Tuesday, July 29, 2014

It's Getting Serious: Social Security's Disability Insurance Trust Fund is Only Two Years Away From Running Out of Money

By Robert Wenzel

The  Social Security and Medicare Boards of Trustees have issued their annual financial review of the programs. It isn't pretty.

Taken in combination, if you believe government accounting, Social Security's retirement and disability programs[OASDI] have dedicated resources sufficient to cover benefits for the next 19 years, until 2033.

However, even under tortured accounting, the projected depletion date for the separate Social Security's Disability Insurance (DI) Trust Fund is only two years away, in late 2016. Dedicated DI revenues are projected to cover only about 80 percent of scheduled benefit payments. "Legislation will be needed to address this financial imbalance," says the Treasury.

The Medicare Hospital Insurance Trust Fund (HI) will have sufficient funds to cover its obligations until 2030 based on the tortured accounting.

That said, remove the phony accounting and the real situation is
even worse. The trust funds don't hold any cash as reserves. They hold US government Treasury securities and the US government doesn't have the cash on hand to payoff for the redemption of those securities. So the real crisis isn't when the trusts finish selling off the Treasury securities, it is when the the redemption requirements become sizable and the Treasury will be desperate to sell more debt to payoff the trust fund redemptions.

The Trustees Summery Report admits this:
Concern about the long-range financial outlook for Medicare and Social Security often focuses on the depletion dates for the HI and OASDI trust funds—the times when the projected trust fund balances under current law will be insufficient to pay the full amounts of scheduled benefits. A more immediate issue is the effect the programs have on the unified Federal budget prior to depletion of the trust funds.
Chart D  shows the excess of scheduled costs over dedicated tax and premium income for the OASDI, HI, and SMI trust funds expressed as percentages of GDP. Each of these trust funds’ operations will contribute increasing amounts to Federal unified budget deficits in future years. 

 Chart D—Projected SMI General Revenue Funding
 plus OASDI and HI Tax Shorfalls[Percentage of GDP]

One has to ask, who will buy the securities and at what interest rate will the Treasury have to sell the securities to meet this growing shortfall? Is that Janet Yellen with an order ticket in her hand?

So when will the Social Security fund start liquidating its securities? It already has. The Trustees' report states:
Social Security exceeded its tax income in 2013, and also exceeded its non-interest income, as it has since 2013. This relationship is projected to continue throughout the short-range period (2014 and 2023) and beyond...Projected OASDI cost generally increases more rapidly than non-interest income [Note:  Interest income is due from the Treasury, which doesn't have it on hand and is thus another accounting fiction.-RW] through about 2035 primarily because the retirement of the baby-boom generation will increase the number of beneficiaries much faster than the number of workers increases, as subsequent lower-birth-rate generations replace the baby-boom generation at working ages.
Things aren't any better on the Medicare front. The Medicare Program is the second-largest social insurance program in the U.S. after Social Security, with 52.3 million beneficiaries and total expenditures of $583 billion in 2013.

The Trustees project that the Medicare Hospital Insurance (HI) Trust Fund will be the next to face depletion after the DI Trust Fund. The projected date of HI Trust Fund depletion is 2030. The Trustees project that total Medicare costs will grow from approximately 3.5 percent of GDP in 2013 to 5.3 percent of GDP by 2035 and will increase gradually thereafter to about 6.9 percent of GDP by 2088.

Medicare is also already cash flow negative. It went cash flow negative in 2005. In 2013, the HI fund used $9 billion of interest income and $15 billion of asset reserves to finance expenditures beyond those that could have been made solely on the basis of tax and premium income. That is, $24 billion, already, in 2013 came via the Treasury having to borrow it because of Medicare security redemptions and interest payments.

Although Medicare cost (3.5 percent of GDP) was smaller than Social Security cost (4.9 percent of GDP) in 2013, the gap closes gradually until 2052, when Medicare is projected to be the more costly program. During the final decade of the long-range projection period, Medicare is about 12 percent more costly than Social Security.

In 2013, the combined cost of the Social Security and Medicare programs equaled 8.4 percent of GDP. The Trustees project an increase to 11.5 percent of GDP in 2035 and 13.0 percent of GDP by 2088.

Here's how Obamacare is going to attempt to make up some of the Medicare shortfall. From the Trustees Report Summary:
The HI income rate—which includes payroll taxes and taxes on OASDI benefits, but excludes interest payments—rises gradually from 3.28 percent in 2013 to 4.29 percent in 2088 due to the Affordable Care Act’s increase in payroll tax rates for high earners that began in 2013. Individual tax return filers with earnings above $200,000, and joint return filers with earnings above $250,000, pay an additional 0.9 percent tax on earnings above these earnings thresholds. An increasing fraction of all earnings will be subject to the higher tax rate over time because the thresholds are not indexed.
However, this new tax revenue won't be anywhere near enough to cover the shortfall, but it is an indication of the desperate government maneuvers behind the scenes.  Over time, the projected share of total non-interest Medicare income from taxes falls, even with the new Obamacare revenue, substantially (from 41 percent to 28 percent) while general revenue transfers rises (from 43 to 52 percent), as does the share of premiums (from 14 percent to 18 percent).

Here's a chart that shows the sad situation, based on conservative Trustee Report cost increases:

Bottom line: The finance problems for the government because of Social Security, Social Security's Disability Insurance Trust Fund and Medicare are dire and the Trustees know this. They also know that the crisis is a lot closer than the so-called reserve depletion dates. From the report:
The urgency of addressing the financial challenges facing both programs is underscored by the fact that the financing shortfall in the theoretical combined Social Security trust funds has now grown to a size substantially greater, even relative to today’s larger economy, than the shortfall corrected in the landmark bipartisan Social Security amendments of 1983. Those reforms, which included a six-month delay in cost-of-living adjustments, exposing benefits to income taxation for the first time, requiring new Federal employees to join the system and pay payroll taxes, raising the age of eligibility for full retirement benefits, accelerating a previously scheduled payroll tax increase, and other measures, were intensely controversial and difficult to enact. It is sobering to consider that financing corrections today would require more significant measures than those. Furthermore, the longer corrective action is put off, the more severe the measures will have to be and the fewer the cohorts who can be asked to shoulder a portion of the burden. Unless Social Security’s historical financing structure is to be altered to finance some or all of the program from the Federal government’s General Fund on a permanent basis, and thereby weaken the historical tie between individual contributions and benefits, legislators must act to eliminate this financing shortfall. This task becomes progressively more difficult, and therefore less assured of success, with each passing year.

Long before the reserves of the OASI and HI Trust Funds are depleted, the finances of Social Security and Medicare will be challenging because of the growing pressure these programs exert on the Federal budget. This is a central concern from the standpoint of program financing because the reserves of each of the various trust funds are invested wholly in U.S. Treasury securities...

Accordingly, a thorough assessment of the degree of risk associated with scheduled benefit payments cannot be limited solely to assessing the level of reserves present in the trust funds, but also requires cognizance of the degree of pressure such payments will place on other components of the Federal budget. The rising cost of Medicare has long strained the Federal budget largely because the preponderance of Medicare SMI expenditures is financed from the General Fund. Pressure arising from increasing Social Security expenditures attained a new significance when program costs began to exceed incoming tax revenue in 2010. In 2013, these programs’ costs together required $357 billion (2.1 percent of GDP) from the General Fund.

Whether one regards the Medicare financing challenge to be more or less serious than Social Security’s depends on the perspective taken. Of the two programs, Social Security has the larger actuarial imbalance and the reserves of one of its two trust funds (DI) are in more imminent danger of depletion. On the other hand, Medicare’s long-term cost growth is still projected to exceed Social Security’s, and its operations stand to place greater strain on the Federal budget. As with Social Security, legislative actions of a significant magnitude will be required to place Medicare on a sound financial footing.
It's difficult to see how the magnitude of taxation required of the current citizenry, necessary to fix the problem, would pass in Congress.This  means it may fall on the Fed to buy up more Treasury securities to support the Treasury funding. This, of course, means a threat of major double-digit price inflation from this crisis alone. Alternatively, Congress may open the floodgates to new immigrants, to build a new base of those who can be taxed to support the baby boom generation, and thus kick the crisis can down the road one more generation, while at the same time allowing so many immigrants in that it will change the demographic nature and culture of the United States.

And that is what government involvement in retirement and health programs has dumped at our door step.

Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.com and author of The Fed Flunks: My Speech at the New York Federal Reserve Bank.

1 comment:

  1. These are all Ponzi schemes - all of them run by politicians who can't be trusted to keep their mitts off a pot of money stolen from its citizens. There are elections to win and votes to buy…with other people's wealth.

    We should not expect the crooks in Washington to suddenly get religion, level with the people, and take the steps necessary to phase out these wretched programs. Nor can we anticipate the tax increases necessary to perpetuate them, as this would result in a tax revolt.

    The best we can hope for under the circumstances is a grand reset. The dollar completely collapses. All outstanding debts are written off, including those for SS and Medicare/Medicaid recipients. Families and communities will have to circle the wagons and take care of their own, because relying on government to save us is a cruel joke.