Austerity problem or something else?

Piezo you admit, as I said above, that the jist of our disagreement is in the nature of what a 'special government obligation' is, compared to a marketable government security.

The rest of you thoughts about the legitimacy of SS as a social program, at least in its intent if not its present structure, is not something we were talking about. I won't get into it now except to say that I agree there was a good and useful intent...I see the problem in the evolution of the structure where it stayed from a self funding insurance model to a social welfare model...but that would be the stuff of another thread and I don't know if I care to bother.

Getting back to the difference between a U.S. Treasury Bond and a 'Special Government Obigation' I don't know how to explain it to you any better that they completely different legal concepts. It is Orwellian of the SS and Treasury to call the special government obligations 'securities' because a security is by defination a negotiable asset; an instrument representing financial value that can be traded. The fact that the special government obligations are non-marketable, means that they are not securities in any sense of what that word means, and of course they cannot be considered independent assets because they add nothing outside the promis of the government itself to keep its promise to fund deficits. It is not an actionable instrument it is simply an accounting marker of how much money is owed from the Treasury to the SS Trust fund.

Here is how the OMB describes the nature of the special government obligations:

"These [Trust Fund] balances are available to finance future benefit payments and other Trust Fund expenditures – but only in a bookkeeping sense.... They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits. (from FY 2000 Budget, Analytical Perspectives, p. 337)"

If you do not understand the difference between that kind of a book keeping notation and negotiable security of the U.S. Treasury that is sold to the public then there is nothing else I can do to help to you.
 
Quote from oldtime:

if it's not a ponzi scheme (and I'm not saying it is) we could give everybody who is paying into it all their money back and there would still be enough money in the trust fund for all current retirees. Is that the case?
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Yes, exactly. Or almost exactly. Technically the dollars paid in by current workers are used first to pay the pensions of retired workers and any surplus is invested in special treasury securities. So the financially naive person would say a'ha, current workers are paying the retirement pensions of those already retired. It's a Ponzi scheme! But the dollars of the Trust are fungible, so once they are in the Trust there is no difference between one dollar and another, and right now there is about a 2.8 trillion surplus in the Trust and it is still growing. That is the dollars coming into the Trust are still greater than the dollars flowing out.

The financially sophisticated person, such as yourself, would of course realize that what is actually done, as described above, is the exact equivalent of all of the money coming in from current workers being used to buy Treasury securities and enough securities currently held by the Trust being redeemed to exactly pay the pensions of the current retirees. And as noted, the new securities bought by current contributions would be greater than the securities redeemed to pay the current retirees. Hence, yes, there is enough in the Trust to pay current retirees out to some date in the distant future, as determined by the actuaries. So, a'ha!, it's not a Ponzi scheme after all. :D

But of course longevity changes over time as does the size of the workforce versus the size of the geezer force, as do interest rates, etc. Hence the actuaries have to call for routine adjustments in the contribution rate to allow for these changes and keep the system sound. As of two years ago the actuaries were calling for a two cent per earned dollar increase in contribution rate (1 cent employee/ 1 cent employer) assuming benefits and retirement age to remain unchanged. However the morons in Congress have so far failed to act, and have actually made matters worse by recently reducing (yikes!) the amount of payroll deduction for Social Security. Either benefits and/or retirement age will have to be changed to accommodate this drop in contributions or else the cut will have to be made up somehow. The longer the required adjustments are put off, the more difficult it will become to keep benefits and retirement age as they are. All of Wall Street is cheering!
 
Quote from piezoe:

...., so once they are in the Trust there is no difference between one dollar and another, and right now there is about a 2.8 trillion surplus in the Trust and it is still growing. That is the dollars coming into the Trust are still greater than the dollars flowing out.
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Hate to say it but SSA outgoings now exceed incoming SSA receipts. The are now redeeming treasuries (trust fund assets), although the fund will grow until 2020 (yeah right) due to earned interest.

http://www.ssa.gov/OACT/TRSUM/index.html

You have to ask what the SAA has used as assumptions on interest earnings when we have the 10Y at 1.6% .....:)

From SSA website:

.....Social Security’s expenditures exceeded non-interest income in 2010 and 2011, the first such occurrences since 1983, and the Trustees estimate that these expenditures will remain greater than non-interest income throughout the 75-year projection period. The deficit of non-interest income relative to expenditures was about $49 billion in 2010 and $45 billion in 2011, and the Trustees project that it will average about $66 billion between 2012 and 2018 before rising steeply as the economy slows after the recovery is complete and the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers.

Redemption of trust fund assets from the General Fund of the Treasury will provide the resources needed to offset the annual cash-flow deficits. Since these redemptions will be less than interest earnings through 2020, nominal trust fund balances will continue to grow.

The trust fund ratio, which indicates the number of years of program cost that could be financed solely with current trust fund reserves, peaked in 2008, declined through 2011, and is expected to decline further in future years. After 2020, Treasury will redeem trust fund assets in amounts that exceed interest earnings until exhaustion of trust fund reserves in 2033, three years earlier than projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2086.

A temporary reduction in the Social Security payroll tax rate reduced payroll tax revenues by $103 billion in 2011 and by a projected $112 billion in 2012. The legislation establishing the payroll tax reduction also provided for transfers of revenues from the general fund to the trust funds in order to "replicate to the extent possible" payments that would have occurred if the payroll tax reduction had not been enacted. Those general fund reimbursements comprise about 15 percent of the program's non-interest income in 2011 and 2012.

Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable earnings will grow rapidly from 11.3 percent in 2007, the last pre-recession year, to roughly 17.4 percent in 2035, and will then decline slightly before slowly increasing after 2050. Costs display a slightly different pattern when expressed as a share of GDP. Program costs equaled 4.2 percent of GDP in 2007, and the Trustees project these costs will increase gradually to 6.4 percent of GDP in 2035 before declining to about 6.1 percent of GDP by 2050 and then remaining at about that level.
 
Thank you for that accurate information. The best place to go for the truth is the S.S. dot gov website, and definitely not ET. I was aware that the Trust would have to start redeeming soon, just not sure exactly when.
 
The Trust has been redeeming since 2010. It is cash flow negative in that the SS revenue coming in is less than the benefit payments going out. This is in part due to the reduction in the SS Employee Tax, the high level of unemployment in a stagnant economy, and by the demographic trend of baby boomers entering their retirement years. The SS Trust fund continues to grow even though it is cash flow negative because the imputed interest continues to accrue...this is an accounting entry of future liability that makes the Trust fund growth even though it is losing money on a cash flow basis. This situation will accelerate from here forward util the baby boomers start dying in large numbers...maybe Obama care can help with that.
 
So long as the interest plus current income exceeds current liabilities I don't think they have to redeem. The excess is still used to buy more special Treasury securities.

Two things need to be done to maintain the soundness of Social Security. 1. The advice of the actuaries must be followed in a timely manner; 2. the federal discretionary budget must be brought into balance, as this comprises a serious indirect threat to Social Security. This can't be done precipitously, but if it is delayed too long changes in retirement benefits/retirement age/salary contribution cap will have to be made, or alternatively rather steep increases in the contribution rate will be required. All of these measures would have the effect of reducing the rate at which securities held by the Trust must be redeemed. This is the main concern, viz., the ability to borrow at reasonable rates the money needed by the Treasury to redeem the Trust's holdings at the required rate of redemption.
 
Quote from Ed Breen:

The Trust has been redeeming since 2010. It is cash flow negative in that the SS revenue coming in is less than the benefit payments going out. This is in part due to the reduction in the SS Employee Tax, the high level of unemployment in a stagnant economy, and by the demographic trend of baby boomers entering their retirement years. The SS Trust fund continues to grow even though it is cash flow negative because the imputed interest continues to accrue...this is an accounting entry of future liability that makes the Trust fund growth even though it is losing money on a cash flow basis. This situation will accelerate from here forward util the baby boomers start dying in large numbers...maybe Obama care can help with that.
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From what I have read Ed, I don't think that is quite right, though it is rather a moot point. I don't think the Trust holds cash. Any excess income from interest, for example, would be converted to securities. Thus if the net of interest income plus receipts exceeds current liabilities, there would be no redemption of currently held securities and any excess of interest plus income over current liabilities would be used to buy more securities.. In other words any net growth in the Trust results in a growth of, rather than a redemption of, securities held. But, in any case, the Trust will very soon have to start redeeming its securities, and the Treasury will have to borrow the money to redeem them. Yikes!
 
Quote from piezoe:

...right now there is about a 2.8 trillion surplus in the Trust and it is still growing.
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That's not really correct. There are no dollars at all in the surplus fund, all it contains is promises of futuref dollars.

At a certainly level the distinction is minor - but from a different level, it's the only thing that matters.
 
piesoe, isn't that like relying on a Bernie Madoff statement because he is the one you have your account with? I'm not saying ET is the place for info but I am saying the guys running the Ponzi might not be reliable.

Quote from piezoe:

Thank you for that accurate information. The best place to go for the truth is the S.S. dot gov website, and definitely not ET. I was aware that the Trust would have to start redeeming soon, just not sure exactly when.
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