTW the number is not 100b per year. It would have to be much larger. $200b is closer to what is required.

You don’t need a Blue Chip to make your point. Any economist worth his salt that advocates the magitude tax increase will win your bet. But for the record for every reputable source you can find that advocates this I will find 10 (all blue chip) that say that raising taxes in that order of magnitude would cripple the economy.

It would be nice to say, “We can fix our problems by raising taxes”. We can’t and we won’t. That is simply not a viable option. You have to be reasonabale about this. What can be done is a different answer to what will be done.

Krasting

I think you will find, if you do the arithmetic that a tax raise of 3% on the income over 100k per person in this country will pay down the Trust Fund according to schedule.  This will not cripple the economy.  If it becomes an issue I’ll go find the official numbers.

And I said “responsible economists”, I did not say “blue chip” or even “most”.  Frankly, I can buy a dozen blue chip economists cheap. They are all on sale.

Krasting

i wish you could hold a logical thought in your mind for ten seconds.   we don’t have to borrow the money to pay back the money we borrowed from Social Security.  It can come from a modest tax raise on the people who got the benefit of the borrowing… the Bush tax cuts… or it can come form growth in the economy.  it could even come from raising the payroll tax…  that would increase the deficit, not reduce it, but if it would hold social security harmless, i’d let the Congress deal with the moral hazard of increasing the debt.

Krasting

you keep missing the point, and you keep repeating your argument.   it does not matter when or by how much Social Security goes cash flow negative.  your entire argument amounts to steal the money from granny so that the bond traders don’t lose a dime of what they EXPECTED based on their stupid assumption that the Trust Fund would never be used for the purpose for which it was created.

Ok Coberly. We have around this block before. We don’t agree. And there is nothing that either of us can do to change the others opinion on that.

Please recall that I put up these numbers to crearte a discussion. I am trying to answer the question, Do we have a problem? I am not trying to address the issue, What should we do about it? That is a very seperate discussion.

You must have the names of a few economists that you respect. Roubini types. People that have sufficient credibily to bring some real weight on this discussion. I propose we ask them to comment on your words,”It does not matter when or by how much Social Security goes cash flow negative”.

I understand and appreciate that there is nothing I can say to convince you that this is not correct. Give me an authority that you trust. We pose this narrow question to them. They will quickly respond that the timing and rate of the surplus run off will be a critical issue for broad economy.

Can we move on from this line of discussion? It is a dead end. Let’s agree that we don’t agree. Can we focus on mine and Webb’s and others effort to just trying to understand where we are and where we are headed versus what are the implication of this and what if anything should we do about it?

Cantab you are Johnny One Note on this. No competent legal opinion holds that the Special Treasuries are not fully backed by Full Faith and Credit. And yes I know about the Supreme Court decision.

This horse was beaten to death years ago, quit flogging the poor beastie and move on.

Krasting

It is a little hard for me to move from my position that it doesn’t matter.  Theft is always the wrong answer to a “fiscal crisis.”

Let me know if you find an honest economist somewhere.  Poor Truman called for a “one armed economist.”  Now we have nothing but.

Webb says:

In order for total receipts to go down you have to assume increasing unemployment, declining labor participation and/or actual declines in Real Wage.

He is 100% correct. But that is exactly what happened in 2009 and there is substatial evidence that it is continuing into 2010.

I am not calling for additional declines in emplyment in my Base Case. I am assuming that things don’t change much from where we were in 2009. I have a lot of good company that supports that. I am not out on a limb by suggesting stability for the next few years as a base case.

Assuming a rapid return to full employment would be a “Least Cost” approach.

I am assuming a retun to growth after 18 months. I am not calling for the end of the world. I am just suggesting that there is a good case for high unemplyment (low emplyment) for an extended period.

“If you fail to see the importance of either the foreign central bank holdings or SS’ holdings in the context of our larger macro picture then I am talking to a deaf ear. Trust me. If SS goes negative in the next 3-4 years it will be a problem for Main Street. You don’t care about Main street. I do. I live on Main street, so do you. We all do.”

Sheesh, cue the violins. My ear is not deaf, I am just hearing babble. I don’t trust you because your number and logic are both so cruddy I have been given no reason to do so. And really that “you don’t care” language is literally pathetic, are you going to go all Glenn Beck on us and burst out weeping?

I followed your link to that supposed Fed Chart and would like to make some points. First there was no link back to the source, it was just kind of a jpg from nowhere. Second one month does not make a trend. And third today is February 1st, do they really have all purchases from January already accounted for? Did someone work through the weekend compiling the numbers that went into that graph? Color me doubtful on this one.

“You must have the names of a few economists that you respect.”

Dean Baker, James Galbraith, Paul van de Water.

Our numbers and our ideas have been run past a list serv of policy experts that include these names and many more. Dean Baker in particular literally wrote the book on this topic back in 1999. It is called “Social Security: the Phony Crisis” and it was and is. Let me quote from the opening of the summary:

We have a chance, said President Clinton, to “fix the roof while the sun is still shining.” He was talking about dealing with Social Security immediately, while the economy is growing and the federal budget is balanced. The audience was a regional conference on Social Security, in Kansas City, Missouri, that the White House had helped bring together.
The roof analogy is illuminating, but we can make it more accurate. Imagine that it’s not going to rain for more than 30 years. And the rain, when it does arrive (and it might not), will be pretty light. And imagine that the average household will have a lot more income for roof repair by the time the rain approaches.
Now add this: most of the people who say they want to fix the roof actually want to knock holes in it.
This is the situation facing Social Security, and it is well known to those who have looked at the numbers.”

Yes it is.

coberly,

your entire argument amounts to steal the money from granny

Granny does not own future social security payments and you can’t steal from someone something that they don’t own. Remember private accounts? Had we gone down that road individuals would have an ownership claim. But because we didn’t inviduals own nothing so they can’t be stolen from.

In summary:
198something: Problem, In thrty years or so old people will be so plentiful that workers social security payroll taxes may not be sufficient to cover soical security benefits. Proposed solution, increase social security payroll taxes (FICA) and create a “nest egg” to be referred to as the SS Trust Fund. Make that surplus available to the general budget through the issuance of

Special Treasuries. The result is a two-fold benefit. On the one hand workers pay extra into a system that will be expected to provide them in the SS benefits years without burdening the work force at that time. Benefit two is that the general fund will have a reliable source of funds to borrow from and (and this is actually a third benefit) pay interest to that fund (that’s the Trust Fund) so that future social security payouts will have that additional support. Win, win, win.
2010:
Problem, the future is now. FICA is beginning to run a deficit relative to benefits. That’s not a surprise given that it was the sole reason for setting up the Trust Fund back in the ’80s. See discussion above. Solution, the Trust Fund is supplementing FICA receipts as it was intended to do. Geezers are now beginning to be supported by both current payroll taxes and the extra payroll taxes they had been paying into the Trust Fund for the past thirty years, about 75% of their working lives.
Straw problem: The Trust Fund is now beginning to pay out money and may run out of funds at some time in the future.
Solution: That was always the intention of the 198something SS “reform” legislation.
Straw problem @#2: At some point in the future, 2035 to 2075 depending on which experts you listen to, the Trust Fund may itself be depleted. Solution: The Social Security system reverts back to its pay as you go structure. It may or maynot be necessary or prudent to raise FICA contributions a tiny fraction.
Issue: The general fund, referred to as the Treasury Dept which handles all of the assets and liabilites of that general fund, is
responsible to the SS Trust Fund for a large outstanding amount of funds. The Treasury is also responsible to many other holders of Treasury securities both within the USA and around the world.
Problem: How will the Treasury meet its obligations to its creditors? Solution: How has the Treasury historically addressed the issue of repayment of its debt? The answer is not a mystery.

If you are assuming a return to growth after 18 months why does the table in your original e-mail show year over year declines for every month in every year from 2010 to 2013?

And there is no evidence that this is “continuing” into 2010. The key words are “increasing”, “declining” and “actual decline”, if the situation stabilizes at whatever level then actual receipts will grow and not continue to shrink.

No you are not out on a limb suggesting stability, you just haven’t come to grips with what that implies for gross payroll receipts which is in fact an increase and not a decline.

I haven’t examined your monthly numbers in detail mainly because your descriptor of them as a “simplistic model” if anything understates the case. But it seems that you have simply postulated that each month will show a steady decline compared to the year before, it just seems like a straight line extrapolation with no supporting mathematical apparatus or economic model. And it would appear that you have treated each month in the same fashion even though the basic inputs vary systematically.  For example Tax on Benefits is credited quarterly and since that is not projected to decline over the period in question those months should show much less dramatic declines. Similarly Interest is mostly credited to the TFs twice a year in Jun and Dec. And while your Dec 2009 number seems reasonably consistent with the Treasury Monthly TF Report it is also quite low compared to any baseline which should track those of July as some $50 billion in interest gets credited. I’ll have to take a close look at the Jan numbers when they come out but that steady twice annual injection of some $50 billion plus does not seem reflected in your projections.

Your whole post has this kind of surface plausible specificity but lacks any explanation of how you came up with numbers like 5.3% annual increases in benefits vs 1.0% increase in receipts. Near as I can tell the first number takes into account the natural increase in the benefit base due to a demographic increase in people 65 and older, while the 1% doesn’t take the natural increase in work force participants at all. This may in itself be enough to explain your results, you are allowing one number to change dynamically while holding the other static but without more detail about your methodology it is hard to tell.

You keep talking about ‘calculations’ and ‘analysis’ but mostly are presenting your numbers on faith. 4.15% interest rate in 2013 just kind of Being There. An example from your e-mail to Dan (bolding mine)

“A 5% increase over the 2009 number creates an increase of $33.75B annually or  $2.8b on a monthly average basis. I think this is too high a number to build into the cost base. I use a simple $2.1b (25.2B annualized) per month increase from January 2010 on.”

To say the least this kind of thing doesn’t shriek RIGOR! It does however at least whisper ‘fitting data to a curve’ in order to arrive at a pre-determined result.

yes, granny should have gotten a written iou for her social security payments.   but who would have enforced her iou?

Cantab I have to admit you put the “psycho” in “psychological” but beyond that I don’t see that you have the credentials to be diagnosing my motivations.

I don’t have a psychological attraction to big government as such, I do have an attraction to securing a future pension benefit that will allow me to share some of the benefits of the richer America I anticipate rather than have that benefit frozen at the rate of inflation when I retire and see my golden years have me ever at a greater disadvantage in standard of living than my younger peers.

Pricing indexing and increased retirement age are simply theft of future services from future retirees.

Coberly and I don’t downplay the funding shortfalls, instead we expose them to the light and air, express them in forms that people can understand and let the readers decide who is right and who is wrong. And not to put too much of a point on this we have managed to convince pretty much everybody but this gang of very similar sounding guys from Cambridge Mass. And Brooks who at least is sui generis.

Give all the wise counsel to Krasting you like, he will learn soon enough that everyone considers you to a pestilous loon.

Coberly,  
 
you ass.  
 
Given that you start like this I have to think that you believe you own this issue. You don’t.  
 
I may be the only one in the room who understands the importance of Roosevelt’s insistence that Social Security be paid for entirely by the workers themselves.   

Then you should state and share your personal understanding with everyone in the room. Backing it up with a quote or other expert opinion can also drive home a point. I’m not ready to elevate Roosevelt to saint status. There were a lot of nasty parts in the original bill that drastically reduced its coverage to women and minorities. So, FDR and congress did not get this thing right on their first try, it took modification over the years to get to where we are today.  

Here is one of FDR’s principals on how the system should be run:  
   
First, the system adopted, except for the money necessary to initiate it, should be self-sustaining in the sense that funds for the payment of insurance benefits should not come from the proceeds of general taxation.  

But now you say it’s fine to pay for benefit from transfers from the general taxation. The social security trust fund forces a violation or this principal. Maybe FDR’s instincts were right on this one.  

It is not “big government” it is a relatively small government program managing a fairly large amount of the workers money so that it is there for them when they need it.     

You’re wrong. Social security is a huge government program, it’s were the money is so you’re right to view any discussion as threat to the system.  

There are no funding shortfalls.   

Yes there are according to FDR’s criteria and these shortfalls are going to require the system be financed from general taxation.

First of all, the SS savings have been accounting for via the increase of the US debt ceiling.  We currently have a debt ceiling of around $12 plus trillion and that has yet to have spooked the bond market enough to stop buying US government debt or demand higher interest rates. 

Since the SS trust fund redemptions will eliminate SSTF debt and create an offset of new public debt (the money of which comes from the redemption of the SSTF debt), there will be no problem with financing new public debt.  So lets stop talking about Granny not getting an IOU, she can look online and see the Treasuries sitting there.  She just may not understand how the monetary operations work.

And let us stop using the construct “Trust Fund going negative”.  The SSTF cannot go negative – it can redeem all the securities it owns then it will be at zero.  The balance between income and expenditures can “go negative” in the sense that there can be more obligations then available income, but even then, expenditures cannot be made in excess of available funds (income + trust funds).  SS does not have an overdraft facility with the Fed.  It is inflammatory and inaccurate to say the SSTF will go negative when I believe what is meant is that expected income is less than expected expenditures.

The question as to whether we can make a prediction of interest rates, unemployment rates, tax rates and inflation rates to predict SS cash flow is not simple.  This is one reason we have economists, and their predictions are often significantly off.  While it might seem reasonable to expect unemployment rates of 7.5% for some period of years, it could just as easily be 6.2% or 8.5% – on what basis other than assertion we make these?  So any derivations calculated from these assumptions have to be taken with considerable caveats.

And there are inter-relationships that we should consider.  Low inflation rates impact SS benefit levels.  High inflation rates impact wage rates and contributions.  Etc.  Long-term levels of unemployment could be related to an increase in mortality rates, decreasing the number of SS participants.  Stranger things have happened.  We need to think through all the implications of such assumptions and not just apply mechanical arithmetic as if one factor can change in a vacuum and the rest stay the same.

Bruce,

The reason I don’t respect this Krasting character is that he does not recognize that you and coberly are a couple of pig headed zealots.  At some point he will realize that your opinion on social security is as useful as diarrhea.

PE

I wish I understood your point.  I have talked about cash flow negative. I haven’t heard anyone here say the Trust Fund would go negative, but maybe I haven’t been paying close attention.

Of course there are all sorts of variables.  That is why I don’t make predictions.  All I do is point out that the predicitions the Trustees have made do not amount to the sky is falling…  that Peterson and the Congress and the President’s advisors all say it does.

Nor do we need to make such predictions.  The “northwest plan”  limits the action predictioin horizon to ten years, and has a built in adjustment every year for changing predicitions.  Nor do we even need to do that.  Social Security can pay for itself.. payas you go… under almost any concievable circumstances.  Certainly any circumstances under which money has any meaning at all.

Mr. Webb suggested one of the methods I used was a convenient use of numbers. Not so. The second method was identified as a test of assumptions approach. The 2.1 “plug” number did make the two approaches jive. That is what it is supposed to do. The plug number was reasonable.

This gets us to the very difficult question of benefits and how they will grow in the future. We could use any range of assumptions and I would listen to them all. With one notable exception. I think the Funds numbers for the future are fuzzy.

The following looks at the growth rate assumptions made in the 2008 and 2009 report:

          2008     2009       Change in forecast
2010     6.1%    3.9%            -56%
2011     6.3%     3.7%           -71%
2012     6.7%     5.1%           -31%

Mr. Webb studies these matters and I hope that he will confirm that when you change a growth rate assumption on a major catagory like Benefits by 70% it produces some potentially distored results.

The Jan 09 jump in payments is partly responsible for this dramatic change in assumptions. But I can’t accept the levels of declines that are currenly forecast based on that alone. We have not seen growth less than 4% for a very long time. The general background, where older workers are accepting early retirement, runs against this significant reductions.

Mr. Webb has accused me of using numbers that ‘fit’. Question: are these big revisions justified? Can the rate of growth actually fall to a historically low level as we enter the boomer period? Or did the Fund just use numbers that ‘fit’?

For those who are interested in how to think about imputed interest rates for government programs, see this link:  http://www.law.harvard.edu/faculty/hjackson/DiscountRates_29.pdf

coberly:

PEBird is talking the right stuff that Bruce K is not going to recognize, acknowledge, or answer. PEBird has hit upon the bond market, the Low, Medium, and High predictions for SS, and he/she is suggesting that Bruce K’s iron clad arithematic is not on a solid foundation because of the economic changes which can get worst or far better. In the end, PE Bird is agreeing with you and Bruce. There is nothing for you to understand on his point as he is reiterating the same as you have done in past and have done multiple times.

Sit back and enjoy.

The article is about discount rates, not interest rates.

Oh boy.

Krasting first the Report was issued May 12 and not in June.

Second you don’t source your $98.6 figure which I suggest omits a big interest component. Under the High Cost projection OAS was supposed to be $2.348 trillion it turned out to be $2.319 which means that your numbers are off by some $6 billion. Which is not a big deal considering, we are talking a 1% difference in SS financials. Unemployment was high, the end result fell outside the 95% confidence interval, what is your point here?

High Cost projected interest to come in at $118.5 billion. By your arithmetic is really came in at $115 billion. How the hell does this fall under the definition of “so far below plan”.

The Trustees projected that average unemployment for the year would range between 7.8% and 8.5%. The actual result fell outside of that range. As a result receipts from contributions fell some $30 billion behind projections. So what? What does “age very rapidly” mean here?  If the Trust Fund balance ends up $100 billion behind projections over the next four years it means that TF depletion might happen two or three months earlier in 2037 than expected. I am still not seeing the pants on fire scenario your over heated language suggests.

Krasting you need to introduce yourself to a guy named Brooks. He used to hang out here until we ran him off, and still hangs out around Dean Baker’s Beat the Press and Diane Lim Roger’s Economists Mom. He too insisted that “ceteris paribus” you couldn’t separate out Social Security finance from other components of national finance and so that weaknesses in the overall picture demanded changes in the SS component. And rejected any suggestion that if there were weaknesses in other components that maybe the focus should be there and not on SS.

If there is a problem with the larger debt picture than I suggest taking action on the General Fund side. Say like trading the income of bond traders and hedge fund billionaires as income and not carried interest, I personally don’t see a lot of problems in the economy that couldn’t be fixed by returning to the same tax rates that Saint Ronnie thought were just about right, which is to say a top rate of 50%. Tax cuts on top marginal rates and on capital DID NOT WORK. They did not produce the results that were promised to the democratic majority, the results did not trickle down, the rising tide did not lift all boats, instead it just made rich people into really, really rich people.

If you are concerned about debt then maybe you should examine the data and find out the periods during which this country was systematically paying down debt as a share of GDP and replicate the tax rates. US debt went down as a share of GDP under every post war President not named Reagan or Bush (and to date Obama). http://en.wikipedia.org/wiki/File:USDebt.png In the fifties that meant top marginal rates at 90%, in the sixties and seventies at 70%, under Clinton a boost from 35% back up to 39%. Higher taxes = more revenue = less debt. That is the reality. Quit trying to take the hamburger out of grandma’s mouth and try taking the caviar out of the mouths of your buddy bond traders. Bernanke suggested slashing entitlements because “That is where the money is”. Not noticing apparently that it was him and his friends that were wearing the $5,000 suits and the $600 Ferragamo loafers.

Traders had their run. They made their claims that their activities created societal wealth. They were wrong, their activities trashed the economy led to 10% employment that is having some ill effects on Social Security and the solution is pretty obvious. And it has nothing to do with slashing Social Security benefits.

Krasting when I see you and yours offer to put some skin in the game maybe I can take you seriously. Until then not.

Webb: The growth rates come from comparing the numbers from the Fund. If you have the numbers you just need a calculator to get to the % change.

I accept that I have not convinced anyone that my approaches are valid and that my numbers are reasonable. I am disapointed in that.

I thought my methodology was reasonable. I said from the outset of this that I had no crystal ball. Just a computer.

My thinking is not fuzzy. I am making an assumption that many of the dynamics of the Fund are currently in neutral (they are actually declining across the board) and that benefits are rising.

In 2009 the Jan Surplus was $24.2b, The Feb. Deficit was $5.7b,

If you assume that everything is the same except an increase in benefits then you can solve for change and the numbers for Jan and Feb 2010. I am using Jan/Feb benefits of $57.3b/$57.6b

This would imply that the Jan.10 # will be a surplus of $21.7B and The Feb Deficit at 8.0B.

So those are my base case assumptions for the upcoming months. I think my base case will not be realized. I think some of the other components that make up the numbers have suffered from a year ago.

Note that the Jan/Feb numbers are larger than the “plug” number (2.1b) that Mr. Webb found objectionable.

Let’s reconvene on this in March. By then the Jan-Feb #’s will be in. If the results are in line with my thinking (or my real suspicion that they will be worse than my number) then possibly my approach and my concerns will have some traction._

I doubt anyone is still following this,but. I just sent this note note Webb and Coberly. Enough said.

I wanted to make sure you saw the piece in the Washington Post today Re SS. I don’t agree with what the author says in some areas but he is going down the same path that I am. Where have you heard the words before?

Instead of helping to finance the rest of the government, as it has done for decades, our nation’s biggest social program needs help from the Treasury to keep benefit checks from bouncing.

Now, years earlier than projected, Social Security is adding to the government’s borrowing needs, even though the program still shows a surplus on paper.

But this year’s Social Security cash shortfall is a watershed event. Until this year, Social Security was a problem for the future. Now it’s a problem for the present.

Allan Sloan is Fortune magazine’s senior editor at large.

http://www.washingtonpost.com/wp-dyn/content/article/2010/02/01/AR2010020103345.html

Sloan is a tool. I answered Krasting privately on this. But as Coberly said if you borrow $10 from me I am doing you a favor. If I run into you on the street and ask for the money back you are not bailing me out by giving me my sawbuck back.

Bruce K, 
 
I used the same method with that CBO report this weekend and it’s obvious that CBO projects that the SSA combined trust funds (OASIDI) will run a negative cash flow to the tune of $-230 billion from FY2010-2020. 
 
Negative cash flow of -$230 billion is not chicken feed. 
 
The Administration’s latest SSA combined trust funds projections are similarly concerning.  They’re now projecting negative cash flow for FY 2010, 2011, and 2012 to the tune of –$33.8 billion, –$19.1 billion and  –$2.0 billion.  And all FY numbers are negative after FY2015.  Only three fiscal years are left with projected positive cash flow. 
 
The Administration’s projections, in part, are based on projected annual unemployment rates of 10.0 9.2 8.2 7.3 6.5 5.9 5.5 5.3 5.2 5.2 5.2 for FY2010-2020. 

Bruce K, 
 
I used the same method with that CBO report this weekend and it’s obvious that CBO projects the SSA combined trust funds (OASIDI) to run a negative cash flow to the tune of -$230 billion from FY2010-2020. 
 
Negative cash flow of -$230 billion is not chicken feed. 
 
The Administration’s latest SSA combined trust funds projections are similarly concerning.  They’re now projecting negative cash flow for FY 2010, 2011, and 2012 on the order of –$33.8 billion, –$19.1 billion and  –$2.0 billion. 
 
All fiscal year numbers are negative after FY2015.  Only three fiscal years remain with projected positive cash flow, and there is no guarantee that those years will actually provide positive cash flow.  The negative cash flow explodes after FY2020. 
 
The Administration’s projections are based, in part, on projected annual unemployment rates of 10.0 9.2 8.2 7.3 6.5 5.9 5.5 5.3 5.2 5.2 5.2 for FY2010-2020.