It’s been a while since I’ve done a full update, and in the interim, the Social Security Trustees issued their 2010 report while the Old-Age and Survivors Insurance portion of Social Security began running 12-month primary (or cash, if you prefer) deficits. This will be a long one, so do read through.
July “Trust Fund” Performance
In July, the Disability Insurance (DI) “Trust Fund” took in $7,762 million in taxes and $4 million in “interest” as it cashed in some more Treasury securities to meet its obligations, and had $10,704 million in expenses. The overall deficit of $2,938 million (or -37.83% of total income) was the third-worst in dollar terms and 6th-worst in percentage terms in the “modern” era of Social Security (which began in January 1987 as the effects of the 1983 reforms took full effect). The primary (cash) deficit of $2,942 million (-37.90% of non-interest income) was the 4th-worst in dollar terms and 14th-worst in percentage terms. That dropped the “Trust Fund” value to $193,354 million.
The 12-month overall deficit was $19,419 million (-18.35% of total income) and the 12-month primary deficit was $29,399 million (-30.68% of non-interest income). All were the worst 12-month performances in the modern era.
The Old-Age and Survivors Insurance (OASI) “Trust Fund” took in $48,092 million in taxes and $19 million in interest, and had $48,535 million in expenses. The overall deficit of $423 million (-0.88% of total income) was 21st-worst in dollar terms and 25th-worst in percentage terms. The primary deficit of $442 million (-0.92% of non-interest income) was 30th-worst in dollar terms and 35th-worst in percentage terms. The “Trust Fund” value declined to $2,407,709 million.
For the first time since the effects of the 1983 reforms took full effect, the OASI “Trust Fund” ran a 12-month primary deficit, which was $1,747 million (or -0.30% of non-interest income). The 12-month overall surplus of $106,791 million (+15.62% of total income) was the worst monetary performance since 9/1998-8/1999 and the worst percentage-of-income performance since 1/1996-12/1996.
August “Trust Fund” Performance
In August, the DI “Trust Fund” took in $7,365 million in taxes and $14 million in interest, and had $10,534 million in expenses. The overall deficit of $3,155 million (-42.76% of total income) was the worst in dollar terms and the 2nd-worst in percentage terms. The primary deficit of $3,169 million (-43.03% of non-interest income) was the 2nd-worst in dollar terms and 4th-worst in percentage terms.
The 12-month DI deficits worsened to an overall $20,001 million (-18.90% of total income) and a primary $29,976 million (-31.28% of non-interest income). The “Trust Fund” value declined to $190,199 million. To put that 12-month primary deficit another way, taxes only paid for 68.72% of Disability Insurance total outgo between September 2009 and August 2010.
The OASI “Trust Fund” took in $43,384 million in taxes and $25 million in interest, and had $48,516 million in expenses. The overall deficit of $5,106 million (-11.76% of income) was 3rd-worst in dollar terms and 4th-worst in percentage terms. The primary deficit of $5,131 million (-11.83% of non-interest income) was 4th-worst in dollar terms and 6th-worst in percentage terms. The “Trust Fund” value declined to $2,402,603 million.
The 12-month primary deficit worsened to $3,637 million, or -0.63% of non-interest income. The 12-month overall surplus declined to $104,873 million (+15.34% of total income), again the worst monetary performance since 9/1998-8/1999 and the worst percentage-of-income performance since 1/1996-12/1996.
Tax Revenues Flat Year-Over-Year
Taxes taken in for the purposes of Social Security were essentially flat for both July and August. July 2010’s tax take of $55,854 million was a mere 0.87% behind July 2009’s tax take. August 2010’s tax take of $50,749 was actually 0.18% higher than August 2009’s tax take. I mention that because in the previous update, I noted that early-2010 performance lagged well behind early-2009 performance.
2010 Trustees’ Report
The one positive I can say about the 2010 Trustees’ report is that its projections of 2010 pretty much mirror reality. Based on nothing more than wishful thinking, the Trustees, mostly appointees of President Obama, assumed that the provisions of PlaceboCare would radically increase taxable wages at the expense of spending on health insurance (which is not taxed and will not be taxed for Social Security purposes, but which will eventually be taxed to pay for various provisions in PlaceboCare). That had the effect of extending the fund-exhaustion dates for the OASI Fund from 2039 to 2040 in the intermediate case and from 2031 to 2032 in the high-cost case. That change did not change the combined OASDI fund-exhaustion dates of 2037 for the intermediate case and 2029 for the high-cost case because the DI fund-exhaustion dates dropped from 2020 to 2018 in the intermediate case and from 2016 to 2015 in the high-cost case.
The reason why I say that the increase in taxable wages, and thus taxes, is nothing but a hope is companies are already starting to either radically raise health-insurance premiums or drop health insurance entirely with no sign that wages are increasing to compensate.
With that in mind, let’s take a look at those assumptions. Under the intermediate case, the Trustees assumed that 2010 taxable payroll (the portion of wages that are subject to the FICA/SECA tax) would be $5,676 billion in the 2009 report and $5,459 billion in the 2010 report. Despite the Consumer Price Index never assumed to be above the long-term average of 2.8% in the 2010 report, while it was assumed to be as high as 3.07% (in both 2013 and 2014) in the 2009 report before returning to the long-term average of 2.8%, by 2018, the trustees assumed taxable payroll would be $8.446 billion in this year’s report, compared to $7.961 billion in last year’s report.
In the longer term, the spread between last year’s and this year’s sets of assumptions for taxable payroll, and thus taxes from said payroll, becomes even wider. For 2040, the Trustees assumed taxable payroll would be $21.258 billion (or $9.284 billion in constant 2010 dollars) in last year’s report, while they assumed the same would be $22.198 billion ($9.863 billion in constant 2010 dollars). GDP in the same year was assumed to be $59.581 billion ($26.021 billion in constant 2010 dollars) in last year’s report, and $60.794 billion ($27,011 billion in constant 2010 dollars) in this year’s report.
While there are other technical changes in this year’s report I would like to include in my “re-modeling”, I haven’t been able to figure out how to work the bogus assumption of a PlaceboCare wage increase out of the model. I will, therefore, stick with last year’s model, modified by actual performance.
The Unfunded Cliff
The most-popular measure of how far in the red the combined OASDI “Trust Funds” are is the “75-year open-group unfunded obligation”. That measure, expressed in “present-value dollars”, which assumes the effects of both inflation (2.8%) and the long-term interest rate “earned” by the “Trust Funds” (5.7%), is how much money would need to have been put into the combined “Trust Fund” at the beginning of that particular year for it, along with every penny of tax possible over the succeeding 75 years, for the fund to not hit zero before the end of that 75 years. In January 2009, the Treasury would have needed to come up with $5.3 trillion to put into the “Trust Funds”, and then combined the operations of the two, to get Social Security through the end of 2083. In January 2010, the Treasury would have needed to come up with $5.4 trillion to get things to the end of 2084.
Even though using “present-value dollars” is a generally-accepted accounting practice, that grossly understates the problems in two ways. The first is that it does not leave any money in Social Security at the end of the 75 years, while there would be a long line of people promised that money.
There are two alternate measures that take differing looks at that; the “infinite open-ended obligation”, which extends the 75th-year conditions out to the indefinite future, and the “infinite closed-ended obligation”, which only takes the taxes for those who were at least 15 years old the year of the report and then pays out until the last one of them dies.
The “infinite open-ended obligation”, which is a test of the very-long-term viability of Social Security, was $15.1 trillion in “present-value” as of 2009, and $16.1 trillion in “present-value” as of 2010. Of note, while the various methodology changes resulted in a positive change at the 75-year level between 2009 and 2010, those same methodology changes resulted in a further negative change on the infinite level.
The “infinite closed-ended obligation” measures what it would take to pay those even marginally-promised Social Security with just the money paid by those people. Last year, the “present-value” of that unfunded obligation was $16.3 trillion. Now, it’s $17.4 trillion.
That leads me to the second way the “present-value dollar” amount grossly understates the problem. It assumes the money to pay off the “Trust Funds” and service the future interest is there. News flash; the only thing that is there is a promise to pay off the “Trust Funds” in full, and specifically, there is no authority for Social Security to borrow funds to meet its obligations. Using last year’s Trustees’ report as a guide, with the only modification being putting the combined funds’ August 2010 balance in instead of the calculated balance for August 2010, it would take $7.9 trillion over the next just-over-26 years to monetize the Trust Funds as the securities get called. With total outgo at about $45.2 trillion (and actual benefits less than that) over those same just-over-26 years, about 17.5% of what is allegedly fully-funded is actually an addition to the publicly-held debt. Of note, that does not count the interest to service that debt, which would also be borrowed, which would be significant both in the just-over-26-year period and beyond.
The nightmare really begins after the “Trust Fund” dries up because at that point, Social Security would be limited to paying out what it took in in taxes. In 2038, $0.759 trillion of the $3.32 trillion in theoretical outgo (22.9%) would not be able to be paid out. In 2050, $1.091 trillion of $5.457 trillion (20.0%) cannot be paid out. In 2060, $1.722 trillion of $8.445 trillion (20.4%) could not be paid out. In 2083, the last year of the 75-year look from 2009, $5.152 trillion of $23.840 trillion (21.6%) could not be paid out.