July 11, 2011

Poised on the Insolvency Event Horizon

First, it may be helpful to begin with a brief digression on the "Social Security Trust Fund" from the Trustees, with respect to the most recent report on the condition of the Fund:

Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The $49 billion deficit last year (excluding interest income) and $46 billion projected deficit in 2011 are in large part due to the weakened economy and to downward income adjustments that correct for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink to about $20 billion for years 2012-2014 as the economy strengthens. After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Through 2022, the annual cash deficits will be made up by redeeming trust fund assets from the General Fund of the Treasury. Because these redemptions will be less than interest earnings, trust fund balances will continue to grow. After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085.

As you can see, even the very driest of government publications are now thoroughly propagandistic, even on trivial points that don't really matter. They just can't help themselves at this point. Why will the economy strengthen in the years 2012-2014? If so, why has it been getting progressively weaker since 2007?

Never mind. That's not really what I want to emphasize from this report. The key thing to look at here, before the budget calamity is considered in wider focus, is the reference to "trust fund assets" and the "interest" they are paying which act to reduce the deficits between what is being collected from covered workers and what is being paid out. Here's the thing: there are no "trust assets" and they don't "pay" any interest at all. This is the Central Illusion of the Social Security debate. The Trustees are describing accounting entries which will be made, not a source of income in "future years." We don't have to wait till 2037 to "exhaust" the Trust Fund. It's exhausted now, because there's nothing in it. What you see in the report is what you get: the Social Security fund now pays out more in benefits than it receives, full stop.

As a homely analogy, suppose you have a Visa card with a balance of $500 and a minimum payment of $25. When it comes time to pay the statement, will the credit card itself pay the bill, or will you pay the bill from some other source, such as earnings? Correct. Now think about the mountains of IOUs from the Treasury in the Social Security "trust fund," currently totaling about $2.5 trillion. Think of these as the Visa statement, a record of money already spent, in this case by Congress. Will this stack of stationery pay the money to the beneficiaries, or will the Treasury pay it with taxes (earnings) from the general fund or from further borrowing from the public?

Okay, so we're clear so far. The reason for the above exercise will become apparent as we analyze further; it provides a way to think about the discussion of "on budget" interest payments and receipts discussed below.

Social Security is insolvent (unable to pay its own way), and the 78 million Baby Boomers have only begun the process of signing up (the first born-in-1946 cohort became eligible for early S.S. in 2008). Now let's place this sad reality in the context of the overall budget morass, or the skeletal remains of the Federal government's finances over which our learned solons and President are currently in deep contemplation. We can look at the most recently available Monthly Treasury Statement for a rigorous statement of our financial condition, since it contains fairly rational projections of full year fiscal numbers (the fiscal year ends September 30, or a little over two months from now).

The dismal picture is as follows (all figures in billions):

Individual income tax receipts: $956 b
Corporate tax receipts: $198 b
FICA (Soc. Security) $559 b (nota bene: the Trustees of the Social Security Fund must have plotzed when Obama agreed to reduce the amount of FICA taxes paid by workers at the end of last year in one of his grand bargains with the GOP. "Oy vey," the Fund gnomes must have muttered, "what is this shmendrick trying to do to us here? This, a bigger hole he thinks we should have?")
"On budget" interest: $191 b. (nota bene again: this is the phantom money paid by the Trust Fund to the Social Security Fund to keep its head above water. It's not really income, and it should be deducted from the total receipts to determine real Federal cash flow. All this amount represents is an accounting entry to keep score on the "money" in the "trust fund." See above.)

If we add to the above receipts certain other income sources, such as money "paid" by the Federal Reserve to the Treasury to reimburse the Treasury for the coupon interest the Treasury paid to the ...forget it, it doesn't matter. Let's let them have that; we can't take away all their pacifiers. Plus excise taxes and some other stuff, total receipts equal $2,178 billion ($2.178 trillion). However, logically speaking, the $191 billion in "on budget" income from the Fund should be subtracted from the total because it's not real. Offsetting this deduction, we should also subtract, on the outlay side, the amounts "paid" by the Treasury to the Fund from the "gross" interest expense of $430 billion (we'll use the same $191 billion) because, again, this is simply an accounting entry and not the payment of real money. The "public debt" of roughly $10 trillion is carried at an average rate of about 2.5% per annum, very good by historical standards, so that the remaining $250 billion per year is roughly in line with the deduction of $191 billion in phantom money from both income and expenses. (The historical average is over 5%; what would this "normalization" do to the Federal budget? You don't want to know.)

This leaves us with $1.987 trillion real dollars to run the federal government. Current projections call for $740 billion for the Pentagon's basic expenses and to fund the 9 or 10 wars we've got going at present. Health & Human Services needs $909 billion for Medicare, Medicaid and its other core health services. Social Security is in for $801 billion. And the balance of the "gross interest" debt service (after the adjustments above) is $239 billion. These fundamental outlays of the "insurance company with an army" (as the Federal government, with reason, is called), total $2.689 trillion, or about (almost exactly) $700 billion more than the government's true cash intake, net of mirages and accounting games. There is no cash for anything else the government does, for any other agency, for the court system, for research, for the interstate highway system or air traffic control, for Homeland Security. Nada, squat, zero. Bupkis mit kuduchas, as the abovementioned Gnomes would say. The difference between the total outlays of about $3.6 trillion (net of phantom interest paid to Trust Funds) and $1.987 trillion is all paid with debt, year in and year out. And thus, Congress seeks the right to borrow more, in the hope, based on something, that things will just turn around, that the aging, displaced, marginalized, offshoring-hammered work force, which currently receives more than 22% of its "income" from government transfer payments, will find it within itself to just step up and start paying lots and lots of taxes from all their new income, will put off retiring for a few decades, and all those jobs we sent to China, Vietnam, Mexico - hell, they'll all just come back, because we need them to. This sort of "plan" makes the effort to find a rainbow-shitting unicorn seem practical by comparison.

This picture is the very image of an insolvent nation. It took us a while to get here (about 30 years), but now that we're here...well, now we're here. This is the way things really are. Congress can raise the debt ceiling, or not, and it will only make a difference in terms of how long we hang on. Obama probably realized all of this a couple of years go, and that's why he's focused primarily on his golf game. Something that he can really take with him after the Presidential years. A nice memory among the ruins.

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