Social Security: What exactly is it? Part 3

Reprinted from: http://www.financialsense.com/fsu/editorials/gnazzo/2005/truth/part3.html

INTRODUCTION

As was stated in part two of this series on social security, we have a national debt problem and a fiscal crisis as well. This report will clearly illustrate both of these nemeses as well as the problems with Social Security and Medicare as well. Likewise, there is a coincident proliferation of government bonds. First we will take on the demons of debt and the bond creatures they feed on. Finally we will see who it is that’s paying the cost to feed all the creatures that are stirring – all through the land.

The Government Debt Demons
And The Bond Creatures They Feed On

TABLE I -- SUMMARY OF TREASURY SECURITIES OUTSTANDING, JANUARY 31, 2004 (Millions of dollars)

Title Amount Outstanding Totals Debt Held by the Public Intragovernmental Holdings Marketable: Bills 907,841 30 907,871 Notes 1,921,742 37 1,921,779 Bonds 564,180 232 564,412 Inflation-Indexed Notes 141,486 0 141,486 Inflation-Indexed Bonds 46,241 0 46,241 Total Marketable 3,581,490 300 3,581,789 Nonmarketable: Depositary Compensation Securities 18,812 0 18,812 Domestic Series 29,995 0 29,995 Foreign Series 5,881 0 5,881 R.E.A. Series 1 0 1 State and Local Government Series 147,438 0 147,438 United States Savings Securities 204,254 0 204,254 Government Account Series 53,088 2,963,734 3,016,822 Other 4,241 0 4,241 Total Nonmarketable 463,711 2,963,734 3,427,445 Total Public Debt Outstanding 4,045,201 2,964,034 7,009,235

[Source: Bureau of Public Debt]

Note the bottom right hand corner figure. This is the total public debt outstanding and is a bit over $7 trillion dollars. Directly above it is total nonmarketable debt of $3.4 trillion. At the top is the total marketable debt of almost $3.6 trillion. These figures are for the year 2004. Next is a table of the outstanding debt for the year 2005.

The Government Debt Demons
And The Bond Creatures They Feed On

TABLE I -- SUMMARY OF TREASURY SECURITIES OUTSTANDING, JANUARY 31, 2005 (Millions of dollars)

Title Amount Outstanding Totals Debt Held by the Public Intragovernmental Holdings Marketable: Bills 984,817 2,022 986,839 Notes 2,167,268 49 2,167,317 Bonds 539,402 141 539,543 Treasury Inflation-Protected Securities 267,256 11 267,266 Federal Financing Bank 0 14,000 14,000 Total Marketable 3,958,742 16,223 3,974,965 Nonmarketable: Domestic Series 29,995 0 29,995 Foreign Series 6,181 0 6,181 R.E.A. Series 1 0 1 State and Local Government Series 163,754 0 163,754 United States Savings Securities 204,446 0 204,446 Government Account Series 60,320 3,183,299 3,243,619 Other 4,781 0 4,781 Total Nonmarketable 469,479 3,183,299 3,652,779 Total Public Debt Outstanding 4,428,221 3,199,522 7,627,743

[Source: Bureau of Public Debt]

The total public debt outstanding is the bottom right hand corner figure of $7.6 trillion dollars. Directly above that is total nonmarketable debt of $3.65 trillion. At the top is the total marketable debt of almost $4 trillion dollars. All figures are for the year 2005.

Remember the phrase – nonmarketable debt, as it will be gone into great detail eventually.

In 2005 the total federal debt was $7.6 trillion and in 2004 the total was $7 trillion, which gives a yearly increase of $.6 trillion dollars or an approximate increase of 9% in outstanding federal debt.

Notice that at the top of each of these tables we find the heading SUMMARY OF TREASURY SECURITIES OUTSTANDING. This clearly shows that the debt demon that is upon us is fed by treasury securities. A government bond is an I.O.U. – a debt obligation to be paid in the future as are all forms of paper fiat.

TOTAL OUTSTANDING PUBLIC DEBT IS $7.6 TRILLION DOLLARS

The following is from the United States Bureau of Public Debt, which can be accessed at Treasury's Public Debt site. I would advise taking some of the following information with a large dose of salt – it helps the messins go down easier. We will take a closer look at what is said in due time.

DEFINITIONS

What is the difference between the debt and the deficit?

“The deficit is the fiscal year difference between what the Government takes in from taxes and other revenues, called receipts, and the amount of money the Government spends, called outlays. The items included in the deficit are considered either on-budget or off-budget.

The off-budget items are typically comprised of the two Social Security trust funds, old-age and survivors insurance and disability insurance, and the Postal-Service fund. Generally, on-budget outlays tend to exceed on-budget receipts, while off-budget receipts tend to exceed off-budget outlays.

You can think of the total debt as accumulated deficits plus accumulated off-budget surpluses. The on-budget deficits require the Treasury to borrow money to raise cash needed to keep the Government operating. We borrow the money by selling Treasury securities like T-bills, notes, bonds and savings bonds to the public.”

What's the difference between the Total Public Debt Outstanding and the Total Public Debt Subject to Limit?

“The Total Public Debt Outstanding represents the total face amount or principal amount of marketable and nonmarketable securities currently outstanding.

The Total Public Debt Subject to Limit is the maximum amount of money the Government is allowed to borrow without receiving additional authority from Congress.

Furthermore, the Total Public Debt Subject to Limit is the Total Public Debt Outstanding adjusted for Unamortized Discount on Treasury Bills and Zero-Coupon Treasury Bonds, Miscellaneous debt (very old debt), Debt held by the Federal Financing Bank and Guaranteed Debt.”

What is the Debt Held by the Public?

“Debt Held by the Public -- Is all Federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside of the United States Government less Federal Financing Bank securities. Types of securities held by the public include, but are not limited to, Treasury Bills, Notes, Bonds, and TIPS, United States Savings Bonds, State and Local Government Series.”

[All the above quoted material from the United States Bureau of Public Debt, which can be accessed at Public Debt.]

Now we revisit some definitions on social security, so as to be able to compare how debt issuance either affects or doesn’t affect social security; and whether social security has any impact on the overall financial position of the economy and the general public at large – We The People.

Note, the following information is according to the 2004 annual report of social security and the related Trust Funds, which is how they perceive the finances to be, which perception will be more closely examined a bit later on.

HOW SOCIAL SECURITY IS FINANCED

“Social Security is largely a pay-as-you-go program. Most of the payroll taxes collected from today's workers are used to pay benefits to today's recipients.

In 2003, the Old-Age and Survivors Insurance and Disability Insurance Trust Funds collected $632 billion in revenues.

Of that amount, 84% was derived from payroll taxes and 2% from income taxes on Social Security benefits. Interest earned on the government bonds held by the trust funds provided the remaining 13% of income.

Assets increased in 2003 because income exceeded expenditures for benefit payments and administrative expenses.”

[Source: The 2004 Annual Report of the Board of Trustees of the Federal
Old-Age and Survivors Insurance and Disability Insurance Trust Funds.]

Social Security's Demographic Challenge

“The number of retired workers is projected to grow rapidly starting in 2008, when the members of the post–World War II baby boom begin to reach early retirement age, and will double in less than 30 years. People are also living longer, and the birth rate is low. As a result, the ratio of workers paying Social Security taxes to people collecting benefits will fall from 3.3 to 1 today to 2.1 to 1 by 2031. At that ratio there will not be enough workers to pay scheduled benefits at current tax rates.”

Ratio of Covered Workers to Social Security Beneficiaries

The Long-Run Financial Outlook

“Social Security is not sustainable over the long term at present benefit and tax rates.”

“Within 14 years the program will begin paying more in benefits than it collects in taxes.”

“By 2042 the trust funds will be exhausted.”

“At that point, payroll taxes and other income will flow into the fund but will be sufficient to pay only 73% of program costs. One way to illustrate the financial shortfall of the Social Security system is to examine the cumulative value of taxes less costs, assuming currently scheduled benefits and tax rates.

In present-value terms, the shortfall over the next 75 years is $3.7 trillion, which is roughly equal to the total U.S. government debt held by the public today.”

Cumulative Income Less Cost Based on Present Taxes and Scheduled Benefits

The Cost of Delay

“Each year, Social Security's trustees provide an estimate of the financial status of the program for the next 75 years. In changing from the valuation period of one year's Trustees Report to the next, an additional year with a large imbalance between taxes and benefits is added to the projection. As a result, the estimated cost of meeting Social Security's financial shortfall tends to go up every year.”

Social Security's Unfunded Obligation on January 1 of Each Year

[Source: Social Security Administration, Office of the Chief Actuary]

It appears that the social security administration and the trust funds that “fund” the social security program are quite a bit more concerned about their solvency than Mr. Krugman is. I do give Mr. Krugman credit (no pun intended), as he definitely is not a worry-wart.

So let’s start digging a little deeper to see what we can find that may help us figure out these demons of debt that feed upon the bond creatures, who feed in turn on whatever they can, as beggars can’t be choosey.

The following chart shows the relationship or ratio of federal expenditures as compared to the gross domestic product.

Federal Outlays and Receipts

Trends

As they say, the trend is your friend. That is if you happen to be on the right side of the trend or if the trend is a nice and friendly trend. However, some trends aren’t all that nice – a case in point being the above trend.

Notice in the bottom left corner that Federal expenditures were well below 5% of the gross domestic product prior to 1930, down to approximately 3% for several years. Then notice how after 1933 the trend took off upwards, hitting 5% in 1935 and 10% by 1942.

Suddenly, there is a huge spike up during the 40’s to 45%, but this is attributable to the war and the cost to feed the dogs of war, which consume huge amounts of national resources. The sinews of war is money, as the saying goes.

After the ravages of war subsided, the feed bill more or less dissipated and Federal expenditures dropped drastically to 15% around 1950, which was still is 5 times or 500% of what it had been prior to 1933. Since then the ratio has run as high as 25% and hardly ever below 20% since the late 1970s.

Two things stick out on this chart and scream – “look at me.”

1. The trend of a 20% ratio of federal expenditures to gross domestic product seems to be entrenched into the economy. This is not good as will be explained.

2. A 20% trend or rate is 7 times or 700% greater than it was prior to 1933. Why does the year 1933 seem to be so decisive for the financial health of the country?

Now let’s look at a chart of the Federal Deficit in regards to federal expenditures for the same time period to see what else we might be able to glean from the data.

So what do we see here screaming out, “Look at me, look at me?” Well this time I think there might be five little creatures staring out at us:

Notice down in the left hand bottom corner how once again, prior to around 1930, that total combined government spending had gone from a 12% consumption rate of the total national income to over 50% during wartime and now sits at about 43%. Which means that the government now controls or eats up about 3.5 times the national income than it did prior to 1930 and the trend has been steadily rising. This is why the blue line, which is the private sector share of the total national income, is declining directly downward. The private sector capacity has been diminished from 88% in 1929 to about a 57% share of the economy presently. This represents a 31% decrease of private sector capacity. Not a good trend. The chart is courtesy of Michael Hodges, whose website is superb in explaining the demons of debt. Visit The Grandfather Economic Report's Federal Budget for a most enlightening experience. And if you’re into charts and graphs, check out [charts at Professor Sahr's site]. Very cool.

So what do the above charts, graphs and data show? Unfortunately they show some not too friendly trends either for our wealth or health. Seems like the debt demons are out in full force with the bond creatures at their side; and We The People are paying for their feeding frenzy.

But what does this have to do with social security? We’re getting there, it just takes some time as a most convoluted and winding path has been taken by the demons of debt, as they return to their lair in the dark forest. And they are very good at hiding their footprints, but they have left some paw prints behind. And we will search and find them out, wherever they hide – and that you can bank on.

The following points are the highlights of our journey so far. Remember them well as they mark the path out of the dark forest:

• There’s a whole lot of debt going on and being issued.
• Important trends of the financial health and soundness of our nation are heading downward.
• The Social Security Administration itself questions its financial health and solvency.
• Many of the intelligentsia of the elite collectivists try to hide the path the government has taken.
• For some reason, the years of 1930-1933 mark a huge turning point in the economy, as if we suddenly got a new deal or something.

Continue to Part 4 Here