Social Security - At the Crossroad?

The 2009 Social Security Trustees Report * has received a great deal of attention. The report clearly shows deterioration in the footings of the Fund. This was to be expected as their income was going down due to the recession while their costs are ballooning with the baby-boomers becoming eligible for retirement. In it’s summary the Trustees were very clear that this matter must be addressed sooner versus later.

The Trustees missed a great opportunity. If they truly wanted to accelerate the debate on the future of the system they would have highlighted the urgency of the problem. The Trustees chose to focus the attention of the media on two less important dates:

-2037 is now the year that the Social Security fund will be depleted.

-2017 is the revised date that the Medicare fund will be exhausted.

These dates are irrelevant. The focus of attention by the Trustees, our leaders in Washington and the American people should be on the more imminent date where Costs Exceeds Tax Income (“CETI”).

CETI is important to us now, as that will be the demarcation point for a very long slide in the dynamics of the Fund. At that point, the pain will start to be felt. Every month from then on, the pain will get worse.

For nearly 70 years the American economy has been the beneficiary of the SS system. The Social Security Trust Fund has been a major source of savings. Those savings have been reinvested back into the economy through the purchase of U.S. Treasury securities. As of year-end 2008 the Fund held $2.4 Trillion of Federal IOU’s, the largest single holder of our debt. Those holdings represent 1/4 of the entire National Debt.

In the period 2000-2008 the Fund purchased a total of $1.34 trillion of additional government bonds. The Fund has provided the liquidity for the entire costs of the Iraq/Afghanistan War, 911, Katrina and a significant portion of the remaining deficits.


This powerful engine of our growth is decelerating very quickly at this point. The Funds capacity to buy any new Treasury securities will be eliminated in a few years following achieving CETI.

The Trustee report provides a range of estimates as to when CETI will be achieved. They suggest that there is a 2.5% probability that it will be reached in 2009 and a 10% chance it will happen in 2010. I love long odds. I will take ten to one that CETI is achieved in 2010. I think it is an even money bet. The following graph shows the range of probable outcomes. My wager is on the lines at the bottom of the curve that are marked 2.5% and 10%.


The next graph describes more clearly the range of possible outcomes. I believe that the Fund is currently performing below the bottom line marked III. Also make note of the ‘blip’ at the year 2008. Notice that the line not only levels out but also appears to be turning negative. That blip is a result of the 2008 economy. The lines all turn upward after the 08 period. These ‘up-trends’ are based on the projections used by the Trustees. I maintain that these projections overstate the level of recovery in the economy over the next 18 months.


The key short term economic assumptions in the Trustees WORST-CASE analysis are as follows:

2009 GDP = –3%
2009 UNEMPLOYMENT = 8.5%

It is possible that the economy will recover over the balance of the year such that year over year growth will be near to the level in the Trustees forecast. However, unemployment today is at 8.9% and as a lagging indicator of economic activity it will certainly rise from the current level. Unemployment means less receipts for the Fund. 2009 will bring us very close to achieving CETI. If the economic recovery is anemic, CETI will be achieved in 2010.

One more graph on this topic. This one plots the timing of CETI based on the Fund’s Base Case assumptions. Note the gap that opened from the 2008 to 2009 reports on the far left. This revision in assumptions reflects the damage from 2008. Note also the upward trend that immediately follows. Here again, that up-trend is based on economic assumptions for 2009 and 2010 that will not be achieved. The bold line is based on the revised 2009 assumptions; it suggests that CETI will be achieved by 2015. It will certainly happen sooner than that.



A review of the first three months of 2009 data confirms that the Fund’s internals are continuing to deteriorate. This final chart shows the raw monthly surplus numbers for 2006 – 2009. There is a 40% drop in the surplus so far this year versus the average of the prior three years. This number should be growing, not falling, if that upward blip in the Trustees forecast is to be realized. Note also that February 2009 is a deficit cash flow month. I anticipate at least three additional negative cash flow months in the summer and the fall of this year. These negative months began appearing in 2008. Prior to that there have been no negative months for more than a decade.


The foregoing has been an effort to create a sense of urgency regarding the SS problem. I maintain this issue is staring us in the face. If I am correct the positive effects of SS are evaporating as you are reading this.

The Trustees have proposed significant increases in withholding taxes or reductions in benefits to ‘cure’ the problem. Tax increases are simply off the table in 2009. That leaves cuts. The approach by the Trustees is to identify a solution that would entail the ‘least’ amount of cuts. I would like to see a proposal that created the ‘largest’ amount of cuts. Perversely, the larger the cuts, the better off we will all be.

The SSTF has both the intellectual and the computing capacity to provide the country with a range of options to consider. I would like to have an analysis that answers the question:

“What benefit cuts are required to achieve a 50% reduction in payroll taxes?”

Substantial cuts will be necessary to achieve that goal. It would require a ‘means’ test for both existing and future beneficiaries. The benefits for younger workers would be substantially eliminated. The actuaries at the Fund could be more specific on the parameters that would be required.

In exchange, America’s 110 million workers would get a permanent 6% pay increase, a sounder basis for the long term economy and a substantially improved health care system. This change in tax policy could lay the ground for renewed and lasting prosperity.

The Obama Administration needs to raise taxes. They have indicated that these new taxes will be levied on high income earners. Although undesirable, that is necessary in the current environment. The best way to tax wealth is to create an eligibility means test for Social Security retirement benefits. It will be more palatable than an increase in the top tax brackets, the capital gains tax, or worse, an increase in withholding taxes that hits all workers.

Full disclosure: I am 60 years old. I already have my SS letter describing when and what checks I will receive. I would give that up in a heartbeat if in exchange I got a valid promise of health care at an affordable cost. A significant portion of the Boomers would agree with my position. On balance, we thrived as a generation. Now it is time to give back.

One more estimate. If we delay in addressing this problem it will cost us more. I will put a number on that. $10 billion incremental cost for every month that goes by without addressing this problem. About the same monthly cost as the Iraq war.

* Link to the Social Security Trust Fund Report:http://www.ssa.gov/OACT/TR/2009/index.html