This morning, I saw two articles on the same website. One indicates that we have hit a new record number of Social Security recipients in the United States:
by Laurence Kotlikoff on Bloomberg:
Social Security just celebrated its 75th birthday. Love it or hate it, it has done its job and should retire. We need a new system, the Personal Security System, which retains Social Security’s best features, scraps the rest, and covers its costs.
Social Security’s objective -- forcing people to save for retirement -- is legit. Otherwise millions of us would seek handouts in our old age.
But Social Security has also played a central role in the massive, six-decade Ponzi scheme known as U.S. fiscal policy, which transfers ever-larger sums from the young to the old.
In so doing, Uncle Sam has assured successive young contributors that they would have their turn, in retirement, to get back much more than they put in. But all chain letters end, and the U.S.’s is now collapsing.
The letter’s last purchasers -- today’s and tomorrow’s youngsters -- face enormous increases in taxes and cuts in benefits. This fiscal child abuse, which will turn the American dream into a nightmare, is best summarized by the $202 trillion fiscal gap discussed in my last column.
The gap is the present value difference between future federal spending and revenue. Closing this gap via taxes requires doubling every tax we pay, starting now. Such a policy would hurt younger people much more than older ones because wages constitute most of the tax base.
What about cutting defense instead? Sadly, there’s no room there. The defense budget’s 5 percent share of gross domestic product is historically low and is projected to decline to 3 percent by 2020. And the $202 trillion figure already incorporates this huge defense cut.
The 3-Year-Old Vote
Reducing current benefits, most of which go to the elderly, is another option. But such a policy is highly unlikely. The elderly vote and are well-organized, whereas 3-year-olds can neither vote, nor buy Congressmen.
In contrast, cutting future benefits is politically feasible because it hits the young. And that’s where Congress is heading, starting with Social Security. The president’s fiscal commission will probably recommend raising Social Security’s full retirement age to 70 from 67, for those who are now younger than 45. This won’t change the ages at which future retirees can start collecting benefits. It will simply cut by one-fifth what they get.
Some political economists point to Social Security’s 2010 Trustees Report and say, “Leave it alone. The system won’t run short of cash until 2037.”
Misleading Accounting
Unfortunately, the Trustees’ cash-flow accounting, like all such accounting, is arbitrary and misleading. In fact, Social Security is broke. Its fiscal gap, which the Trustees measure correctly, is $16 trillion.
This gap is small compared with the U.S.’s overall $202 trillion shortfall, not because the Trustees treat Social Security’s $2.5 trillion trust fund as an asset (a questionable choice), but because they credit one-third of federal revenue to the program.
But dollars are dollars. If we re-label Social Security “payroll” taxes as “general revenue wage taxes,” Social Security’s fiscal gap increases by $60 trillion, and the fiscal gap of all other government activities falls by $60 trillion, leaving the overall $202 trillion gap unchanged.
Even by the Trustees’ measure, there’s a massive problem. Coming up with $16 trillion requires permanently raising revenue or cutting benefits by 26 percent, starting now. In other words, the program is 26 percent underfunded.
Hitting Young People
Now cutting benefits of new retirees by 20 percent, with an increase in the so-called full retirement age, starting 20 or so years from now isn’t the same as immediately cutting the benefits of all retirees by 26 percent. Hence, the fiscal commissioners will need to hit young people with an even bigger whammy if they really want to solve Social Security’s long-term woes.
Most likely, Washington will simply raise the retirement age and kick the can further down the road. This is what the Greenspan Commission did in 1983, knowing full well that by 2010 the system would be in even worse shape.
I say, retire Social Security and replace it with a version that works. Do this by freezing the current system, paying today’s retirees their benefits, while paying workers only what they have accrued so far once they retire.
Next, have all workers contribute 8 percent of their pay to the new system, with half going to a personal account and half to an account of a spouse or legal partner. The federal government would make matching contributions for the poor, the disabled and the unemployed, permitting the system to be as progressive as desired.
Going Global
All contributions would be invested in a global, market- weighted index of stocks, bonds, and real estate. The government would do the investing at very low cost and guarantee that contributors’ account balances at retirement would equal at least what was contributed, adjusted for inflation.
Between ages 57 and 67, each worker’s balances would gradually be swapped for inflation-indexed annuities sold by the government. Those dying before 67 would bequeath their account balances to their heirs.
While this plan has private accounts, Wall Street plays no role and makes no money. Additional contributions would be used to fund life- and disability-insurance pools.
Our nation is in terribly hot water. Business as usual is no answer. The only way to move ahead is to radically reform our retirement, tax, health-care and financial institutions to achieve much more for a lot less.
The Personal Security System is a major step in that direction. It meets all the legitimate goals of Social Security without the system’s waste and penchant for robbing the young.
(Laurence J. Kotlikoff is a professor of economics at Boston University and author of “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.” The opinions expressed are his own.)
from Yahoo Finance and Fortune Mag:
Don't look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.
A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.
Instead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing -- in other words, a taxpayer bailout.
No one has officially announced that Social Security will be cash-negative this year. But you can figure it out for yourself, as I did, by comparing two numbers in the recent federal budget update that the nonpartisan CBO issued last week.
The first number is $120 billion, the interest that Social Security will earn on its trust fund in fiscal 2010 (see page 74 of the CBO report). The second is $92 billion, the overall Social Security surplus for fiscal 2010 (see page 116).
This means that without the interest income, Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30.
Why disregard the interest? Because as people like me have said repeatedly over the years, the interest, which consists of Treasury IOUs that the Social Security trust fund gets on its holdings of government securities, doesn't provide Social Security with any cash that it can use to pay its bills. The interest is merely an accounting entry with no economic significance.
It would have been a lot simpler to fix the system years ago, when we could have used Social Security's cash surpluses to buy non-Treasury securities, such as government-backed mortgage bonds or high-grade corporates that would have helped cover future cash shortfalls. Now it's too late.
Even though an economic recovery might produce some small, fleeting cash surpluses, Social Security's days of being flush are over.
To be sure -- three of the most dangerous words in journalism -- the current Social Security cash deficits aren't all that big, given that Social Security is a $700 billion program this year, and that the government expects to borrow about $1.5 trillion in fiscal 2010 to cover its other obligations, about the same as it borrowed in fiscal 2009.
But this year's Social Security cash shortfall is a watershed event. Until this year, Social Security was a problem for the future. Now it's a problem for the present.
WASHINGTON (AP) - Big job losses and a spike in early retirement claims from laid-off seniors will force Social Security to pay out more in benefits than it collects in taxes the next two years, the first time that's happened since the 1980s.
The deficits - $10 billion in 2010 and $9 billion in 2011 - won't affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion. But they will add to the overall federal deficit.
Applications for retirement benefits are 23 percent higher than last year, while disability claims have risen by about 20 percent. Social Security officials had expected applications to increase from the growing number of baby boomers reaching retirement, but they didn't expect the increase to be so large.
What happened? The recession hit and many older workers suddenly found themselves laid off with no place to turn but Social Security.
"A lot of people who in better times would have continued working are opting to retire," said Alan J. Auerbach, an economics and law professor at the University of California, Berkeley. "If they were younger, we would call them unemployed."
Job losses are forcing more retirements even though an increasing number of older people want to keep working. Many can't afford to retire, especially after the financial collapse demolished their nest eggs.
from Tuscaloosa News:
TUSCALOOSA | “Social Security could face a deficit within two years,” U.S. Rep. Spencer Bachus predicted here Tuesday. “The situation is much worse than people realize, especially because of the problems brought on by the recession, near depression.
“That’s not been on the board — people don’t seem to know that,” Bachus, the ranking member of the House Committee on Financial Services, said in a wide-ranging interview with the Tuscaloosa News Editorial Board. “What this recession has done to Social Security is pretty alarming.
“We’ve known for 15 years that we were going to have to make adjustment to Social Security, but we still through that was seven or eight years down the road,” he said. “But if things don’t improve very quickly, we’re going to be dealing with that problem before we know it.”
The solvency of Social Security, which provides pensions for people over 65, has not played a major role in the current debate over health care in Congress and Bachus, a Vestavia Hills Republican who represents part of Tuscaloosa County, said it will not likely be addressed in any health care bill the House eventually passes, although if a Social Security bail out is needed, it will invariably impact government health care programs.
In the debate over health care, Bachus said that he could support a bill that includes privately-administered health “co-ops,” along with the elimination of fraud and waste in existing government programs like Medicaid and Medicare.
The creation of health care “co-ops,” or non-profit health cooperatives run by members, is an idea that has gained momentum as Democrats and President Barack Obama seems to have moved away from the idea of a “government option,” which would be a government-run alternative to private health care now offered by for-profit insurance companies.
“I can not vote for a bill that has the government intruding into the private sector, subsidizing health care and eventually putting the insurance companies out of business,” he said.
As for the looming Social Security crisis, Bachus said options are just now beginning to be discussed.
“We could raise the retirement age, or in the worst case, cut back on some benefits,” he said. “But that is something we are just now beginning to get a handle on.”
Bachus visited The News the morning after a standing-room-only crowd of 2,000 people attended a health care public forum he hosted in Birmingham Monday night.
Unlike some town hall meetings that have turned chaotic across the county as members of Congress have returned to their districts during the August congressional recess, Bachus said there was “only a little friction” between opponents of various health care proposals advanced by the Democratic majority in Congress and those who support those proposals.
“I think everyone was for the most part civil and we had a lot of people just agree to disagree,” he said. “But you can tell that health care is an issue that has energized the country, because I have never had a town meeting with 2,000 people. And we even had to turn away a lot of people because of fire department regulations.”
from the LA Times:
from Forbes:
This week, the federal government published two important reports on long-term budgetary trends. They both show that we are on an unsustainable path that will almost certainly result in massively higher taxes.
The first report is from the trustees of the Social Security system. News reports emphasized that the date when its trust fund will be exhausted is now four years earlier than estimated last year. But in truth, this is an utterly meaningless fact because the trust fund itself is economically meaningless.
The 2010 budget, which was finally released this week, confirms this fact. As it explains in Chapter 21, government trust funds bear no meaningful comparison to those in the private sector. Whereas the beneficiary of a private trust fund legally owns the income from it, the same is not true of a government trust fund, which is really nothing but an accounting device.
Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled "Social Security trust fund."
The problem is that by law 100% of these "assets" are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It's as if you wrote an IOU to yourself; no matter how large the IOU is it doesn't increase your net worth.
This fact is documented in the budget, which says on page 345: "The existence of large trust fund balances … does not, by itself, increase the government's ability to pay benefits. Put differently, these trust fund balances are assets of the program agencies and corresponding liabilities of the Treasury, netting to zero for the government as a whole."
Consequently, whether there is $2.4 trillion in the Social Security trust fund or $240 trillion has no bearing on the federal government's ability to pay benefits that have been promised. In a very technical sense, it would lose the ability to pay benefits in excess of current tax revenues once the trust fund is exhausted. But long before that date Congress would simply change the law to explicitly allow general revenues to be used to pay Social Security benefits, something it could easily do in a day.
The trust fund is better thought of as budget authority giving the federal government legal permission to use general revenues to pay Social Security benefits when current Social Security taxes are insufficient to pay current benefits--something that will happen in 2016. Effectively, general revenues will finance Social Security when the trust fund redeems its Treasury bonds for cash to pay benefits.
What really matters is not how much money is in the Social Security trust fund or when it is exhausted, but how much Social Security benefits have been promised and how much total revenue the government will need to pay them.
The answer to this question can be found on page 63 of the trustees report. It says that the payroll tax rate would have to rise 1.9% immediately and permanently to pay all the benefits that have been promised over the next 75 years for Social Security and disability insurance.
But this really understates the problem because there are many people alive today who will be drawing Social Security benefits more than 75 years from now. Economists generally believe that the appropriate way of calculating the program's long-term cost is to do so in perpetuity, adjusted for the rate of interest, something called discounting or present value.
Social Security's actuaries make such a calculation on page 64. It says that Social Security's unfunded liability in perpetuity is $17.5 trillion (treating the trust fund as meaningless). The program would need that much money today in a real trust fund outside the government earning a true return to pay for all the benefits that have been promised over and above future Social Security taxes. In effect, the capital stock of the nation would have to be $17.5 trillion larger than it is right now. Alternatively, the payroll tax rate would have to rise by 4%.
To put it another way, Social Security's unfunded liability equals 1.3% of the gross domestic product. So if we were to fund its deficit with general revenues, income taxes would have to rise by 1.3% of GDP immediately and forever. With the personal income tax raising about 10% of GDP in coming years, according to the Congressional Budget Office, this means that every taxpayer would have to pay 13% more just to make sure that all Social Security benefits currently promised will be paid.
As bad as that is, however, Social Security's problems are trivial compared to Medicare's. Its trustees also issued a report this week. On page 69 we see that just part A of that program, which pays for hospital care, has an unfunded liability of $36.4 trillion in perpetuity. The payroll tax rate would have to rise by 6.5% immediately to cover that shortfall or 2.8% of GDP forever. Thus every taxpayer would face a 28% increase in their income taxes if general revenues were used to pay future Medicare part A benefits that have been promised over and above revenues from the Medicare tax.
But this is just the beginning of Medicare's problems, because it also has two other programs: part B, which covers doctor's visits, and part D, which pays for prescription drugs.
The unfunded portion of Medicare part B is already covered by general revenues under current law. The present value of that is $37 trillion or 2.8% of GDP in perpetuity according to the trustees report (p. 111). The unfunded portion of Medicare part D, which was rammed into law by George W. Bush and a Republican Congress in 2003, is also covered by general revenues under current law and has a present value of $15.5 trillion or 1.2% of GDP forever (p. 127).
To summarize, we see that taxpayers are on the hook for Social Security and Medicare by these amounts: Social Security, 1.3% of GDP; Medicare part A, 2.8% of GDP; Medicare part B, 2.8% of GDP; and Medicare part D, 1.2% of GDP. This adds up to 8.1% of GDP. Thus federal income taxes for every taxpayer would have to rise by roughly 81% to pay all of the benefits promised by these programs under current law over and above the payroll tax.
Since many taxpayers have just paid their income taxes for 2008 they may have their federal returns close at hand. They all should look up the total amount they paid and multiply that figure by 1.81 to find out what they should be paying right now to finance Social Security and Medicare.
To put it another way, the total unfunded indebtedness of Social Security and Medicare comes to $106.4 trillion. That is how much larger the nation's capital stock would have to be today, all of it owned by the Social Security and Medicare trust funds, to generate enough income to pay all the benefits that have been promised over and above future payroll taxes. But the nation's total private net worth is only $51.5 trillion, according to the Federal Reserve. In effect, we have promised the elderly benefits equal to more than twice the nation's total wealth on top of the payroll tax.
Of course, theoretically, benefits could be cut to prevent the necessity of a massive tax increase. But how likely is that? The percentage of the population that benefits from Social Security and Medicare is growing daily as the baby boom generation ages and longevity increases. And the elderly vote in the highest percentage of any age group, so their political influence is even greater than their numbers.
The reality, which absolutely no one in either party wishes to face, is that benefits are never going to be cut enough to prevent the necessity of a massive tax increase in the not-too-distant future. Those who think otherwise are either grossly ignorant of the fiscal facts, in denial, or living in a fantasy world.
Bruce Bartlett is a former Treasury Department economist and the author of Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. He writes a weekly column for Forbes.
The Congressional Budget Office this morning released a report that the Social Security surplus has dropped 95% within the past year. This suggests that very soon, we have to either raise taxes to fund Social Security or borrow even more money to pay for current benefits. This train wreck is closer than anyone could have ever imagined just 12 months ago!
Frightening excerpts from John Mauldin's newsletter:
Earnings Estimates
Earnings may drop 31% in the second quarter and 18% in the next before gaining 74 % in the last three months of the year, analysts predict. Banks are projected to account for all of the rebound in the final quarter. Without financial companies, the gain turns into a 5% decline, the data show.
The above estimates are based on operating earnings, not as reported earnings. Long time readers know that operating earnings are actually earnings before interest and Bad Stuff. As reported earnings are what companies actually report on their tax reports, as a gauge of profitability they are much more reliable. Before the mid-90s the difference between operating and as reported earnings was typically quite small. Then companies found that they could play the market if they played games with their operating earnings.
Operating earnings are earnings which typically do not take into account one time, non-recurring events. The number of items which get classified as “non-recurring” has mushroomed to the point where projected operating earnings for 2009 are more than double the estimates of as reported earnings. Operating earnings for 2008 was almost three times actual or as reported earnings.
Housing Mess -- Will Deepen in 2010-2011
They contend that much of the bad news in the subprime and housing market has been written off. And one would have to admit that a lot has been, and with the relaxation of mark-to-market, there may indeed be some truth to that suggestion. But there are still some issues that remain in the future for housing problems. Take a look at the graph below. (Not sure where it is from as it was sent to me, but I have seen the same data elsewhere.) Notice that monthly mortgage rate resets declined markedly in 2009 from 2008, only to rise once again in 2010 and 2011.
Shadow Inventory of Foreclosed Homes
We are seeing what some call a “shadow inventory” of foreclosed homes. “We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market,” said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures.
Realty Trac in a survey found that only 30% of foreclosures were listed for sale... Add in homes that people would like to sell but simply can’t find buyers and must either hold or rent, and the unsold inventory numbers that are public are likely far below actual available homes.
Might some homes in foreclosure be held off the market as banks eventually want to negotiate with the homeowner? Possibly, but other surveys show that anywhere from 30-40% of homes in the foreclosure process in many areas are actually already vacant. There is no one with whom to negotiate.
Typically a foreclosed home sells within a few weeks as banks take the first “reasonable” offer. Again, it normally takes about three months from foreclosure to where the home is sold. It takes a few months to get a home ready. But surveys show it is taking a lot longer, and many homes have not made it onto the market, even as more homes are being foreclosed each month. There are just so many homes it is hard to get them onto the market and sold. Normally there are about 160,000 homes are year in foreclosures sales. We are now seeing 80,000 a month, or six times normal levels and rising.
Second, lenders could be deferring sales to put off having to acknowledge the actual extent of their loss. "With banks in the stress they're in, I don't think they're anxious to show losses in assets on their balance sheets," one observer said.
Finally, banks may not want to flood the market with foreclosures, driving prices down even more. They are simply managing their assets so as to recover the most capital they can.
Given that the graph above says that there will be more mortgage misery as so many mortgages reset in the next two years, and given the unknowable nature of the losses, it is somewhat optimistic to think financial profits will rise by 74% in the fourth quarter. But it gets worse.
Commercial Real Estate
We are now starting to see some real deterioration in traditional bank lending. Delinquencies on home equity loans are rising rapidly. The American Banking Association released a composite index of eight different types of consumer loans and the delinquency rate on this 35 year old composite jumped to a record high of 3.22%.
The above data reflects 4th quarter data. As unemployment is up 2% since then and is rising, it is more than reasonable to assume that we will see another record rise in delinquencies this quarter. With unemployment headed to over 10% and maybe 11% from today’s 8.5%, delinquencies are likely to continue to rise for the entire year.
Commercial mortgages are in trouble. S&P has warned they may cut ratings on $97 billion in commercial mortgage asset backed debt. The country’s 10 biggest banks have $327.6 billion in commercial mortgages, according to regulatory filings. A projected tripling in the default rate would result in losses of about 7% of total unpaid balances,according to estimates from analysts at research firm Reis Inc. (Bloomberg)
P/E Ratios Go Negative
The P/E ratio for the end of the second quarter is 1944 (not a typo). The losses of the 4th quarter almost wipe out all earnings for the 12 months ending June 30. But by the end of the 3rd quarter, the P/E ratio has dropped to a negative -467.That has never happened. We have never seen negative earnings over a 12 month period since WW2. (I don’t have data for the Depression era.)
“…Much of the excitement in the stock market – at least that is related to the current performance of the economy - seems to be centered on an economy that is performing less badly than expected. The risks here seem to be that if the trends in data surprises change, so could investor's attitudes toward stocks that are currently overbought on a number of measures.
“…If the high correlation between stock prices and data surprises holds, the recent rally in stocks might be tested. Even if the economy has bottomed, it's very likely that the eventual recovery will prove to be uneven, causing the flow of positive surprises to be uneven. During these periods, the risks to stocks will be greatest when the market is overbought and investors have priced in high expectations of positive data surprises continuing.”
The projections of many market analysts assume that we will have something that will look like a normal recovery. I have objected that that could be a very bad assumption, as we are not having a normal recession. This is already a very lengthy recession, and is just going to get longer. As I will note below, there are reasons to think we could see a mild recovery late this year only to dip back into recession next year.
Even ignoring the disastrous 4th quarter of 2008, what if earnings drop by 80% or more, which is quite possible? That means they have to rise by 400% to get back to new highs. That could take some time. Even if they could rise at an unlikely 24% a year, it would take six years to see new highs. Look at what a mountain corporate earnings must climb.
Further, the Democratic Congress and the Obama administration are going to enact the largest tax increase in history in 2010, just as the economy is barely recovering, as the Bush tax cuts go away because the Republicans could not make them permanent when they had the chance. We are going to pay for that with a likely dip back into a recession in 2010, or at the very least a prolonged weak economy.
Social Security -- About to Implode
And then there is the last piece of data I want to bring to your attention, which is the most troubling of all. Everyone knows that the government spends the Social Security surpluses on current spending, “borrowing” the money and putting it into a “Social Security Trust Fund” which is basically just US debt we owe to the trust fund. In other words, there is no trust fund with anything other than paper debt. It is accounting legerdemain.
Everyone assumed that the real problem was some time later next decade when there would no longer be surpluses. In 2008, the Congressional Budget Office (CBO) projected that there would be $703 billion in surpluses from 2009-18. Recently, the CBO has revised those estimates downward. It now projects surpluses to be on $83 billion.
Trillion Dollar Deficits
But there is a limit to continued $2 trillion deficits without an appreciable rise in interest rates that will be needed to attract buyers of treasury bonds, which of course increases interest rate payments on the national debt, while also crowding out corporate and personal borrowing. This is not going to end well, and the end game is getting a lot closer.
All in all, the next few years are going to be a very difficult environment for corporate earnings. To think we are headed back to the halcyon years of 2004-06 is not very realistic. And if you expect a major bull market to develop in this climate, you are not paying attention.
The original question was “Is that recovery we see?” I think the answer is no.
