Back on January 5, when we first broke the news that the US debt ceiling has been reached, and breached, yet again, we said “And now the Social Security Fund pillaging begins anew until Congress signs off on the latest interim debt ceiling increase.” Sure enough, operation rape and pillage is a go.

• U.S. SUSPENDS PAYMENTS TO PENSION FUND TO AVOID DEBT CAP BREACH
• GEITHNER INFORMS CONGRESS ON SUSPENSION OF PAYMENTS TO FUND
• GEITHNER SAYS `G’ FUND PARTICIPANTS `UNAFFECTED’ BY SUSPENSION
• GEITHNER SAYS `G’ FUND TO BE MADE WHOLE AFTER DEBT LIMIT RAISED
• GEITHNER: DEBT LIMIT WILL BE INCREASED JAN. 27 UNLESS BLOCKED

In other words: Congress better pass the debt ceiling prontt, or else it will have to explain to government retirees the tens of billions in deficit funds, i.e., marketable debt, already issued will permanently offset the level in G-fund holdings.

Lastly, any comparison to similar acts of commingling performed by other insolvent entities in recent months is purely coincidental and no Obama handlers were thrown in jail as a result of this post.

ZeroHedge

  We’re all aware (at least those of us who care, and thus are worth two cents) of our ballooning national debt. As of this writing –latest Treasury figures dated Oct. 6 — Total Public Debt stands at $14.836776T dollars. That is, rounded to the nearest million (chump change) 14 trillion, 836 billion, 776 million dollars. That figure is what the (in)famous debt ceiling applies to. Such a sum is hard to visualize, but remember the succession of “-illions” goes by factors of one thousand. A billion is a thousand million, and a trillion is a thousand billion, one million million. An astronomical sum.

But it turns out that Total Public Debt consists of two components. One component is known as “Debt Held by the Public”, which is sort of easy to confuse with “Total Public Debt”, but the two are different things. Debt Held by the Public stands, again as of Oct. 6 at  $10.126447T, 10 trillion, 126 billion, 447 million dollars, again rounded the nearest million. Debt Held by the Public represents “real money” that the federal government has borrowed, the form of Treasury securities, from the “public”, which consists of Americans as well as foreign governments and central banks. All the money we owe China is included in this component.

But what of the rest, the other component, which is known as “Intragovernmental Holdings”, which as of Oct 6. stands at $4.710329T, 4 trillion, 710 billion, 329 million? What is this? Well, it turns out this really something of an accounting scam, something that would make Enron and Bernie Madoff proud. What they did was illegal, however what the governement does is completely legal, because the law not only allows, but creates the whole thing.

Let’s consider a married couple. The husband is a spendthrift ne’er do well whose pockets quickly have holes burned in them by money. He blows everything he makes on booze, strip joints, and similiar. His poor wife works, making a salary of her won, yet she is responsible. She wants to put away savings to handle their retirement as well as their future medical care and the general rainy day that might come. That is, she wants to invest it.

Her husband makes her a deal. “Hey Honey, why don’t you invest your money with me”, he suggests. “I’ll even pay you interest, more interest than you’d make at the bank!”. And so she takes him up on it. She hands her paycheck, less current needs for groceries, and he writes he IOUs. She puts those IOUs in a  “lockbox” and counts those as her nest egg retirement investment. Hubbie just takes the money and blows it on more booze, hookers, and everything else. Every six months, he pays his wife interest just as he promised.

He pays those with more of those IOUs, of course, which the wife dutifully puts in her lockbox. On paper, she’s doing good. Her “investment” with her husband is paying her a nice interest rate and her little “trust fund” in her lockbox is doing well. On paper.

Now, even with his own salary, and his wife’s, the husband is still spending more than he takes in. He runs up the difference on the credit card. Let’s consider the household debt in the situation. The household owes the outside world the credit card balance. But the IOUs in the lockbox are something the husband owes the wife, a type of “intrahousehold debt” we might call it. One part of the household owes the other part.

Now is this arrangement between our husband and wife here worth anything? It’s a scam, a joke, you say, and there’s  no way the wife can consider those IOUs to be worth anything. And that’s true.  The only way the wife can get her money back is from the husband. And where will he get it? He’ll either have to somehow increase his own income or borrow it from the credit cards to pay her back. Are those IOUs any sort of real asset the wife  could sell to someone else for cash? Hell no. No one in their right minds would take those IOUs.

The whole thing is just a little Ponzi scheme the husband is running on his wife, blowing her money and tricking her into thinking it’s an investment. This is what Bernie Madoff did of course.

Who is this couple running this Ponzi finance scheme? Well, they’re relatives of ours, turns out. The husband is an uncle of ours, Uncle Sam to be exact, and the poor naive wife is Social Security, Medicare, military and federal civil service pension funds, and some other stuff.

This is exactly how the “trust funds” of Social Security, Medicare, and the rest are financed. The payroll taxes that come in are put in the general fund and spent, with Uncle Sam writing IOUs to the trust funds for the difference between what they had to pay out and what they took in. He makes interest payments every six months on these IOUs, in the form of yet more IOUs.

This is that intragovernmental debt. It is where the “lockbox” for Social Security and Medicare and the rest all live accounting wise. It is debt one part of the government owes another part. You may protest, surely that can’t be. The trust funds claim they hold US Treasury bonds, the “safest investment in the world”.  Well, they are called Treasury bonds, but a “special” kind, called Government Account Series (GAS).

These GAS bonds are only for the purpose of government accounts, and are non-marketable, which means they can’t be sold on the open market. Just like our wife above can’t sell her pile of IOUs, so Social Security and the other trust funds can’t sell any of their GAS bonds. Thus they are nothing but IOUs as worthless as the sorry husband wrote his wife.

So Debt Held by the Public is like the credit card debt the husband has run up, and Intragovernmental debt is the pile of IOUs he wrote to his wife.

The only way those GAS bonds can be made good is to be redeemed by the US Treasury. But where is it going to get the money? Only by borrowing from the public or raising tax, or both, (or worse printing money to pay for it).

There are no “trust funds”, just a pile of IOUs with fancy names. And the only funding for those trust funds going foward is the federal government’s ability to tax and borrow from the open market.

And incidently, something even more Enronish has been going on with the trust funds the last couple of years. Remember the payroll tax cuts which were part of the various stimulus bills that were supposed to be the medicine our economy needed and which failed miserably? Well, that’s like our sorry husband asking the wife take a pay cut. But he says he’ll make up the difference and pay her back he lost pay. How does he pay her back? Well, as I’m sure you guessed now that you’re wise to the game, he pays her back with more of the same IOUs.

Publius-SC - FedUpUSA

Discussion (registration required to post)

Yes, that is a correct headline. In its annual report to Congress last  week SS acknowledged that its condition had sharply deteriorated in  2010. This sentence from the report is all you really need to know about what the status is:

The open group unfunded obligation over the 75-year projection period has increased from $5.4 trillion (present discounted value as of January 1, 2010) to $6.5 trillion (present discounted value as of January 1, 2011).

Note that this is a present value calculation. The total unfunded  obligation has grown by a cool $1.1 trillion in just a year. In other  words, if we had to shore up the TF to the level that it was just a year ago the USA would have to write a check for $1.1 T. The unfunded status was a disaster a year ago at $5.6T, it got worse by 20% during 2010.  The cost of “fixing” SS goes up as a result. To put things in balance  one of these two extremes are now required:

For the combined OASDI Trust Funds to remain solvent, the payroll tax rate could be increased an immediate and permanent 2.15%, (or) scheduled benefits could be reduced by an immediate and permanent 13.8%.

If you think this a ho-hum result, think again. If benefits get cut  across the board by 14% we will have many seniors who will fall into a  hole. An increase in payroll taxes of 2.15% is simply not going to  happen anytime soon. There is no support in Congress for an increase  like that. It would mean that taxes on all workers/employers would have  to go up by $110b in the first year and rise every year thereafter. This would be a very regressive tax increase that hurts lower end workers  the hardest. For 2011 there is already a payroll tax holiday of 2%. If  the required increases take place in 2012 it would mean a 3.2% reduction in wages. Kiss the economy goodbye under that scenario.

I underlined the TF’s use of the words immediate and permanent as this language highlights the fact there can be no delaying on the fixes necessary at SS. One thing that you can take to the bank is that nothing will happen with SS in 2011 or 2012. This is a problem that will simmer for at least another 24 months. This delay will prove to be very costly for all involved. Both the required  tax increases and/or the required cutbacks will be much larger than  today.

The NPV of the unfunded liabilities at SS are now growing by at least  $100b a month. One would think that this massive cost would spur some  response in D.C. Don’t count on it. As a result, SS is going to come off the rails in about two years.

Zero Hedge

Note this one well folks:

Medicare, the government health plan for seniors, will exhaust its principal trust fund five years sooner than previously thought, which could heighten pressure on the White House and Congress to change the program as part of deficit-reduction negotiations.

Wait a second…. didn’t we just hear this from Timmy about the need to borrow more money?

“If the United States were forced to stop, limit or delay payment on obligations to which the Nation has already committed – such as military salaries, Social Security and Medicare, tax refunds, contractual payments to businesses for goods and services, and payments to our investors….”

Busted jackass.

Tim Geithner just admitted in writing that there is no trust fund – there is no money – the Government in fact blew every last penny of it.

You, America, have been serially lied to about these so-called “trust funds.”

THEY DO NOT EXIST.

Anyone – and I repeat anyone – who believes there is a “trust fund” or that there is one thin dime set aside by the government to cover Social Security and Medicare after you were just told, in black ink by the Secretary of the Treasury that there is not deserves exactly what they get.

You, the American people, have been robbed.  I and a few others have been trying to warn you of this for years and have been laughed at.

Tim Geithner has now admitted in black letters that what I’ve been saying for years is, in fact, correct.

The Market-Ticker

Next in line for a bailout: Social Security

By Allan Sloan

NEW YORK (Fortune) — 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.

Social Security hasn’t been cash-negative since the early 1980s, when it came so close to running out of money that it was making plans to stop sending out benefit checks. That led to the famous Greenspan Commission report, which recommended trimming benefits and raising taxes, which Congress did. Those actions produced hefty cash surpluses, which until this year have helped finance the rest of the government.

But even then, it was clear the surpluses would be temporary. Now, years earlier than projected, Social Security is adding to the government’s borrowing needs, even though the program still shows a surplus on paper.

If you go to the aforementioned pages in the CBO update and consult the tables on them, you see that the budget office projects smaller cash deficits (about $19 billion annually) for fiscal 2011 and 2012. Then the program approaches break-even for a while before the deficits resume.

Social Security currently provides more than half the income for a majority of retirees. Given the declines in stock prices and home values that have whacked millions of people, the program seems likely to become more important in the future as a source of retirement income, rather than less important.

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. 

SS Trust Fund – 2009 Full Year Results – Ugh!

Submitted by Bruce Krasting

The Social Security Trust Fund issued their November and December reports today. They also provided the payment data for January 2010. I think there is some significant information.

From my writings on the Trust Fund I have received many comments from those who believe that the SS is a bankrupt Ponzi scheme. That is not correct. The SSTF did an admirable job in a very tough year. They paid a total of $675 billion in benefits and ended the year with an even $100 billion surplus. On December 31st they were sitting on $2.5 Trillion of US Treasury IOU’s.

That said there are some very disturbing trends at the Fund. First a Macro Economic thought:

There was a onetime negative COLA adjustment that kicked in January 1. Rather than the usual increase, beneficiaries are getting smaller checks. The difference between the December and January payments comes to $475 million. That re-base means a reduced outlay for the full year of $6 billion. In the scheme of things that is peanuts. But this is going to be felt most in the Sunbelt states where the bulk of the beneficiaries reside. I believe that a significant percentage of SS payments goes right into consumption. Given that fixed costs are actually rising for this group of consumers (the hell with COLA) the 65+ set might not be going to the Wal-Mart in Boca as much as they used to. A year ago we were talking of ‘green shoots’. This ‘shoot’ is decidedly brown.


On the Fund itself:

I think that the recession of 08 and 09 and the anticipated high unemployment (low employment) in 2010 has crippled the Fund. Nothing short of a major overhaul can turn it around at this point. The damage has been too great.

In the 2009 Trustee Report to Congress (signed by Chairman Tim Geithner) the following information was provided:

Now look at the reports released today. Total tax receipts were less than the disbursements. This was not supposed to happen until 2016. It happened last year.

There was a $100 billion surplus for the year. But compare that to the $190 Billion surplus in 2007. We have lost $90 Billion in just two years. But this number should be much higher than the 07 surplus. It was assumed that the Fund would have larger and larger surpluses for years to come. The 2008 Trustee Report (signed by then Chairman Hank Paulson) provided a set of Intermediate Assumptions for the Fund’s surpluses looking forward. As you can see we missed the 2009 target of a $220b surplus by a cool $120 billion. As of 12/31/09 the funds assets are behind that 08 schedule by $155 billion.

In prior years the SSTF has financed up to 50% of the deficit through their purchases of Treasury paper. In 2009 that ratio fell to a measly 7% of the total new issuance. It will be a rounding error in a few years. At some point someone is going to look at this and conclude it is not a plus for the bond market.

We are in an election year. Any significant legislation on SS changes will have to be completed by June. After that no one will want to touch this. Given that Health Care is far from resolved and there is that thorny problem with the mortgages Agencies I can easily see that the problems at SS get buried for another year. It will be very difficult to fix this beast if we wait another year.

The most optimistic scenario is that out of the ether comes a bi-partisan effort to address the issue head on and make the necessary fixes. By my calculation that would require a 2% increase in payroll taxes and as much as a 20% reduction in benefits (over time). Taxes on benefits would have to increase as well.

Those combined actions are extremely deflationary. It would directly cut consumer demand. It would be another blow to the head of small businesses. This would not be a brown shoot. Think of this development as being Amber Waves of Grain. And that is the optimistic scenario.

My solution has always been a means test. If you have $100k in taxable income you don’t get paid. Finished. I’m not sure that is legally possible. But to me it is the only option. The alternative will impoverish those that are/will be dependent on SS benefits. Raising taxes on America’s 90 million workers and their employers is just bad economics. It should not be considered.

I am not the only one looking at these numbers. This issue will have to come on the table before June. The 2009 results of the Fund are like an elephant in a room. It’s too big to avoid.