Fed’s low interest rate is killing Social Security

Already, we are told that Social Security (SS) is in trouble, forecasted to start paying out more in benefits than it takes in by 2017, and to go completely broke by 2033.

But there is yet another reason why Social Security is heading to ruinage even faster — the Federal Reserve’s low interest-rate policy. The reason for that policy, of course, is to keep America’s GARGANTUAN national debt from ballooning even faster than it already is.

But the Fed’s policy means U.S. Treasuries offer record-low interest rates. (As an example, the last auction of 10-year Treasury Note, on July 6, 2012, yielded an interest rate of 1.544% !) This is creating a problem for retirees who, in their work years, had been frugal and conscientiously saved to secure their “golden” years, but now find themselves unable to live off the paltry interest generated from their savings and must dip into their principal. The Fed’s policy is also a problem for investors, among whom is none other than the Social Security Trust Fund (SSTF).

Writing for ZeroHedge, July 4, 2012, Bruce Krasting explains that in June of each year the SSTF reinvests a significant portion of its investment portfolio in newly issued Special Issue Treasury Securities. The interest rates on these bonds is set by a formula that was established in 1960. The formula was designed to insulate the SSTF from transitory changes in interest rates by averaging market based bond yields over a three-year period.

But Ben Bernanke’s Fed Reserve has set interest rates at zero the past four years. The result is that in 2012, the 1960’s formula has finally caught up with the SSTF. It got murdered on this year’s rollover.

Data from the Social Security Administration (SSA) show that $135 billion of old bonds matured this year. This money was rolled over into new bonds with a yield of only 1.375%. The average yield on the maturing securities was 5.64%. The drop in yield on the new securities lowers SSA’s income by $5.7B annually. Over the 15-year term of the investments, that comes to a loss of $86 billion. It gets worse.

Bernanke has pledged that he will keep interest at zero for a minimum of another two years. Since the formula used to set interest rates for SSA looks back over the prior three years, this means SSA will be stuck with a terrible return on its investments until at least 2017, which means still lower investment returns for the next five years.

A total of $543 billion of securities with an average yield of 5.6% is coming due. The reduction in income from the 4.2% drop in yield translates to $23 billion a year, totalling $350 billion for 15 years. It gets worse.

Not only will SSA’s interest income substantially drop over the coming decade, the problem is exacerbated because SSA has provided projections for its interest income over this time period that don’t jive with this reality.

In its 2012 report to Congress, the Social Security Administration maintains it will earn an average of 4% over this period. That is not possible any longer. Given the Fed’s low interest-rate policy, the most SSA could earn is an average of 2.3% (it could be significantly lower). The drop in yield translates to a reduction in income of $535B over the forecast period.

Based on a realistic assessment of interest income at SSA, the trust fund tops out in 2015, its peak value will be ~$2.823B. The SSTF has reported that the TF will top out at $3,061B, and that milestone will not be reached until 2021. Essentially, the train wreck will happen 6 years earlier then assumed, and the TF will be $250B short. It gets worse.

The other key ingredients in the SS “pie” are tax receipts from workers and the amount of monthly benefit payments (the assumptions used is that GDP growth will average 4%, and unemployment falls to 5.5% –  no recessions over the ten-year horizon). These are not realistic assumptions. This means that once the SSTF hits its peak in 2015, the run off in assets will happen very quickly.

The SSTF has stated that the date in which the Trust Fund falls to zero will be 2033. The actual termination date of the Social Security Trust Fund is much closer than that. It could come as early as 2023.

Anyone who is 55 or older should be worried about this. Based on current law, all Social Security benefit payments must be cut by (approximately) 25% when the Trust Fund is exhausted. This will affect 72 million people. The economic consequences will be severe. The drop in SS transfers translates into a permanent drag on GDP of 2%. In other words, when this happens, the country will be unable to have any significant positive growth for a long time to come.

Given the prediction that the Social Security Trust Fund will fall to zero by 2023, that is in 10-11 years, if you are or will be receiving Social Security, you should expect your SS checks to decrease by 25%. Make your plans accordingly!

But the news get even worse.

Even before 2023 arrives, in just FOUR years, by 2016, the first of the Social Security funds — SS disability — will be broke, having plain run out of cash. This will trigger a 21% cut in benefits to 11 million Americans — people with disabilities, plus their spouses and children — many of whom rely on the program to stay out of poverty. [Source: Washington Post]

In summary, the monetary policies of Ben Bernanke and the Federal Reserve aren’t just breaking the backs of small savers, they are killing Social Security. The results will be:

  • Social Security Trust Fund will run out of money even sooner than we’d been told — by 2023 (instead of 2033). When that happens, by law Social Security checks will be cut by 25%.
  • Social Security Disability will run out of money even sooner, in just 4 years by 2016. When that happens, your disability checks will be cut by 21%.

If you don’t make plans for the impending disaster now, you’re in willful denial. Don’t say you haven’t been forewarned!

~Eowyn

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5 responses to “Fed’s low interest rate is killing Social Security

  1. Thank you so much, Dr. Eowyn, for this very informative post. I have been trying to warn my husband for years but he doesn’t listen; if I am armed with all these facts maybe he will. He has worked so hard and been so responsible all his life he’s just in denial this could happen to him. I think ACA fits in to this also; if we are old, sick, broke, and miserable we are prime targets for any suggestions by helpful “End Of Life” counselors or whatever the term-du-jour is.

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    • moxie and joan:

      The most frightening thing about all this is the fact that no presidential candidate talks about this — not the POS in the White House; not Romney. As if the problem will just go away if everyone just ignores it. 😦

      Like

  2. Thank you Dr. Eowyn for this scholarly economic report. No wonder Social Security is in the state it is in, as it was bled by the government, even though it was supposed to be a trust fund with our money in it. This is most dismal in every respect.

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  3. The Conspiracy to Regain Control of the United States by England 
       
    Look at a dollar. Across the top it says Federal Reserve Note. The Federal Reserve Bank that own it is a private bank, it is not part of U.S. Government. 
      
    The Federal Reserve Bank has a Charter to operate as a business with the U.S. Government. The Charter started in 1913 with the Federal Reserve Act.
       
    The Federal Reserve Bank is a private bank that loans money to the U.S. Government only. To pay the interest on these loans to the Federal Reserve Bank the U.S. Government passed the Federal Income Tax Act of 1913. 
       
    The objective of the Federal Reserve Bank, is like any other bank, to loan money, and collect interest payments. The bank has a duty to itself to create a need for government to borrow money, it is called war and economic disasters.
       
    The owners of the Federal Reserve Bank did not waste any time in creating a need for the U.S. Government to borrow money. They created world war one in 1913. Next they created the Great Depression. Next they created world war two. Next they created the Korean war. Next they created the Vietnam war. Next they created the economic gas problems in the 1970’s. Next they created the banking and stock market problems in the 1980’s. Next they created the Persian Gulf war. Next they created the 911 war. Next they created the banking and stock market failures. Now people are getting wise to them in America. Now they are creating laws to oppress the American public. Most of all they want to abolish the U.S. Constitution and the Second Amendment to prevent the public from rising up to correct the problem. 
       
    The problem with the Federal Reserve Bank was first noticed by the Founding Fathers after the United States was created and the U.S. Congress authorized the Charter for the First Bank of the United States by the Rothchilds in England. They saw it was a disaster waiting to happen and enslave the American public in debt to England. The Charter was revoked after twenty years. England then started the war of 1812 to force the U.S. Government to renew the bank Charter. The bank Charter was renewed for another twenty years. But this time plans were made to stabilize the country financially and then cancel the second bank Charter after twenty years and never let England back into the banking business in the United States.
       
    England and the Rothchilds now had to take a different approach in their business with the United States after the second bank Charter was revoked. They had to infiltrate the United States Government and take over from the inside. By getting agents into the United States Government they could then get the laws passed to create another bank Charter. This approach took over seventy years, from about 1840 to 1913. But they succeeded in 1913 and decided not to call the Charter the Bank of the United States, they called it the Federal Reserve Bank. England and the Rothchilds were once again in control of the finances of the United States Government.

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  4. Collateral damage, unfortunately. I don’t believe that there is a solution to fix the current financial collapse of the industrialized nations……the charge led of course by the USA.

    Advice to those with any kind of job. Save, save, save. Preserve your capital. Stay away from Wall Street. 0.25% is next to nothing, but $0.00 net worth is a disaster.

    Stop, repeat, stop, repeat, STOP spending and STOP making excuses about why you cannot STOP. Cut out your movies, pizza, new stuff, dining out, clothing du jour, schools and laptops and iPads du jour. Much more.

    If not, prepare to pay the price. You are doing what the politico’s are charged with…..”kicking the can down the road” Trouble is that you live on a dead end street, and the Guv. builds the roads, longer and longer, to fit heir needs and circumstances.

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