The Congressional Budget Office (CBO) is out with its annual report. It’s a blockbuster. This 165 page monster is filled with dozens of charts, graphs and detailed projections. It will be talked about for weeks. The report provides a dismal outlook for the economy. There is one data point I'd like to focus on.
Here is the CBO forecast for real GDP for 2012 and 2013:
The 1.1% Real GDP number for 2013 surprised me. The CBO’s expectations are way under those of both the “Blue Chip” economists and the Federal Reserve:
What does it mean if the economy is going to slow, as CBO now thinks? Some consequences:
The CBO now forecasts Social Security to run into trouble in just a few years. This is a very substantial change in the outlook for SS. Changed fortunes make it a certain that America’s favorite entitlement program will be on the table for a significant re-vamp.
The CBO has answered two critical question:
1) In what year does SS first goes into deficit (including interest)?
2) What is the size of the SS Trust Fund when #1 has been achieved?
Key data is here:
Using this information, we can estimate the Trust Funds (TF) balances over time, and compare them to what SS forecast in its report to Congress ten-months ago:
SSTF's "Intermediate" (Base) case:
The bottom line is that the SSTF is going to top out three years ahead of “schedule” and be $800B shy of what it was “supposed” to be.
I think the CBO report has created a big headache for a good number of folks in D.C. Most of them are running for office this year. They certainly won't be able to wave the CBO report as a measure of how well they are doing.
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Really nice graphics, btw.
ReplyDeleteThe political people are picking up on this too, esp since it is an election year. Here is one example.
http://townhall.com/tipsheet/guybenson/2012/01/31/white_house_panic_gruesome_2012_economic_forecast_could_doom_obama
The following refers to the Social Security Trust Fund, but applies equally to all Treasury trust funds. The name "trust fund" has a particular, misleading, political meaning. There are no assets in these "funds" other than a promise from the treasury.
ReplyDeleteCBO: What Are Trust Funds?
The bonds in the Social Security Trust Fund are promises, not assets. They are as good as other government bonds, which are also promises but not assets. The taxing power of the government is in doubt. The promises of the government are so large that it may not be able to pay back the debts which the bonds represent, including the bonds in the Social Security and other "funds". The bonds are a promise, but they don't help to pay for themselves.
Don't take my word for it. Here is a statement by the Congressional Budget Office - May 2003 [edited excerpt]:
== ==
The money that the government owes to itself has no impact on the economy because it represents debt owed from one Treasury account to another, mostly held in federal trust funds.
Trust fund holdings are not assets of the government and do not represent money owed to program recipients individually. Payments to Social Security recipients (like other social insurance programs) are based on rules set by law unrelated to trust fund holdings.
A federal trust fund is an accounting device that measures the difference between the income designated for a program and the expenditures made to its beneficiaries. The accumulated balance often represents the future "spending authority" for the program, but it is not a reserve of money for making payments.
== ==
So, it is just as hard to meet the promises of Social Security as any other promise made by our government. Those promises are backed only by current tax revenue. There are no savings. The amounts represented by the social security trust fund "surplus" were collected and spent long ago. The trust fund bonds are only a note from the government to itself, to find the money somewhere in the future.
Also, the future promises of Social Security far exceed the notations of the trust fund bonds. Those promises total about $15 trillion (net present value), above the value of Social Security taxes at current levels.
That's a great citation from CBO; thanks for that. SSTF could remain "solvent" by the simple expedient of raising the interest rate on its bond "holdings" -- I'm sure someone in DC will suggest this soon.
DeleteAccording to the Supreme Court case, Chas. C. Steward Mach. Co. v. Davis, 301 U.S. 548 (1937):
Delete1. The F.I.C.A. tax has nothing to do with Social Security and is just another income tax.
2. Money paid into F.I.C.A. goes into the Treasury’s general revenue account and is NOT earmarked in any way (otherwise it would be unconstitutional).
3. Money paid to beneficiaries is nothing more than old-age welfare.
Title 31 of the United States Code contains a list of accounts maintained by the U.S. Treasury that Congress has classified as "trust funds." That list is found at section 1321. There is no "social Security Trust Fund" listed, nor anything that could possibly be construed as having anything to do with what Americans think of as "Social Security."
I found it interesting that the CBO projects low inflation with one reason being that excess bank reserves are unlikely to pose a problem since the Fed could mop up that liquidity by raising rates. I would not be so sanguine, as raising rates would expose the Fed to huge losses on its book and thus hesitant to apply such a lever.
ReplyDeleteAndrew:
ReplyDeleteExcellent excerpts to make your strong points.
What Do I Know:
I understand the interest rate for the trust fund last year was around 4% - already high by today's standards.
Also, bear in mind that interest is not paid in cash as in debt held by the public. Rather, the trust fund interest is paid with more infunded debt (promises).
Also bear in mind that all promises are not equal.
Some Treasury bonds are considered explicit liabilities, while others are implicit promises - denoting different levels of obligations to fulfill.
Don Levit
M-m-m-m Payment-in-kind bonds. . .
DeleteBruce, it seems like CBO has substantially lowered interest earnings of SSTF (like you suggested). Also, can you explain handling of DI when asset balance goes to zero in 2016. See footnote C here
ReplyDeletehttp://www.cbo.gov/ftpdocs/127xx/doc12725/OASDI.pdf
What is the Congregational Budget Office?
ReplyDeleteIt is an arm of the US Congress and thus is not a part of the executive branch. As such, it tends to be more trustworthy than statements coming from the executive (such as the Treasury department). It is also congress's mechanism for auditing the executive branch. It is inherently political, unfortunately, so it is not completely trustworthy either.
DeleteHow about that for a mistake? I swear to you I don't see these things. I have an editor and she missed it too.
DeleteCongregational.... Ugh....
Amen!
DeleteWhat do I know? but isn't the Trust Fund just another of the governments schemes to defraud the citizens? They have taken the receipts, replaced with non negotionable notes. So the Fund is just paper? I suppose that won't slow the Politico's down too much, they'll just hike the national debt up another trillion and, ergo, pay me my dole. Paper works so long as the fraud is hidden. Soon is the unveiling.
ReplyDeleteThe SS Admin. has intra-governmental securities that are non marketable. I think we know why they were not given Treasury Paper which would make the securities money good in a very liquid market without having to go back to the Tresury Dept. These non- marketable securities will, in the future, have to be put back to the Treasury, including interest earned so that They can be retired with Treasury Paper that will have to be issued even though we paid this already by way of tax withholdings once already.
ReplyDeletePonzi scheme might be too polite for what they are doing which is stealing the last nickel from the American Treasury.
With the tens of millions Americans about to retire,and without the tens of millions of
ReplyDeleteworkers on the other end supporting them,it's
only going to get worst.....You guessed it:
I'm talked about the tens of millions aborted
Americans that could be helping Us balance
the Mess Our Forefathers got Us into....Now
it's going to take Us 20 to 30 years to get
back to where the system works.Of course it
can only work if We overturn You know what.
10,000 Americans per day for the next 19 YRS., so as you say, good luck with that plan.
DeleteWe already have millions unemployed. You're saying if we had millions more people they would somehow find jobs?
DeleteEver wonder why unemployment figure never reaches 10%?
ReplyDeleteEconomics 101/102 states that "10% unemployment is a depression."
Of course during this 'depression' most unemployed are driving automobiles.
Interesting?
Don't you have a typo above in your comment about GDP growth projection by CBO vs. Federal Reserve forecast.?
ReplyDeleteIt is not 1/3 less growth. It is 1/3 of the expected Fed growth forecast which would actually be 2/3 less growth, correct?
1.1% CBO vs. 3.1% (average of ranges for Fed)
Correct. Tks
DeleteDear anonymous abortion nazi. WTF were you thinking? We have a debt problem, not an abortion problem. Millions of more mouths to feed and jobs needed. Most would probably be born into low income households, unemployed and on food stamps you ignoramus.
ReplyDeleteThis is really scary. Image the interest rate going up, and it will be a double whammy. It will be like the way USSR was before it went down.
ReplyDeleteI never thought I will live to see this day.
We will not leave ZIRP until it all blows up. Any meaningful move up in rates will blow the livin' chit out of the FED's Balance Sheet. I wish I could say we are Japan, but we are not that lucky. Our citizens didn't buy Treaury Paper with both hands for decades, and we don't have trade surpluses that lasted for decades either. The demographics have changed, and now Japan will finally face it's destiny, and I have no doubt that we will follow them down the same toilet bowl in short order.
ReplyDeleteWe are a pretty pony in a glue factory.
Its ok though really as the rich have already been paid in last couple of years with all the bailouts to cover their gambling ... as long as the rich are fine all is ok !! LOL
ReplyDeleteJust for clarity. The Social Security Trust Fund does not exist. The boys started cooking the books in the Johnson administration and have been "borrowing" the money into the general fund ever since. The SSTF is filled with non-marketable securities. Simply put, IOU's with we the people backing them up...and fiat currency.
ReplyDeleteMr. Krasting,
ReplyDeleteI'm sure you have read Seldes, A.Del Mar and Ferdinand Lundberg.
Thank you for your info.
Will you please tell me if the gov't declared bankruptcy in 1933 and the Dist of Colum.became what it is ?
Best,
EB
Re: The Social Security Trust Fund does not exist. The boys started cooking the books in the Johnson administration...
ReplyDeleteSo, why on earth would we not believe that he also lied to us about the Social Security Trust Fund? We found out that Johnson lied in 1964 about the Gulf of Tonkin Incident of two confrontations. One was fictitious. In one, there was no sea battle, but instead may have involved "Tonkin Ghosts" (false radar images) and not actual torpedo boat attacks. There were no North Vietnamese Naval vessels present. In the second, there were four North Vietnamese sailors killed and six were wounded; there were no U.S. casualties. And the outcome of these two incidents was the passage by Congress of the Gulf of Tonkin Resolution. The resolution served as Johnson's legal justification for deploying U.S. conventional forces and the commencement of open warfare against North Vietnam. If he showed no care for our men and women in armed forces, why would he care about retirees?