Thursday, March 11, 2010

Social Security Is Going Cash Flow Negative Six Years Earlier Than Expected

Pay attention, this is BIG.

The Trustees of Social Security Fund, in their annual report, have implied that the trust fund will turn cash flow negative around the year 2017. This doesn't mean they will be bankrupt and out of assets in 2017, just that they will start to pay out more in benefits than money they take in.

Well, scratch that 2017 date. The fund is now cash flow negative.

Here's how Bruce Krasting puts it:
The Social Security Trust Fund is able to make accurate estimates on the major components of its monthly cash flows. Therefore the first quarter operating results for the Fund are in. Only the payroll taxes and benefits paid numbers are currently available for January, February and March of 2010. The raw numbers show clear acceleration of the deterioration in the Funds dynamics...The conclusions are not good...

The 1st Q 2010 YoY top line for the Fund is down by 6%. A very significant drop...

There is no good news for the Fund on the expense side either. While there has been variations on a month to month basis, the trend line for benefits is northward at a 5% compounded growth rate. And that percent number has nowhere to go but up as the boomers get checks...

The actual results for the Fund are not available. The reporting for interest income, income tax receipts (outside of FICA and SECA), the operating expenses and the costs of the Railroad Retirement are not available. In 2009 these numbers were +$118b, +$20b, -$6b and -$4b respectively. It is unlikely that these numbers will vary too much in 2010.

Based on the assumption that these other numbers will remain static and that payroll receipts will stabilize to the 2009 numbers for the remainder of the year the following forecasts of the full calendar year can be made:

Benefits paid will exceed Payroll tax receipts by $40b (+660b, -700b).In my opinion this is the primary measure of financial soundness. This number was -$5 billion in 2009.

The Fund uses the ratio of total tax receipts to benefits paid as its soundness measurement. Based on the 1st Q results it would appear likely that the full year results of this ratio will be negative $20b ($700b-680b). Should that happen, it would be the first time in the Fund’s history.
I agree with Krasting when he also writes:
When I look at the Fund I look at cash flow. All of the experts on this topic say that is a dumb way to look at it. Annual cash flow is meaningless when you are looking at something that has $2.5T in assets and will, under the very worst of conditions, be able to pay the bills for 15 years or so. I disagree. It’s all well and good to ignore cash flow when cash flow is positive. But when it goes negative it is the first gentle step that leads to a very slippery and steep slope.

Interest income for the Fund is a non-cash item. They get credit for more paper. There is something about this process of automatic money creation that bothers me. I believe the Fund must ponder this question as well. In their reports they publish on a monthly basis their net cash position...the net cash flow is a positive $3b.
But the cash flow problem is also going to be a whammy from another direction, the Treasury debt direction. As I wrote early last year:
It should be noted that the projected point, by the Social Security Board of Trustees, at which tax revenues will fall below program costs comes in 2016 -- one year sooner than the estimate in last year’s report. This means that although the fund does not become exhausted, by Trustee projections, until 2036. In 2016, Social Security stops being a net buyer of Treasury securities and becomes a net liquidator, with smaller and smaller net new quantities purchased leading up to 2016 . Currently, Social Security buys approximately 25% all Treasury securities issued. Who is going to make up for that shortfall, especially since Social Security will not only stop buying, but will be a net liquidator? It's not going to be the other major Treasury security player, the Chinese. They are trying to slow their purchases now. So in addition to the Social Security and Medicare crisis for the elderly, this funding crisis will have a major impact on Treasury funding...
Now that it is clear that the Great Recession has knocked the Social Security numbers way off from their original projections, the trouble should be clear to see.

The Social Security Fund will not be buying, net, any new Treasury securities. In fact, as the years pass, they will be net-sellers, competing with the Treasury for Treasury security money. Given the huge amounts of new debt the Treasury will have to issue, and the fact that the Chinese will be forced to cut back on their buying because of growing domestic Chinese inflation, this is not a pretty picture at all. You have huge increases of U.S. debt just ahead and the two major players, China and the Social Security fund, being taken out as major buyers.

I repeat, if you are in debt, do what you have can to lock that debt in at the current fixed rates. They are not going to stay at these levels for much longer.


  1. Look on the bright side, you'll be able to pick up farm land in Detroit on the cheap. I hear they want to turn some parts of the city back into agriculture.

  2. Geez...between this and your other post on China's inflation, it's not been a good news day for bonds at all.

    I've often wondered at what point the public will finally become aware of what 'SSI trust funds' are, and realize that the money's been stolen.

    Maybe then we'll have protesters carrying signs asking 'Where did the money go?'. Maybe they'll also stop on the way home to pick up the subsidized meds they're 'entitled' to, but have no clue as to how their paid for. lol!