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!