Sunday, April 12, 2009

Social Security Stunner; Bankruptcy of Nation Moved Up Several Years

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Well, Obama is talking tough with the Big Three, even letting on that the bankruptcy of GM and Chrysler is a very real possibility and may happen soon.

Since these are bankrupt companies, I suppose this makes a certain amount of sense, leaving aside the perplexing silence on why a similar approach is not being taken with insolvent banks. I guess it's possible that manufacturing paper profits is now “more American” than fashioning real goods out of hard materials.

But it goes further than this. The current administration might as well be worrying about the fact that the US government itself is hurtling towards bankruptcy.

Not only are debts exploding - moving smartly past “unsustainable” and into “ruinous” - but revenues (tax receipts) are falling like a rock.

Yesterday it was reported that the difference between Social Security income (taxes) and outlays (benefits payments), which is known in Washington-speak as “the SS surplus”, would shrink to zero next year.

The U.S. recession is wreaking havoc on yet another front: the Social Security trust fund.

With unemployment rising, the payroll tax revenue that finances Social Security benefits for nearly 51 million retirees and other recipients is falling, according to a report from the Congressional Budget Office. As a result, the trust fund's annual surplus is forecast to all but vanish next year -- nearly a decade ahead of schedule -- and deprive the government of billions of dollars it had been counting on to help balance the nation's books.

First of all, let’s clear something up. As we’ve covered here repeatedly, there is no such thing as the Social Security “Trust Fund”. A “trust fund” implies that there are funds held in trust somewhere. Instead the Social Security account consists of several 3-ring binders filled with government IOUs which will have to be repaid by taxpayers (surprise!).

In case you missed it in the Crash Course, here it is again – a picture of Bush physically standing next to the entire SS “trust fund”.

I am not kidding. That’s the trust fund. Right there in that snazzy filing cabinet.

You could replicate the entire thing with about a $300 shopping trip to Staples, unless you wanted the fancy locking cabinet too. Then you might have to expend closer to $700 in total.

Next, it was only last year that I was writing about the impeding fiscal calamity that was awaiting us all in 2017 when the outlays for Social Security were slated to exactly match receipts. Now that date could be as early as 2010, apparently.

In the chart above (source), I want you to note the extreme deterioration in surplus funds between the 2008 and 2009 forecasts. Can you spot the trend?

Here’s a prediction – these too will be revised to the worse in about 6 months. I base this prediction on my belief that more people will opt for retirement than are currently projected and that entitlement program tax receipts will be below current projections. Also, nearly every prediction by the CBO has been revised to the worse over the past year so I am “riding the trend” with this prediction.

In the projections for the table above, the CBO has assumed no cost of living adjustments (COLAs) in 2010, 2011, or 2012 and a return to economic growth next year. If either of those assumptions proves wrong, the table above gets smoked to the downside. I give that a better than 90% chance of happening.

From a budget-busting perspective, last year where the US government had a $73 billion Social Security surplus to spend, this year it will be a paltry $16 billion and next year it will be a number indistinguishable from zero. It is hard to overstate the importance of this shift.

This means several things. Instead of $703 billion coming in over the next 10 years, the current (overly optimistic) projection calls for only $83 billion. This means at least another $620 billion in fresh borrowing will have to occur.

More importantly, this means that the United States eventual date with bankruptcy has been moved forward by about 8 years or so. It also means that instead of being some future problem, a few administrations down the road, it is a near certainty that the current administration will have to confront some very difficult funding decisions that will be forced by the inability to borrow enough to pay for everything.

This isn’t necessarily a bad thing. For those who question the wisdom of having troops stationed in 150+ countries the funding crisis will translate into reduced foreign troop levels. The constantly expanding budgets of federal agencies tasked with keeping track of average Americans will face stiffer competition.

Here’s another entirely silly paragraph in the article:

While the new numbers will not affect payments to current Social Security recipients, experts say, the disappearing surplus could have considerable implications for the government's already grim financial situation.

Here’s how Mainecooncat expertly encapsulated the folly of that last sentence:

If there’s no longer going to be a surplus and the US government is insolvent how is this not going to affect payments to current recipients? Through more borrowing obviously, which simply dilutes the worth of future payments. So it patently will affect payments.

Yes indeed, good question, how can future payments not be affected? It’s a complete mystery to me why members of the media can manage to understand how a company overissuing common stock is dilutive to existing shareholders but cannot manage to understand that a country overissuing its common stock (the dollar) is dilutive to existing holders. But time and time again, this proves utterly elusive as a concept, especially in the Washington Post which has never, in my experience, managed to draw this connection.

And here's another "winner":

Many liberal analysts reject the notion that Social Security needs fixing, arguing that the system is projected to fully support payments to beneficiaries through 2041 -- so long as the Treasury repays its debts.

My comment: Well, then, “liberal analysts” need to go back and take some basic accounting courses. The idea that it’s somehow possible for an entity to owe itself money, especially a government, is patently ridiculous. If it were possible to owe oneself money, then we’d all be fantastically rich. Let me put it this way, if you cannot figure out how to loan yourself money then the government cannot do it either. The Treasury is no more capable of "repaying its debts" than it is capable of reversing the flow of time.

This next piece from the article captures this busted logic with comic perfection:

And at some point, perhaps as early as 2017, according to the CBO, the Treasury would have to start repaying the billions it has borrowed from the trust fund over the past 25 years, driving the nation further into debt or forcing Congress to raise taxes.

I am struck nearly speechless at the gigantic gap in logic on display in this sentence. “...repaying the billions it borrowed” by going “further into debt.

This isn’t that hard, folks. It is not possible to “pay off your debts” by borrowing money. The only source of funds the government has is either printing, which is a thinly disguised tax on all holders of money, or taxes which are, um, taxes and come from taxpayers. More borrowing is just pushing the obligation to repay off onto future taxpayers. It's really that simple.

The honest way of phrasing this would be “future taxpayers will have to cover the spending excesses of current and prior generations and will either do this directly or indirectly, depending on whether the government elects to cover the shortfalls with taxes or printing, respectively.

Conclusion: The United States government has a date with a fiscal emergency that will not differ appreciably from the current predicament in which GM finds itself. This future crisis will look like, act like, and feel like a bankruptcy. With history as our guide, we can be almost completely certain that political and monetary leaders will prefer a policy of printing over taxation and that this will ultimately result in a crisis of the currency involved.

There’s still time to do the right thing at the policy level, but not very much.

We are only a few years away, at most, from an irretrievable mismatch between our fiscal policies and reality.

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