Why Soc Sec TF Balances Grow in a Time of Recession
by Bruce Webb
(Update-something in this doesn’t look quite right. The over all argument is right but something is amiss down in the post. Bonus points if you find it before I do.)
(Update 2-found it. I think, see strike out and addition below. But there are a lot of numbers in play here.)
Blogger/Reader BK: I know what the TF says and I know what the CBO says,and I think they are both wrong. We will top out the Fund at a much lower number $2.8 T and it will come much sooner than anticipated.
To see why this isn’t so and actually just can’t be we need to inspect the following table from the 2009 Report Table IV.A3.—Operations of the Combined OASI and DI Trust Funds, Calendar Years 2004-18. The second column from the right shows the Combined Trust Funds projected to go from $2.4 trillion in 2008 to $4.0 trillion in 2018. What would it take to freeze it at $2.8 trillion? Discussion below the fold.
Well to freeze the Trust Fund at any given value obviously ‘Net Increase in Assets’ for the year has to go to zero. And this can only happen if total ‘Cost’ equals total ‘Income’. And this is where our reader goes off the rails.
For Social Security ‘Income’ is the sum of ‘Contributions’ (payroll tax), ‘Tax on Benefits’, and ‘Interest’, on the other hand ‘Cost’ is the sum of ‘Benefits’, ‘Admin’, and RRB Interchange (another kind of benefits). All three cost components and the first two income components are in the form of cash flowing in and out of Treasury and so are a measure of current year cash-flow. The CBO calls this ‘primary surplus/deficit’. On the other hand interest does not come in the form of cash or checks, like the interest on your simple savings account it shows up as a credit, but like that interest payment does shows up on your balance. So in order to calculate ‘Increase in assets’ we take ‘Primary surplus/deficit’ and add interest which in 2008 gave us an increase in TF balance to $2.4 trillion.
The 2009 Report projected an ‘Increase in assets’ of $137 billion for 2009, $138 bn for 2010, and $154 bn for 2011 for a total of $2.9 trillion. What would it take to get that end sum down to $2.8 trillion? Well it would mean that $100 billion in interest that would have been credited as an ‘Increase in assets’ had to be go somewhere else and the ONLY place that can be is to offset a larger than expected primary deficit’. In this case in order to keep the TF Balance from going to $2.9 tn you need an ADDITIONAL $100 plus billion of primary deficit over those three years. Including of course last year.
How did we do last year? BK tried to figure that out from monthly numbers from SSA. Well Nancy Ortiz and Some Guy explained why that was a bad idea, those spreadsheets are working tools subject to all kinds of variation. On the other hand the Treasury publishes Monthly Trust Fund Reports that are pretty much the final word, at least I have not found in the past any varation between their Dec 31 totals and the year end total printed in the Annual Report (due in the Spring). And luckily for us the December final was published yesterday. Since each Trust Fund is legally separate for Treasury Dept purposes there are two reports each month, one for OASI and one for DI .
The OAS Report ftp://ftp.publicdebt.treas.gov/dfi/tfmb/dfifo1209.pdf shows an ending balance of $2.318 trillion dollars. If we go to Table IV.A1 we see this is up from 2008 year end of $2.203 tn but fell short of anticipated $2.349 tn. And because of the way the math works ALL of that shortfall came on the receipts side. But unless those receipts fall so short that ALL interest has to be tapped to make up the difference then the TF balance will continue to go up.
Now the DI Report ftp://ftp.publicdebt.treas.gov/dfi/tfmb/dfifd1209.pdf shows an ending balance of $199 billion. If we go to Table IV.A2 we see that this is DOWN from $216 billion. On the other hand the DI TF was already projected to decrease to $206 billion, the end result was just $10 billion worse than expected. (Which is to say bad, DI needs fixing now.)
If we add these numbers together we would get a ‘Net increase in assets’ for combined OASDI for 2009 of $108 billion to a total of $2.53 tn. And here is the key point our commenter missed in order for the INCREASE to be less, next year has to be WORSE than last year, in order for that increase to be ZERO next year has to be a LOT WORSE. Because not only would results have to be bad enough to gobble up an amount equal to the interest that made up the net increase but also any interest on that interest. In order to keep the Trust Fund to growing to $2.8 trillion we have to project an EXTRA $50 billion in decrease in ‘Net Increase’. Well that might well be, there is nothing implausible about reducing the RATE of growth of the TF balance by having only $225 billion in net increase in 2010 and 2011 instead of projected $275 billion, a year end TF balance of $2.8 trillion or less in 2011 would not at all be surprising.
On the other hand it would not on that account be frozen. Because a $2.8 trillion Trust Fund still throws off a certain amount of interest and in order for that to NOT give you a positive ‘Net Increase in Assets’ then primary deficit has to come in at more than the total amount of interest earned that year. Meaning that not only would 2010 and 2011 have to be significantly worse in terms of revenue than 2009 but 2012 would have to be MUCH worse (the effect ultimately damps out).
In order for the Trust Fund to ‘top out’ it needs to run systematic cash deficits in excess of $120 billion a year. Forever. Other wise the insidious effects of compound interest continue to work on the balances.
We are in a deep unemployment recession and the resulting decrease in payroll tax receipts has resulted in a decrease in the RATE of increase of Trust Fund Balances, but in order to get that rate to go to zero we would need to have an immediate decrease in payroll contributions of $8 billion plus a MONTH to eat up the roughly $100 billion plus of interest the current TF will earn this year. Which would mean a drop in around $775 billion in total payroll (quick numbers, please check) which is more than triple the total of wages in covered employment. This literally can’t happen. Yep too quick. The right numbers are found here: http://www.ssa.gov/OACT/TR/2009/VI_OASDHI_dollars.html#133537 which shows taxable payroll right at $5.6 trillion, $775 billion is 14% of that meaning we would need maybe 25% unemployment to eat up that interest income in the short run.
Per the 2009 Report’s Intermediate Assumption the Combined Trust Funds were projected to peak at $4.3 trillion in 2027 and then descend fairly rapidly to zero in 2037. Under the more pessimistic High Cost Assumption the would peak at $3.4 trillion in 2018 en route to depletion in 2027. (On the other hand High Cost model had unemployment 8.5% for 2009, 9.3% 2010 and average 8% through 2016, and never better than 6.5% after that with Real Wage permanently under 1.0% (in other words a fricking catastrophic perma-recession)). Still there is a case to be made for a TF that tops out in 2018, the Trustees make it,
But there is no set of numbers that would have the Trust Fund top out at $2.8 trillion in the next two years, the momentum of the existing TF balance and the interest it accrues are simply too great to be entirely overcome by a shortfall in tax income over the short run.
Bruce
I think you are right about this, but not taking the time to check the arithmetic. There are two points that you might not be making quite clear enough for us to understand both Krasting and the futre of SS.
First point is that the Trust Fund IS scheduled to run out. Of course with “low cost” it might not. But with “intermediate cost” benefits would exceed income enough to bring the trust fund to (effectively) zero (that is, not counting the one year reserve) sometime around 2035 – 2045. It is important that people understand this so they can stop thinking of the Trust Fund as ‘going broke”: it was always supposed to run out of money after doing its job, and then SS returns to pay as your go (with a Trust Fund reserve of one years benefits… which as you point out ought to last through about ten years of deep recession if called upon).
Second, as far as I can tell Krasting doesn’t yet understand this, OR he is thinking like a congressman, or, god help us, the “experts.” And they go all fluttery at the very idea of having to find the cash to replace the Social Security surplus, much less pay back the money they borrowed, which is what a declining Trust Fund means.
It cannot be made too clear, their reluctance to pay back the money they borrowed is another way of saying they intend to steal it, even if granny has to work until she drops in her tracks because they stole her retirement insurance.
All of this could have been avoided, and if Gore had not been de-selected by the Supremes night have been. What might have been.
___________________
June 1, 2001. President Gore announces a bold new program to assist the students and workers of today even as it solidifies the Social Security Retirement system. This program would invest Social Security cash surpluses in qualifying interest earning state and local construction bonds This new funding will be in addition to any appropriations and grants from Congress, investments will be determined on the basis of safety on the investment and priorities as established primary by state legislatures and designated state conditions. Efforts will be made to invest funds equally by Congressional district, In cases where recognized governmental jurisdictions such as large Cities or Metropolitan Organizations include multiple Congressional Districts, the allocation can be distributed by that group of districts, subject to Cabinent level review.
This program is by design a closed end ten year $100 billion per year attempt to address America’s long standing backlog of critical infrastructure repair, replacement and renovation even as it supplies strong and safe returns to the Social Security System for the real challenges it faces in the years after 2010.
______________________________
Designed well this would have been perfect. No need to set up private accounts, interest and pricipal payments for the bonds coming out of the current economy instead of being shifted to an indefinite future, no interference in equity markets, little impact on bond markets except to the degree that inccreased demands for munis put downward pressure on yields so reducing cost of funds for states and cities. And maybe best of all every job created with this trillion dollars of funding would be creating payroll tax dollars and so compounding the effect.
Somehow I think $1 trillion in direct investment in infrastructure might have paid off better than simply cutting a trillion and a half off rich people tax bills.
Well Dale although understand the framing I have never accepted the idea the the Trust Fund was “supposed to run out of money” because I have never accepted the underlying model of “pre-funding”.
It is pretty clear to me from reading the Oral History of Robert Myers and that portion of Bob Ball’s unpublished biography that the Greenspan Commission did not think of it in quite that way, and indeed were never really presented the actuarial tools that would allow them to evaluate it in those terms.
I know that Nancy presents it a little differently and that technical staff may have approached it differently but it doesn’t seem to me that the Commission thought they were setting up any kind of new vehicle “the Trust Fund” to serve as a respository for a dedicated tax to serve a particular purpose and then more or less pass out of existence.
The testimony of Bob Ball was that the intent was to get Social Security past the challenges of the day plus the next ten years plus be able to say they had at least addressed the 75 year long term outlook. Which they did, the end result of the 1983 Act was to put the Trust Fund in actuarial balance at the end of 1993. But the pure fact is that on examination of the Reports Social Security underwent substantial degradation in the 1993 to 1996 period as the outlook darkened. The four plus year period of high productivity, high Real Wages and low inflation that allowed the conversion of GF deficits in 1993 “as far as the eye can see” into surpluses by 2000 were not anticipated or planned for by the 1983 Commissioners, that the result was an effective prefunding (and for a while overfunding) of Boomer Retirement being mostly a happy accident for all concerned.
To say that the TF was “supposed” to do anything is I think a distortion of the historical record. I understand why you find it useful and it is a reasonable way of explaining why a reversion to a TF ratio is not be be feared but instead to be welcomed as a reversion to the overall model of pay-go with prudent reserve, it just goes against my grain to project current knowledge back in the heads of historic actors.
Bruce
You miss my point. If the Trust Fund was not supposed to fund the Boomers, then it was projected to run out even sooner. By run out I mean approach from above or from below a stable Trust Fund Ratio of 100. I don’t really give a damn what the 1983 commission thought it was doing. I have no way of knowing. And as far as I can tell neither do they.
The point is that the Trust Fund “running out of money” is not a problem. This is the point that the people need to be made to understand. They don’t give a damn about the historical record either.
Of course I agree with this entirely. What do we do now?
Bruce, the net effect of 6this approach was to make the investment of excess funds totally/partially politically driven. State and local jusisdictions would become a new set of lobbyists. The secondary effect is to make those new SSTF bonds less secure than the current set. State and local Govts do default on bonds. So, already low interest bonds become even lower interest bearing while adding risk.
I absolutely do agree with your benefits list. Because of the above downside a case must be made that the added risk and lower interest are offset to taxpayers by this approach. Haven’t thought deeply enough about it it, yet, but it might be an easy sale.
CoRev
thanks for a thoughtful reply. as long as it is understood that Social Security is pay as you go, worker funded, i have no problem with “investing” the surplus… and then adjusting the pay go rate as needed. down if the investments succeed, up if they go bad.
It wasn’t projected to “run out” at all.
http://www.ssa.gov/OACT/TR/2009/VI_cyoper_history.html#172170
The Trust Fund ratios stabilized as Title 1 phased out and Title ii phased in in the late fifties but that is all it was. I don’t know if Short Term and Long Term Actuarial Balance were defined as precisely in the sixties as they are in more modern Reports but there didn’t seem to be a lot of outcry when the TF ratio slipped under 100 in 1971 and slowly sank towards double digits, at which time we had action that brought it from double digits (briefly less) in 1983 to 97 in 1993, but from appearnces it remained just a technical metric.
Dale, thinking a little more deeply, I see one other problem with the state/local investment option. There is no easy way to sell those State/local bonds when they are needed for paying benefits. They would almost always take some beating if not an actual loss, and this plays into BK’s bond market impacts. Maybe even more so than just offering the SSTF bonds as they exist today.
As far as Gore’s “lock box” is concerned, that is exactly what we have today in the SSTF. How ignorant were we to even consider it as a proposal. When viewing the SSTF via risk colored glasses, we have the best of all possible worlds with today’s solution. I can think of no better way to protect the SSTF.
CoRev
I am glad you are thinking deeply today. None of the rest of us are. I don’t know much… anything… about the bond market. I do understand Social Security and the Trust Fund. The current situation is actually perfectly fine.. except that Congress does not wnat to honor the Trust Fund, the bond market (Krasting says) is going to go crazy it SS goes cash flow negative… meaning that it draws on its Trust Fund, and people who should know better say on the one hand the Trust Fund was never supposed to “do anything” but on the other it is critically important to argue when it “runs out.”
I did not understand Gore’s lock box proposal at the time. My high end news service talked about it as if it were a literal safety deposit box with gold and jewels in it. My current understanding is that he just meant that all the wonderful surpluses coming from the Clinton tax raises and the dot com miracle should be used to pay down the existing debt before being spent on new spending or tax cuts… so that there would be room to pay down the Trust Fund debt when it was called.
Not all state and school bonds are equally risky, there should be at least some jurisdictions within each Congressional District secure enough to get their share.
The politics get largely boiled out by simply mandating that competitions between CDs get you nothing,
As to the issue of needing to sell them in an untimely fashion. Social Security is currently not an investment fund where money is made trading on price, instead it relies on holding bonds to maturity. Under this system I would see Social Security holding the first 100 TF ratio in fully callable Special Treasuries and only have invested funds over that in fixed in Munis, It is hard to think of an economic emergency that would catch you so unawares that the drop in payroll income and tax on benefits would be so severe as to also eat up all cash revenues currently generated out of your total portfolio (because of of those Munis would be maturing) AND burn through you 100% reserve of US Treasuries so as to force you into a rush sale.
Gore’s “lock box” is NOT exactly what we have now. Instead people who didn’t understand Social Security finance to start with took a metaphor and assumed it meant something else. Operationally Gore’s lock box meant a two step process. One use the Social Security surplus to calculate Unified Budget Deficit/Surplus but then don’t let it be calculated for pay/go budget purposes as they existed then. If this had been followed in 2001 then $77 billion in Debt held by the Public would be redeemed permanently leaving Congress free only to spend the money saved on the debt service for it. The lock box was not so much to lock money in as to lock Congress out. The idea under the idea is that you are locking away capacity for future borrowing and so costs when it came time to redeem the TF fund, think of it as stashing away spare Full Faith and Credit.
Bruce
I guess I am not sure what you are saying here, but it looks to me like you are caught on the barbed wire.
If the Trust Fund was never supposed to “do anything” or even “be anything,” then it is hard for me to understand why you worry so much about the precise date it “runs out.”
The point I have been trying to make is that it does not matter when it runs out. The depletion of the Trust Fund does not make Social Security “broke” as Bush said. Nor does it’s change from growing to declining mean the sky is falling, as Krasting continues to say.
I foolishly said at one time what I heard everyone saying, who knew anything at all, that the Trust Fund was “designed” to pay for the Boomers and then run out. I retract part of that. I don’t know what the Trust Fund was “designed” to do. But it is on course to pay for the Boomers and then run out. And it won’t matter when it does. Because beyond a necessary buffer to make sure the checks are covered every month, it has no importance whatsoever. I assumed that it was allowed to grow so large “in order to” pay for the Boomers retirement, even if that was not what it was originally “designed for.”
It seems to me you are making an “historical point” at the cost of throwing dirt on the only point that matters: The Trust Fund is not Social Security. The Trust Fund “running out” does not make Social Security “broke.” It does not mean that the sky is falling.
That’s why Low Cost and High Cost do not matter… except to give “planners” an idea what to look forward to. What matters is whether social security can pay for itself. That means, can workers pay a reasonable amount of their pay into a system that will return them a reasonable standard of living when they want to retire and have a reasonable basis to believe they have paid for their own retirement. The answer to that question is “as far as the eye can see.”
oh, well,
i guess i need to say that i did not buy the gold and jewels picture of the lock box at the time, but i found myself arguing against it.
Bruce’s analysis above … good old halo scan makes it hard to keep track of who said what first.. may be right on target. sounds about right to me. but i have to say i can’t really claim i understand it.
which, i guess, leaves room for Cantab to jump in say if I can’t understand Bruce how can I claim to understand Social Security?
Y’all–It doesn’t surprise me that Greenspan and the guys didn’t think of the TF as a fund containing a dedicated tax, but when you direct the Treasury to convert all payroll taxes upon receipt into special purpose bonds, that’s the effect you get. You already have laws saying that payroll taxes must be spent only on Social Security, so you don’t have to dream it up. That was already in effect when Commissioner Ball and Bob Meyers served on Greenspan’s commission.
The Treasury then borrows the money back and throws it in with Gen Rev. This has the effect of reducing the total amount of Gen Rev you have to collect through income taxes and other fees, levies, etc. Which is great if you actually have to pay income tax but, of course, under the Reagan/Bush administrations, higher income people enjoyed additional income tax reductions without respect to payroll taxes, so benefitted doubly.
At staff level, the agency sent us off to months of training (not kidding!) to learn about all this stuff. It was emphasized repeatedly to us that the TF was dedicated solely and only to pay for SS benefits and administrative expenses. Subject to approval by Congress alone as LAE (limitation of administrative expenses) which funds the agency. That’s the story they told us at a time when both Comm. Ball and CA Meyers were still active in Social Insurance policy. So, pay as you go is fine with me. NO problem there. My problem is not keeping the program operating. No bond market is worth pulling SS checks out of circulation at the street level all over the country. IMO Nancy Ortiz
The Trust Fund is not an instrument that “does” something, it is not a mechanism or a tool, it is a label on a box. Actions by Congress cause the Trustees or their agents to take ‘dollars’ out of that box or put dollars back in.
The very first Social Security Report is called the same thing as the current one: Report of the Trustees of the Social Security Trust Fund and is a Report of the activities of people putting things into and out of the box.
In reality it matters very much if the balance in the Trust Fund goes to absolute zero. Under current law the Commissioner of SSA has no legal ability to reduce the value of checks nor any ability to borrow and checks would have to be delayed until some was able to put money back in.
Since its inception there have been times that the balance in the Trust Fund has been allowed to rise above the minimum needed to establish a prudent reserve, equally there was a long period where it was allowed to diminish to the point it threatened benefits but there is no point that is starts or stops doing anything absent absolute depletion.
The Trust Fund is not Social Security in the same way that the Paymaster’s ledger and check book are not the entire factory, in a pinch you can buy a new ledger, get new checks from the bank, and recreate your numbers, but that doesn’t mean the Paymaster and his books can simply be extracted from the overall operation. In 2037 or whenever the factory workers will be expecting and needing a check, that the amount they get is in fact enough to meet their actual needs is not likely to meet their actual objections, one side, the other, or both better be prepared in advance to accept the adjustments.
Well I am more and more happy with my new claim that the contents of Gore’s Lock Box was just a reserve of Full Faith and Credit.
Operationally it means looking forward to the economy 15 years latter and saying “Look we project the economy will be this big and that our room for borrowing will be this big and the share we need to pay for Social Security will be this big so lets pay off enough existing debt between now and then to prevent crowding out.”
Maybe if Dale thinks of it as a Jewel Encrusted Gold Card it will help.
Bruce
we don’t seem to be getting anywhere. I tried to make it clear that by “runs out” i meant “approaches TFR=100. I did not mean “goes to absolute zero.” in fact, i think i said so.
The expected date that it will run out is important for planners so they can plan what to do about that check in 2037 or 2047 or 2017. The sane thing to do is to start raising the payroll tax rate so that the pay as you go tax will take the place of the depleted trust fund. As long as that doesnt’t impose real hardships. And we have shown that it will not.
You seem to be talking as if I had no conception at all. I sure as hell don’t confuse the numbers in a ledger with the need for real dollars in benefit checks that come from real people still earning a living.
Looking at SSTF and trying to make some assumptions about what may happen is a complicated business. There are many parts that have to be taken into consideration. I think it would be helpful if we examined a few of the components and see if we could not agree on a few things.
Mr. Webb has suggested some back of the envelope math on interest income for the fund. He has used the number of 5% as the basis for an estimate of 2010-2014 interest income. I think that is too high a number.
As of December 2009 the Fund reported an average yield on the investments it hold as 4.68%. That number is CERTAINLY going to fall. The only question is by how much.
In EVERY year for the past twenty the Fund has reported a drop in the average yield on its portfolio. The next few years will be no exception.
In June of each year the TF invests its accumulated annual surplus. Also in June a portion of their old holding mature. With the surplus and the maturing investments they acquire from Treasury special issue IOUs that range in maturity from one to 15 years.
Because of this pattern it is especially important to take note in the drop in average yield on the portfolio in June. Some numbers:
From 1990 – 2009
The average YoY drop was 12BP.
The Median drop was 11BP.
The largest drop was 30BP (2003)
The smallest drop was 2 BP (1996)
The largest four-year cumulative drops took place in:
1990-93 (-52BP)
2001-04 (-67BP)
Some thought on looking at this:
*The two largest drops occurred in big recession years. During those periods the Fed dropped rates sharply to combat economic slow down. The yield that the SSTF realized was impacted by these events. The yield fell as a result of the Fed’s actions.
*The smallest drop occurred in 1996. In the two years preceding this, 10-year interest rates rose from 5% to 8%. Once again, the Fund was affected by changes in prevailing interest rates.
*The drop in yield in 2009 was 15BP. Based on the historical impact of recessions and drops in falling rates one can easily assume that the 2009-2012 period will mirror the results of both 90-93 and 2001-04. In those periods the yield to the Fund fell an average of 15BP. Given the severity of the recent recession and the extreme steps that the Fed has taken (short term interest rates have been at zero for nearly one year). We have never in our history seen such low rates. The suggestion is that the 2010-03 period will be larger than any in history. This analysis leads me to assume that average yield could fall by as much 65 BP (less than 01-04).
The fund generates significant surpluses at the end of each quarter. Looking at this overtime the amounts that are invested by the Fund for a period of less than 12 months has been a significant source of revenue. The yield that the Fund receives has fallen substantially in recent years.
Some Numbers (short term rate only):
2006-5.25%
2007-5.00%
2008-4.00%
2009-3.25%
January 2010 – 2.75%
The first thing to notice is that the Fund is still enjoying a very high rate of return on its short term cash 2.75% is a great deal for the Fund. A market investment in 6 -month marketable Treasury notes is closer to 50BP. The reason for this is that the formula for determining the rates is based on multi-year averages. The formula smoothes the results to the Fund. But what this means is that the formula will produces lower and lower short-term interest rates for the next three years. Interest on the Funds short-term surpluses will fall to 1.5% (or lower) in the next three years. There is nothing that can stop that.
I do not want to hear that I am forecasting interest rates that may or […]
Thanks Nancy.
sadly we can’t expect people to just lay aside their preconceptions and actually understand what we are saying.
Looking at SSTF and trying to make some assumptions about what may happen is a complicated business. There are many parts that have to be taken into consideration. I think it would be helpful if we examined a few of the components and see if we could not agree on a few things.
Mr. Webb has suggested some back of the envelope math on interest income for the fund. He has used the number of 5% as the basis for an estimate of 2010-2014 interest income. I think that is too high a number.
As of December 2009 the Fund reported an average yield on the investments it hold as 4.68%. That number is CERTAINLY going to fall. The only question is by how much.
In EVERY year for the past twenty the Fund has reported a drop in the average yield on its portfolio. The next few years will be no exception.
In June of each year the TF invests its accumulated annual surplus. Also in June a portion of their old holding mature. With the surplus and the maturing investments they acquire from Treasury special issue IOUs that range in maturity from one to 15 years.
Because of this pattern it is especially important to take note in the drop in average yield on the portfolio in June. Some numbers:
From 1990 – 2009
The average YoY drop was 12BP.
The Median drop was 11BP.
The largest drop was 30BP (2003)
The smallest drop was 2 BP (1996)
The largest four-year cumulative drops took place in:
1990-93 (-52BP)
2001-04 (-67BP)
Some thought on looking at this:
*The two largest drops occurred in big recession years. During those periods the Fed dropped rates sharply to combat economic slow down. The yield that the SSTF realized was impacted by these events. The yield fell as a result of the Fed’s actions.
*The smallest drop occurred in 1996. In the two years preceding this, 10-year interest rates rose from 5% to 8%. Once again, the Fund was affected by changes in prevailing interest rates.
*The drop in yield in 2009 was 15BP. Based on the historical impact of recessions and drops in falling rates one can easily assume that the 2009-2012 period will mirror the results of both 90-93 and 2001-04. In those periods the yield to the Fund fell an average of 15BP. Given the severity of the recent recession and the extreme steps that the Fed has taken (short term interest rates have been at zero for nearly one year). We have never in our history seen such low rates. The suggestion is that the 2010-03 period will be larger than any in history. This analysis leads me to assume that average yield could fall by as much 65 BP (less than 01-04).
The fund generates significant surpluses at the end of each quarter. Looking at this overtime the amounts that are invested by the Fund for a period of less than 12 months has been a significant source of revenue. The yield that the Fund receives has fallen substantially in recent years.
Some Numbers (short term rate only):
2006-5.25%
2007-5.00%
2008-4.00%
2009-3.25%
January 2010 – 2.75%
The first thing to notice is that the Fund is still enjoying a very high rate of return on its short term cash 2.75% is a great deal for the Fund. A market investment in 6 -month marketable Treasury notes is closer to 50BP. The reason for this is that the formula for determining the rates is based on multi-year averages. The formula smoothes the results to the Fund. But what this means is that the formula will produces lower and lower short-term interest rates for the next three years. Interest on the Funds short-term surpluses will fall to 1.5% (or lower) in the next three years. There is nothing that can stop that.
I do not want to hear that I am forecasting interest rates that may or […]
Looking at SSTF and trying to make some assumptions about what may happen is a complicated business. There are many parts that have to be taken into consideration. I think it would be helpful if we examined a few of the components and see if we could not agree on a few things.
Mr. Webb has suggested some back of the envelope math on interest income for the fund. He has used the number of 5% as the basis for an estimate of 2010-2014 interest income. I think that is too high a number.
As of December 2009 the Fund reported an average yield on the investments it hold as 4.68%. That number is CERTAINLY going to fall. The only question is by how much.
In EVERY year for the past twenty the Fund has reported a drop in the average yield on its portfolio. The next few years will be no exception.
In June of each year the TF invests its accumulated annual surplus. Also in June a portion of their old holding mature. With the surplus and the maturing investments they acquire from Treasury special issue IOUs that range in maturity from one to 15 years.
Because of this pattern it is especially important to take note in the drop in average yield on the portfolio in June. Some numbers:
From 1990 – 2009
The average YoY drop was 12BP.
The Median drop was 11BP.
The largest drop was 30BP (2003)
The smallest drop was 2 BP (1996)
The largest four-year cumulative drops took place in:
1990-93 (-52BP)
2001-04 (-67BP)
Some thought on looking at this:
*The two largest drops occurred in big recession years. During those periods the Fed dropped rates sharply to combat economic slow down. The yield that the SSTF realized was impacted by these events. The yield fell as a result of the Fed’s actions.
*The smallest drop occurred in 1996. In the two years preceding this, 10-year interest rates rose from 5% to 8%. Once again, the Fund was affected by changes in prevailing interest rates.
*The drop in yield in 2009 was 15BP. Based on the historical impact of recessions and drops in falling rates one can easily assume that the 2009-2012 period will mirror the results of both 90-93 and 2001-04. In those periods the yield to the Fund fell an average of 15BP. Given the severity of the recent recession and the extreme steps that the Fed has taken (short term interest rates have been at zero for nearly one year). We have never in our history seen such low rates. The suggestion is that the 2010-03 period will be larger than any in history. This analysis leads me to assume that average yield could fall by as much 65 BP (less than 01-04).
The fund generates significant surpluses at the end of each quarter. Looking at this overtime the amounts that are invested by the Fund for a period of less than 12 months has been a significant source of revenue. The yield that the Fund receives has fallen substantially in recent years.
Some Numbers (short term rate only):
2006-5.25%
2007-5.00%
2008-4.00%
2009-3.25%
January 2010 – 2.75%
The first thing to notice is that the Fund is still enjoying a very high rate of return on its short term cash 2.75% is a great deal for the Fund. A market investment in 6 -month marketable Treasury notes is closer to 50BP. The reason for this is that the formula for determining the rates is based on multi-year averages. The formula smoothes the results to the Fund. But what this means is that the formula will produces lower and lower short-term interest rates for the next three years. Interest on the Funds short-term surpluses will fall to 1.5% (or lower) in the next three years. There is nothing that can stop that.
I do not want to hear that I am forecasting interest rates that may or […]
Yikes!! A screw up by me. The comment I just posted has the HTML crqp in the beginning. I wrote this off line and tried to pase in. Now it is up and I can’t fix it. Could the monitor do that for me please? If not, my appologies to the readers for mucking this up.
bk
Bruce
What are you trying to accomplish here?
krasting
you could delete it and try again. you might want to copy it first to the note pad of your choice, strip out the html and paste it back to AB comments.
as far as your argument, i have to say i am not following it. could you make a shorter argument for why i should care?
just to be clear, my argument is that the Trust Fund depletion does not matter to Social Security, and Trust Fund cash flow does not matter to Social Security. Those are side operations that help balance the flow from month to month, or through hard times, or the extended hard time predicted for the Baby Boom.
What Mr Krasting appears to be worried about is how the Government and the Bond Market are going to react to Social Securty minding its own business. His proposal is that the Government simply steal the money from Social Security and keep the bond market happy. I suggest a more honest proposal would be for the government to simply pay its bills.
What Mr Webb is talking about eludes me entirely. The Trust Fund either is or is not “real” in some sense. Gold encrusted credit cards don’t seem to have been any view of either the Trust Fund or the Lockbox that I ever endorsed. The actual date the Trust Fund “runs out” or goes negative cash flow is useful as a matter of planning, but it has no meaning whatsoever for Social Security.
What matters for Social Security is whether the current payroll tax is sufficent to pay current benefits. The Trust Fund can help smooth the changes that would otherwise be necessary to maintain this equation. But it is of no fundamental importance whether it runs out sooner or later.
The comments to this thread are indeed drepressing to read. Not so much for their specific content, but more because they under score the reason why the right end is always sacrificed to the need to be precisely correct. There is no precision when projections to the future and specualtions about the past are part of the topic. That Bruce Webb and Dale Coberly should be arguing with one another in regards to any aspect of the SS issue is the first sign of our defeat. Your enemies will beat both your brains out with your own words and they’ll use both sides of your argument to demonstrate that neither of you are right about anything.
Come on guys, get your act together. You’re not on opposing sides and you need to close ranks to win any and all parts of this fight.
Let me preface my comment with GOOD GRIEF!!!! Charlie Brown. Which one of you is holding the football?
The comments to this thread are indeed drepressing to read. Not so much for their specific content, but more because they under score the reason why the right end is always sacrificed to the need to be precisely correct. There is no precision when projections to the future and specualtions about the past are part of the topic. That Bruce Webb and Dale Coberly should be arguing with one another in regards to any aspect of the SS issue is the first sign of our defeat. Your enemies will beat both your brains out with your own words and they’ll use both sides of your argument to demonstrate that neither of you are right about anything.
Come on guys, get your act together. You’re not on opposing sides and you need to close ranks to win any and all parts of this fight.
Bruce K:
Welcome to the joys of c&p and JS-Kit. Usually a deletion and a rery works as Coberly suggested. Or the “boss” (dan) can intercede.
Jack:
I didn’t take it as an argument; but, I did see a discussion ot terms and understanding. “distortion of the historical record” kind of give a clue as to what Bruce was referring too. Unfortunately both coberly and I tend to look at things in a different manner.
run,
I’ll repeat my main point so that it is highlighted. A cohesive front is required when fighting a battle or a war. Wars only take longer to win, but there is no victory for the side that can’t or won’t keep up a solid wall. Every disagreement between the participants gives fodder to those who whould dismantle the ramparts and tear down the structure. That’s what will happen to Social Security as we know it if there is not a cohesive approach to the discussion. Argue between yourselves in private if that is necessary to form a single minded approach to protecting what your enemies intend to destroy. The dissemblers have plenty of ammunition in their willingness to lie and deceive. Our strongest advocates have no good rationale to air their differences to the public. It’s self defeating.
Jack
you are exactly right. and that’s what i thought i was saying.
Cobery, Come on. We have been through this before. There are two question:. Do we have an issue? If so what should we do about it.
If the answer to the question to the former is yes, then we can move on and debate what should be done about.I am trying to make case that there is an issue. Recall that this started out with you calling me chicken little with the sky falling forecast. I am just trying to make a case that we have something to worry about. I got to step one of ten and you change the subject.
Bruce K.,
I see no basis to dismiss out of hand the latest CBO projections. The changes from the March 2009 to Summer 2009 baselines are significant. If one wants to be overly concerned, then modify the Summer Baseline by indicating a further 20 percent drop in payroll tax revenues over the three to five few years. I am not sure by what logic one would modify many of the other numbers, other than the resulting totals driven primarily by a further decline in payroll tax revenues.
It’s my opinion that this is the comparison that makes sense:
Combined OASDI Trust Funds (Projections)
Summer 2009 Baseline
By Fiscal Year, in Billions of Dollars
http://www.cbo.gov/budget/factsheets/2009c/oasdiTrustfund.pdf
Combined OASDI Trust Funds
March 2009 Baseline
By Fiscal Year, in Billions of Dollars.
http://www.cbo.gov/budget/factsheets/2009b/oasdiTrustfund.pdf
.
Bruce K.,
I see no basis to dismiss out of hand the latest CBO projections. The changes from the March 2009 to Summer 2009 baselines are significant. If one wants to be overly concerned, then modify the Summer Baseline by indicating a further 20 percent drop in payroll tax revenues over the three to five years, or modify the entire projection range. I am not sure by what logic one would modify many of the other numbers, other than the resulting totals driven primarily by a further decline in payroll tax revenues.
It’s my opinion that this is the comparison that makes sense:
Combined OASDI Trust Funds (Projections)
Summer 2009 Baseline
By Fiscal Year, in Billions of Dollars
http://www.cbo.gov/budget/factsheets/2009c/oasdiTrustfund.pdf
Combined OASDI Trust Funds
March 2009 Baseline
By Fiscal Year, in Billions of Dollars.
http://www.cbo.gov/budget/factsheets/2009b/oasdiTrustfund.pdf
.
It has been mentioned in other threads that this years increase in costs in an event, not a trend. The extra 62-62 years old who retired even earlier than they would have cannot retire again. Extrapolating costs as a trend would be a horrible math error.
Also mentioned elsewhere is that the way SS works, changing the rate of ecomonic growth is not a first order effect. If interest rates drop the TF will be credited with less, but AWI and COLA are correlated and they will also drop, leading to a (relative) decrease in costs.
If you find a good way to determine what rate the trustees are using for predicting the rate on new deposits (including matures notes), I would like to see it. I wanted to have a model that was between IC and LC on a sliding scale, but could not make it match up.
Dale not one reader in a thousand would understand runs out as approaches a 100 TF ratio. Your audience is not or should not be run Jack Dan and me. Yes we know what you are saying and so do acouple dozen AB front pagers and commenters. You of all people should know the shallowness of knowleddge on these things.
Start a discussion on Krastings bad math.
Certainly not picking fights with friends and allies. You on the other hand opened the ball by claiming I was ignoring two points though important by you. If it were anyone else I would think you were thread jacking, as it is I know you are just passioanate about the cause. We talked about this earlier in a different forum.
No.
Krasting all points used by opponents of Social Security use long range numbers from Intermediate Cost. I do the same, now you want to introduce a blizzard of numbers based on your own work and force me to work on your ground?
Counter the basic math in the post and show with as much elaboration how you like that interest in the next two years can come at a level that would produce a $2.8 trillion balance and then show how accrued interest on that $2.8 trillion will never serve to increase that balance.
The question doesn’t boil down to basis points, not over the period of time in question.
And your argument implicitly assumes that the percentage of benefits the difference in some basis points matters much. In fact it matters not at all until interest needs to be tapped to pay for a shortfall in benefits. Your lengthy calculations seem to me to only effect the rate of increase in TF balance and not a significant decrease in the baseline that would take a projected $4tn balance in 2016 to a capped $2.8 tn in 2012 that will never get bigger.
Bruce, I just do not understand how this could ever work. “If this had been followed in 2001 then $77 billion in Debt held by the Public would be redeemed permanently leaving Congress free only to spend the money saved on the debt service for it.“
Every treasury when it is redeemed is done permanently. Then, as new needs are identified, say the need to redeem the next round of treasuries, new are issued to raise that money and any other revenue shortfall. The borrowing is done to cover revenue shortfall, AFAIK the SSTF bonds can not effect this borrowing.
Perhaps it is because of this phrase: “The idea under the idea is that you are locking away capacity for future borrowing and so costs when it came time to redeem the TF fund,…” which seems to be an incomplete thought.
Coberly and I have had strongly divergentent views on framing and tactics even as we understood we were pulling in the same direction. The NW Plan is a complicated amalgam of our various views that works for both of us plus some outside collaborators. But on some things we continue to disagree. Just as to his last day runninng this blog PGL and I never agreed on the issue of pre-funding which is of course related to the root cause of dissent about the nature and purpose of the TF on this thread. In the bigger context Machts Nichts.
Krasting I made a claim that using simple arithmetic your $2.8 trillion number in 2012 is impossible or nearly so and the notion that even if it somehow was that it would be the peak point of SS absurd. You immediately pivoted to a question of whether 5% or 4.69% was more reasonable without actuall applying either to the actual Dec 2009 balances in hand, unleash a blizzard of analysis irrelevant to the narrow question I posed and then try to make this some foundational Perry Mason “Isnt it true collooquey between you and Coberly.
Quit ducking, this is not Coberly’s thread. Show me the arithmetic that limits TF balances in the way you have repeatedly claimed within the time frame you claim.
Bruce
thread jacking would be changing the point entirely. your post re Krastings bad arithmetic seemed to me to leave open the question that his bad arithmetic matters. i don’t think it does. whenever the trust fund runs out, or ss goes cash negative, the answer is not to embezzle from the widows and orphans fund.
of course you are absolutely correct to attack his arithmetic, but i think you can stand getting a little cover on your left without mistaking it for an attack.
Bruce
it is just possible that Krastings friends are worried not only about having to pay back the Trust Fund, but are really annoyed that they can’t keep using the “surplus.”
Krasting
how did i change the subject? i asked you to make a short case why i should care about your long comment. your comment here contains not one word of substance.
And in re-reading your post you are assuming that TF ROI and changes to same have important implications for solvency and can move the dates the TF hits big numbers in a significant way. They don’t not at least over the time periods you cite given a TF at the ratio it currently has.
Plus your description of how SSA invests surpluses is wrong. Social Secirity bhas three sources of income, one “invested” monthly. Another “invested” quarterly” and another re-invested twice a year. We have two long term SS employees following these threads, you can save yourself the effort of mis-explaing the mechanics involved.
We too are not new here.
The pre-payment of Boomer retirement narrative cannot be reconciled with the data of the 1993 to 1995 Reports. If that was the goal in 1983 it would have been considered a miserable failure. That the narrative is useful today does not erase the historical record which as Cactus shows us time and again is what it is. Leave the retrospective glow painting to Sammy.
you say there are two questions.
“do we have an issue?” i don’t know, do we? what is the issue?
“if so, what should we do about it?” depends on what the issue is.
what i thought we had settled was that Social Security was not going broke. and that you think that the answer to it reaching a negative cash flow was to rob the widows and orphans. while i think that the answer is pay our goddam bills.
all of your arithmetic, which, i take it, is intended to show that Social Security is really going broke after all, is completely beside the point (as well as after the point) a point I tried to make to Bruce and got accused of thread jacking.
Arne,
actually they can retire again. there is a provision by which they can pay back the benefits they have received plus interest, and start over retiring at a later age.
but yes extrapolating present costs as a trend is a horrible logic error. it gets you to Petersonland.
a real increase in economic growth might raise wages enough so that neither payroll tax raise or an income tax raise would be needed.
Let me lead you a little farther into the wonderful world of street level reality for SS. Disability claims are the name of the game in recessions. So, between hearings allowances and intial claims awards, SSA will churn out about a million more DIB beneficiaries a year for a while in addition to its projected increased retired beneficiaries. It’s unknown how long. Other factors, such as the banks’ unwillingness to lend money to smaller businesses will drag it out in all likelihood. Three, four years maybe.
Of increasing importance is the incidence of diabetes in the population at large especially in people age 50 or older. This is the population most likely to file and be awarded DIB benefits. So, you figure that even if the economy improves short term, this trend of higher DIB allowances may easily persist for a good while. Also, we have major problems with “structural unemployment” which leads to poor health care. Which produces more disabled people and more DIB claims for the foreseeable future.
And to put the icing on the cake, we keep exporting jobs. Not just any jobs, high paying jobs. So, both income tax and payroll tax revenues are lower than they would have been had we not given up our industrial workforce. And, throw in the fact that we have artificially depressed wages through importing immigrant workers in large numbers and keeping the min. wage low, we have made ourselves a hell of a mess.
Into all this, people here have valid concerns about the health and future profitability of the stock and bond market, tax levels, public expenditures and so on. And, it’s apparently against the damn law to raise taxes on upper income people (pardon me, let me be clear, rich people other than prosperous professionals) and you see a situation in which we simply refuse to do what we should to keep the country going.
In comparison to all the messes we have made in the past 30 years since Reagan, keeping SS going is nothing in comparison. As Bruce and Coberly point out, it’s easy to do. But, it is more important than ever before. Why? Because ordinary people in this country are up against it, and no one here should forget that fact. So, this is not an argument about bond returns, or percentages of possible TF deficits. This is about getting real and saving people from terrible need. Which is right around the corner if the Deficit Hawks have their way.
Too late, of course, to keep the “big banks” and AIG or GS from stealing us blind, but I certainly hope not too late for really smart people like y’all to figure out a way to fix it. I don’t want to hear about what the bond market is going to do in 5 years right now. Right now, I want to hear sensible thinking on how to keep the idiots in Congress and the Senate from selling us all down the river. Which I submit is a good direction for the good people here to take now. IMO
Incomplete thought. Well you should know.
I don’t know if Lock Box ever got to legislation. One possible version would have treated the amount of Debt Held by the Public paid down by Social Security Surplus not be available for spending or borrowing on the basis that there was no change in total Public Debt as Intragovernmental Holdings replace that debt dollar for dollar. This what I was referring to as reserving borrowing space going forward.
Perhaps I thought I had enough cover on that particular issue and preferred to keep the thread more focused. Not every SS thread has to drag in the morality or the simplicity of the fix. Sometimes I find it useful to fight on enemy grounds without distracting fire from the flank, fire which often enough knocks me from the saddle. As here.
Cohesive Wall
French military thinking 1914 to 1917 and 1939-1940 aided and abetted by the British General Staff in both cases. We would hav a lot more names on battle memorials if Black Jack Pershing and Patton had agreed to buy into that thinking.
You can grind out a victory, Wellington proved that. But funny whether at Ypres or the Peninsula lots of soldiers and bystanders die in the process. Sometimes a bold strike to the vulnerable point beats bringing up flanking artillery and seige guns.
Social Security opponents have plenty of weak points in their lines, let me get a company or two of cavalry roaming their communications and maybe you guys can run the regiment through the resulting weak points in the front lines.
Thanks Nancy
I should say that an economy a great deal worse than the Trustees project would throw all of my calculations out the window. I think we would still have to contribute enough to social security to provide a decent retirement for old people. But “enough” and “decent” would change. If it gets bad enough we can all go back to living with our in-laws.
As for what to do about congress, I think in terms of tar and feathers. I have seen no indication that Congress listens to anybody on this issue but the Peterson cabal. I have to admit that after a recent experience listening to “liberal” “experts” on the issue, I am not sure they are saying anything that congress can make any sense out of. Just rather vague “protect social security” with no concrete plan (such as “the northwest plan”) and certainly no organized political voice… but since the Democratic Party pretends to care but is not listening either… well, this won’t be the first time that the rich and powerful destoyed their own civilization.
Bruce:
Maybe I am wrong; but, every other conservative or right hanging economist is forecasting higher interest rates over the long term due to the Fed’s consistent policy of low Fed Rates now. I would beleive shorter term rates would be higher as the Payroll Taxes as a result. It also makes sense from the amount of stimulus the Fed and the Treasury had to enact because of the failure of Wall Street, Banks, and the Bond market.
Bruce:
Maybe I am wrong; but, every other conservative or right hanging economist is forecasting higher interest rates over the long term due to the Fed’s consistent policy of low Fed Rates now. I would beleive shorter term rates would be higher as as a result. It also makes sense from the amount of stimulus the Fed and the Treasury had to enact because of the failure of Wall Street, Banks, and the Bond market. Higher deficits = higher interest rates.
Jack:
You can repeat all you want too, we are not Republicans who march in lock step the way the Repubs did under Boy-George Bush. We do have differences and we air our differences which makes us vulnerable to asses like Brown, Boehner, McConnell, Corker, Peterson, Brooks, etc.
The strongest defence we have is that we can agree to disagree on points and still come together for a common goal. That is the difference.
From the Supplementary Statement to the Greenspan Commission by Moynihan et. al:
“The best medicine for Social Security is full employment and economic growth, not benefit cuts.”
The short term calculus seems to contain relatively few variables: population growth, labor force participation, wage growth, inflation and, to a lesser extent, income distribution. Year to year, those things don’t really make that much of a difference. Even a bad couple years like 2009-10 aren’t that big a deal. Though, as Bruce argues, if things get worse year over year for many years in a row, the compounding effects can be a big deal.
The long term calculus seems pretty straightforward, too: the payroll deficit is what it is. One way or another it has to be closed. Wage growth and full employment (if that still means anything) would make the necessary tax increases almost imperceptible. Of course, the other side would argue that wage growth would make benefit cuts almost painless.
From the Supplementary Statement to the Greenspan Commission by Moynihan et. al:
“The best medicine for Social Security is full employment and economic growth, not benefit cuts.”
The short term calculus seems to contain relatively few variables: population growth, labor force participation, wage growth, inflation and, to a lesser extent, income distribution. Year to year, those things don’t really make that much of a difference. Even a bad couple years like 2009-10 aren’t that big a deal. Though, if things get worse year over year for many years in a row, the compounding effects can be a big deal. Of course, as Bruce argues, year after year declines have to happen for the trust funds to stagnate.
The long term calculus seems pretty straightforward, too: the payroll deficit is what it is. One way or another it has to be closed. Wage growth and full employment (if that still means anything) would make the necessary tax increases almost imperceptible. Of course, the other side would argue that wage growth would make benefit cuts almost painless.
We just finished off a 9 or so year run of stagnant real wage growth. And for all of that, Social Security’s not so badly off. If we went through the decade or so of stagnant economy necessary to screw up your calculations, we might move to a pitchfork based economy. Assuming we haven’t already moved to an ammo and canned food standard by that point.
Actually run, higher deficits do not = higher interest rates. Interest rates are set not driven by market forces.
http://bilbo.economicoutlook.net/blog/?p=1266
This whole line of thinking is a gold standard holdover that is inapplicable. It should be like talking about phlogiston in chemistry circles but these memes are hard to kill, even flawed ones.
Greg:
Shhhhh, you are not supposed to say that!
some guy:
Somewhere in the past, I have said pretty much the same on Participation Rate and Employment without regard for SS or its TF. Without a greater portion of the population in the Labor Force (as opposed to a decreasing portion), we will be in far greater trouble in the long term and no amount of cuts will make up for the differene. Of course, we could always tax capital more heavily to make up for the difference and loss in payroll wages.
You folks are impossible. In my opinion the factors that will influence the Funds future results (in order of importance) include:
-FICA & SECA receipts.
-Benefits paid and the rate of growth of those payments.
-Interest rates that the Fund recieves on its holdings.
-Taxes on benefits that the Fund recieves.
-The RR benefits paid.
-Overhead.
I think that overhead, The RR payment and tax income other than payrolls are fairly easy to estimate going forward. The harder ones are the interest rate, benefit payments and payroll tax receipts.
Of the later I put forward a reasonable argument for what the interest rates will be. I beleive that my assessment of what these were resonable and were based on facts that are available and not some dartboard guess.
If there had been some acceptance of this approach I would have tackled the difficult job of putting down some estimates for the benefit and payroll tax receipt numbers.
But you all said NO. That was a frustrating response. If you had put a reasonable case for an alternative set of estimates for the yield on the Fund I would have attempted to debate you and convince you that these assumptions were reasonable as a ‘base case’ approach.
But you did not do that. You just said NO and stuck with the attitude that ‘you’ know better. Fair enough, if you do not want to approch this in a reasonable way, neither do I. So let’s just end this exchange and go our seperate ways. We can reconvene on this when the issues of SS are elevated beyond the likes of us.
I have good news for all of you. There will be no discussion of SS this year. An important development took place yesterday. A statement by TS Tim Geithner on the D.C. mortgage Agencies Fannie and Freddie:
“I don’t think we’re going to be able to legislate that until that process can start, until next year, because it’s just a complicated thing to get right.“
What does this have to do with SS? In one sense nothing, in another it is important. SS can’t come up for public discussion until there is some type of plan for health care (Goss has said this) and the issues of the mortgage Agencies have been tackled.This puts SS on a deep back burner. As you have consistently pointed out, the Fund has no imbalances today, nor will they be running a deficit in the next 24 months. So it is reasonable that it is shelved until an actual imbalance start to occur that has Macro implications to the financial market and the broad economy.
To me that means that the timing of this next discussion will be happening when the dynamics of the Fund look the scariest. The worst time for you folks.It means that the effort to ‘fix’ it will be much more dramatic than might have otherwise been required. To delay is going to cost us. The cost of waiting may just be that SS get Socialized. Your worst nightmare.
bk
RDan: Did you remove my comments where I provided my assumptions for the yield going forward?
Ok, I quit.
bk
Bruce Krasting, why did you start with a focus on bonds? I don’t see the obsession with interest income. It’s a comparatively small percentage of SS’s receipts. And it only really matters if things stay bad for a while.
If things stay bad, then even as the rate of growth of interest income declines, it will still be a pretty good real return. Right? I don’t really know that much about bonds and such.
********
Receipts are dependent on economic conditions. If the economy remains stagnant, then we can project the next few years as somewhat closely resembling last year. Receipts will be enough to cover benefits in current pay, but increasingly large retroactive payouts (due mostly to DIB claims), will eat into a little bit of interest income which will still grow. The trust fund as a whole will grow, too, just at a slower nominal rate.
As to payouts, there are three rates of growth to retirement benefit payments: the net of new beneficiaries minus deceased beneficiaries, the wage index and inflation.
Speaking roughly, the wage index only influences a person’s benefit amount up to age 62. After that it’s adjusted for inflation. While a higher wage index in a given year will mean a higher payout to new beneficiaries, it means that receipts for SS go up, too. Assuming, as run75441 notes, that labor force participation at least holds constant.
Inflation is actually not that big of a deal. It affects far more payouts than the wage index in any given year, but so long as the wage index is higher than inflation, whatever the size of the COLA is doesn’t matter that much. Long term, the size of the gap between the two is an issue.
As to the absolute level of payouts, we also have the demographic data to make reasonable estimates of what the approx. payout for retirement in the short term will be. That’s why the CBOs estimates don’t change that much based on current economic conditions. (Though economic trends and compounding effects can make estimates from 7-10 years ago look a lot different.)
Disability, as Nancy Ortiz notes, is far less predictable. In fact, it has pro-cyclical tendencies which exacerbate the effects on SS of bad years for the economy. That said, the size of the DIB outlays are relatively small compared to RIB.
What’s the upshot, then? Basically that the rate of growth of the trust fund will slow vs. its baseline so long as the economy stays really bad for the next few years.
The sorts of nightmare scenarios that send SS spiraling won’t be a big deal just to SS. We just lost $6-8 trillion in “wealth” and SS weathered it pretty well. The economy as a whole is–what?–$14 trillion. If things get so bad that receipts stay flat as outgo increases due to the boomers, then the negative effects on the $14 trillion economy will dwarf whatever it does to SS.
In that context, quibbling over a few basis points of interest income is like arguing over whether I skipped a number in my quest to count all the grains of sand on all the beaches in all the world.
Edit: re-posted for formatting.
Bullshit Krasting.
Look you made a claim. $2.8 trillion Trust Fund Balance in 2012 and no increases going forward. I made the counterclaim that this number is impossible using basic arithmetic. You then pivoted into some discussion of interest rates and now want to take your ball and go home because we won’t play by your rules.
We have two Trust Funds totalling $2.5 trillion dollars. We now with precision the maturities and yield of the assets in those funds as of Dec 31, 2008. The amount of interest that will be generated from these Trust Funds can be calculated with precision or by taking a rough number like 4% or 5% or perhaps closer to reality 4.5%.
http://www.ssa.gov/OACT/TR/2009/VI_cyoper_history.html#165676 OASI Trust Fund Assets
http://www.ssa.gov/OACT/TR/2009/VI_cyoper_history.html#169531 DI Trust Fund Assets
We now know that despite terrible economic performance in 2009 there was no net draw down in the combined Trust Fund Balance even as the DI TF took a hit. Since the two portfolios mirror each other in composition we can safely take the total to calculate what interest earnings will be from the existing portfolio over the next year. Unless there is a need to draw on a portion of that interest to pay current benefits the Trust Fund balance WILL increase by the amount of that interest. None of that is dependent on interest changes over the next year, current Trust Fund assets are not marketable and are held at par, their ultimate yield is fixed.
Now the amount of the increase in the TF balance and so its rate can be reduced by any cash shortfall in the combined OASDI program this year, but unless that cash shortfall is so great as to erase the amount of expected interest the Trust Fund Balance will increase this year. And in ANY future year where the cash shortfall does not exceed interest accrued on the existing balance.
You make the claim that the TF will top out in 2012 at less than $2.8 trillion. This in turn has two unstated sub-claims. One that cash shortfalls in 2010-2011 will keep the TF from hitting its projected target of $2.85 trillion at year end 2011 (per the 2009 Report). This is reasonable enough 2009 itself fell around $25 billion shy of expectations, two more years of performance at that dismal rate would put 2011 year end quite close to your target.
But it is your second claim that screws you. Your first claim would have the Trust Fund growing SLOWER than expected but still growing by a little over $100 billion a year due to interest effects on the existing TF. In order for 2012 balances to not show any growth over 2011 you need to show that there will be an additional $100 billion plus CASH shortfall from OPERATIONS in that year to soak up that accrued interest on the existing TF balance.
Now you are “frustrated” that we won’t engage your interest rate argument and suggest (for the second time) that we just post-pone the discussion for six months or a year all without any attempt to answer the direct question. Can you justify the following statement using actual arithmetic:
“I know what the TF says and I know what the CBO says,and I think they are both wrong. We will top out the Fund at a much lower number $2.8 T and it will come much sooner than anticipated.”
Well it is not clear that you actually now what either the TF Report says given your apparent ignorance of the implications of the numbers in the Table I extracted from it. Nor have you shown why either is wrong, by giving any calculation that would yield that “much lower number” at a sooner date than year end 2010 which is where the most recent TF Report would have it. And if by “top out” you mean “never grow any larger” you have not provided any calculation showing how interest […]
“You folks are impossible. In my opinion the factors that will influence the Funds future results (in order of importance) include:
-FICA & SECA receipts.
-Benefits paid and the rate of growth of those payments.
-Interest rates that the Fund recieves on its holdings.
-Taxes on benefits that the Fund recieves.
-The RR benefits paid.
-Overhead.”
No sh#t sherlock. Six of those are the precise columns seen in Table IV.A4 and the seventh, interest rate can be back calculated from the dollar figure of interest accrued. You don’t need to bring in your ‘opinion’ or fancy this up by calling them factors. The problem is that short term changes in any of them are NOT particularly important in establishing Trust Fund balance minimums over the short run. Instead what is important in that is the current balance and the known yield on existing assets both of which are known to precision with Dec 31 TF balances known to the penny.
Changes in the factors you outline can only adversely effect short term TF balances if and only if the accumulated effect creates a cash shortfall greater than the existing interest being accrued on an existing fixed portfolio, a portfolio that itself is not subject to changes in public bond and equity markets at any given time.
The Table I supplied projects the Combined SS Trust Funds going from a current $2.5 trillion to an estimated $4.0 trillion in 2018 and on inspection almost all of that is based on accrued interest on existing assets. You claim it will fall at least $1.2 trillion short of that projection. Why? Because you have some interest rate model which you don’t even compare to the existing model to show how it could have the effects you claim. 60 basis points here or there isn’t going to make $1.2 trillion in in mostly interest go POOF, not without some better arguments.
Interest on existing portfolio. Big, big elephant in the room. Yet you seem to have missed it. And then claim it is US that are being “impossible”?
Horseshit added to bullshit
“If you had put a reasonable case for an alternative set of estimates for the yield on the Fund I would have attempted to debate you and convince you that these assumptions were reasonable as a ‘base case’ approach.
But you did not do that. You just said NO and stuck with the attitude that ‘you’ know better. Fair enough, if you do not want to approch this in a reasonable way, neither do I. So let’s just end this exchange and go our seperate ways.”
It was incumbant on you to show that changes in yield on the Trust Fund even MATTERED as a first order determinant of Trust Fund balances in the short run. Instead you just asserted that not only that the were a determinant but that they were determinative. When we declined to accept your premise on the grounds that it is in fact mostly irrelevant to the question at hand, rather than showing us why we are wrong ARITHMETICALLY you stamp your feet and accuse us of ducking the issue.
And we didn’t say “No”. We said that for working purposes we would use the estimates made by the Trustees. And really that has been true since the outset of the debate on Social Security here at Angry Bear, we mostly don’t bring our own numbers, our own economic projections, instead we point out the implications of those supplied by the relevant government agencies responsible for such matters. And it is not because we accept them uncritically, it is because you have to have some platform from which to begin discussion and the standard model seems like a reasonable place to do so.
Greg
since I do not know, I will ask. I thought interest rates were set for some bottom level banking transactions and that “the market” was expected to follow more of less, but that the market often had a mind of it’s own, so that the price of existing bonds determined an effective interest rate different from the nominal interest and often different from the Fed target. that is a question.
Krasting… if you can still hear
I doubt very much Dan would strip anything on purpose other than the html garbage you were apologizing or having included.
can you try to make your case in a form a simple minded person like me can follow? short helps.
bk
it is hard to argue with someone who loses his place. or maybe i just flunked reading comprehension 101. you are still arguing as far as i can tell that the cash flow negative of Social Security is going to cause the sky to fall. and you haven’t heard me say “raise taxes if necessary to avoid the borrowing that you think will cause the sky to fall.” it is useless to argue with you about when the SS will go cash flow negative. i at least always knew that it would one day or another and have tried to say that it doesn’t really matter.
Coberly
As I understand it the Fed sets rates and never HAS to move them. Some have suggested keeping them always at zero.
http://bilbo.economicoutlook.net/blog/?p=1961
I must say that while I am only agreeing because most everything else this guy talks about I agree with, he makes some good points I can understand. Obviously I must let the bigger minds argue the implications of this policy………… but I wouldnt bet against Mr Mitchell, he’s sharp as hell.
He reminds of you and Bruce( regarding SS) in that respect 😀
Much of the talk about rates is in the secondary markets where trading occurs and that is a different animal but the rates that change with inflation expectations (in the monetarists view) is the one set by the Fed, and they never have to change them.
I’m beginning to understand that bond traders want to influence currency issuers and badger them into meeting their wants and needs but if a currency issuer is strong and wishes to it can tell the bond traders where to go. The whole idea that bond traders will be able to cripple a currency issuer is absurd when you look at it. As long as there are things for sale in US dollars and the US treasury will pay you US dollars SOMEONE will take it. No one leaves money on the table.
To sum up. Currency issuers do NOT need to finance their spending. Case in point is our military budget. It is not financed with debt. No bonds are issued when we spend on the military. This was done so we could say our national debt wasnt going up……..YIPPEEEE!
Krasting is stuck on the idea that the Trust Fund is primarily an investment fund equivalent to CalPers or some other public pension fund where solvency is crucially dependent long term on ROI
http://www.ssa.gov/OACT/TR/2009/VI_cyoper_history.html#159726
Near as I can see interest on the Trust Fund has never been called on to pay for more than 2% of Cost in any given year (1974).
The Trust Fund is simply a reserve fund that has been allowed to swell in order to extend the time when Social Security has legal authorization to pay to pay full benefits. Interest on that TF extends that by additional time but does not change the ultimate benefit level.
Krasting just doesn’t seem to get that the changes he sees do not act so much on a dollar axis as a time axis which is why he absurdly has moved crisis up,
Near as I can see the year that TF interest will never be called to pay for more than 10% of benefits in any given future year and half point changes in basis short term while adding up to some bucks can’t add up to much in terms of percentage of payable benefits,
http://www.ssa.gov/OACT/TR/2009/VI_OASDHI_dollars.html#150920
I have drafted and discarded two main page posts on the relation of the TF to Social Security Insurance. I may try a third along this line: the TF is not the foundation of SS funding, instead it is just the top level of the superstructure, its fundamental function is to be a roof over benefits when rainy days come.
I tried a new metaphor at the Bruce Webb. Take a typical Public Pension like Calpers and look at it sideways as if it were an oil barrel.
Much of the content at any given time would be the fund itself. New contributions and more importantly earning are poured onto the top while benefits are siphoned out. The fund itself ideally remains unroiled just calmly doing his job.
Now Social Security presents a different image. Here you have something more like a storm drain clean out. Here you have a roaring mass of water in the form of taxes flowing in and a similar rush of water in the form of benefits and other costs flowing out. in this mental picture the Trust Fund is just a mass floating on the raging stream below.
Where the CalPers fund has to work for its keep, if it doesn’t generate earnings then it gets sucked at directly, the floating Trust Fund doesn’t necessarily have to work at all, certainly it generates earnings but normally they just attach to the bottom and serve to increase the float.
In Krasting’s world all the churn and motion is at the top, any diminuation in earnings is felt first. In Social Security world such diminuation might not be felt at all, depending on the inflow from earnings and taxation.
A public pension fund manager has to worry about every ripple on the surface, while Social Security simply needs to measure the top elevation, all the agitation not only being under the surface and out of its control.
CalPers has less leeway to ignore surface agitation which in turn helps determines ROI. Krasting wants us to act as if all the action is taking place at the top of the SS pool just like it does in his investment pools. That the mechanism is just different has yet to sink in.
As far as I know I took out only html…I even read all of the code and did not see text.
Bruce K,
Ahead of all the items you listed is how long people will live. Double the amount of time a beneficiary spends in retirement and you have double the (inflation adjusted) cost. The projected rate of increase in longevity dwarfs the impact of changing the interest rate.
Some Guy:
“Receipts are dependent on economic conditions.”
Exactly what I was thinking.
This is a bit off-topic, but it is a metaphor.
If you were driving over the Kochertalbrücke you would have little sense of what was underneath, but when you look at it from the side (as most pictures do) it is obvious that the pillars reach the valley floor.
The Greenspan Commision may not have set out to prefund Boomer retirements, but by providing 75-year solvency, they were forced to bridge the gap. All the legislators needed to know was how much to raise taxes, but the actuaries who provided the answer needed to know how big the demographic bulge was. The distinction is really only a matter of perspective.
All of this discussion fails to understand the Fundamental nature of Social Security…. and the less than fundamental nature of the Trust Fund.
What Social Security is is a contribution by workers to a fund to pay the basic retirement expenses of former workers. All that matters is that the amount collected be enough to pay an adequate benefit.
In practice a balance is attempted by setting the tax rate as low as possible to achieve a benefit rate that meets community standards of adequate.
The Trust Fund is simply a means of smoothing collections over a period of time to avoid frequent changes in the tax rate.
The “interest” that the Trust Fund receives is not an important factor. When the trust fund “runs out” is of no fundamental significance.
The “rate of return on investment” is of no significance. Social Security is not an investment. It would make as much sense to ask for a rate of return on your purchace of an ice cream sandwich, or that Mercedes you want.
Comparisons of rate of return across generations are ridiculous. One generation is not like another. The have different dangers and opportunities. I don’t know of any sane person who, absent Social Security, would search the records to make sure it was not costing him any more to support his elerly mother than it had cost his grandfather to support his.
Now, all of those calcualtions about interest, Trust Fund depletions, effective rate of return, do help people plan, and they do help people know what they are getting for their money… but to make them the Holy Object of Policy is to fail utterly to understand what Social Security is.
Another ‘lunatic” thinks SS is an issue:
“Anybody who says we don’t have to do anything, we can just keep on doing what we’re doing, has got their head in the sand. Social Security and Medicare are both cash negative today. They are both headed for insolvency. Those who say we don’t have to do anything, they are guaranteeing a disaster.”
Senator Kent Conrad (D-ND)
January 26, 2010
I admit to being only an occassional reader of the site and this is my first comment, so let me say first that you have enhanced my understanding of social security tremendously, so deep thanks for that and I find your general lines of argument very persuasive. I have two questions that admittedly are not directly related to this particular post but where else would I post them: 1) My view is that a lot of the sense of unjustified popular level “crisis” perception (this clearly does not apply to “experts” who know better) is because of the frequent combination of social security with Medicare/Medicaid in debates over “entitlements”. So my question is (assuming you agree): what can be done about this? How can the direction/terms of public debate be changed. I think your Northwest proposal is great in that regard but also: Can and should the trustees issues two separate reports for “social security” and “Medicare/Medicaid” several months apart and who would make that decision (the administration or congress)? Should someone stress that “we will honor the debt to our seniors as we will honor the debt to the Chinese and others by paying back the trust fund (or letting it go down to 100% TF ratio)” (a presidential address and joint resolution of Congress would be nice though legally of course irrelevant). I know the law clearly recognizes the full backing by the full faith and credit of the US but obviously there are doubts about this today in the general public and I guess the bond market. Obviously this does not address the potential post 2035-45 situation but as you have made clear that can be addressed quite sensibly. 2) Is there a possibility and benefit to reframe the debate by foccusing it on “unified deficit and debt” (sorry if I got the term wrong) instead of the “fiscal debt” (ignoring intergovernmental holdings/obligations). Frankly I would be interested if someone had a link to development of the unified deficit/debt over the last few decades: my guess would be that we ran larger than perceived “unified deficits / debt levels” but never wanted to focus on them (especially during the 90s). Based on those numbers relative to GDP I would not be surprised if the 2010-2030 picture does not look quite as “unusual” as one might first think. Also, it would be interesting to get a better understanding of whether the bond market “looked through” this or “assumed the trust would (mostly) not be paid back”. Thanks for your attention. Putting these two questions together I guess I ask: what can be done to change public perception as “social security” in crisis and the public mixing of fiscal/budgetary challenges with “social security”.