Bankrupt is in the Eye of the Beholder

Brad Setser has a nice post taking the President's language about social security and asking what it must mean about the governments current budget shortfall.

By the President's definition, Social Security is bust because it can only pay about 80% of promised benefits with dedicated revenues in 2053, after the trust fund is exhausted in 2052, and only 75% of promised benefits in 2062 (using the CBO forecast).
"If you're 20 years old, in your mid-20s, and you're beginning to work, I want you to think about a Social Security system that will be flat bust, bankrupt, unless the United States Congress has got the willingness to act now," Bush said.
Right now, though, the non-Social Security part of the government has dedicated revenues sufficient to cover only about 70% of its expenses. Revenues in 2004 were around 11.3% of GDP, expenditures were about 16.25% of GDP (including interest payments on the Social Security trust fund), for an overall deficit in the non-Social Security part of government of a bit under 5% of GDP. Put differently, non-social security government spending exceeded non-social security revenue by over 40%.
(One note: I used the CBO's data for FY 2004, and the Trustees' data for calendar year 2004 for Social Security, I could not quickly find the CBO's forecast for FY 04 Social Security payroll tax revenue. The resulting error is tiny).
On the external side, revenues (exports) only cover 65% of our current spending (imports). By my calculations, based on data through November and conservative estimates for December exports and imports, end 2004 exports will be around 9.75% of GDP, imports around 15.05% of GDP. Our current trade deficit of 5.3% of GDP is equal to 54% of export revenues.
In other words, using the President's criteria for Social Security, we are already bust.

Read the full post here.

Krugman on Social Security

This is an interesting and timely piece about Social Security before the reform talk really gets started. This was news to me but I am probably just too young to have noticed.

"Right now the revenues from the payroll tax exceed the amount paid out in benefits. This is deliberate, the result of a payroll tax increase - recommended by none other than Alan Greenspan - two decades ago. His justification at the time for raising a tax that falls mainly on lower- and middle-income families, even though Ronald Reagan had just cut the taxes that fall mainly on the very well-off, was that the extra revenue was needed to build up a trust fund. This could be drawn on to pay benefits once the baby boomers began to retire."

Grindin' em out

My personal anxiety level is red lining here. I sold too much too early. The tape has done an excellent job of morphing from buy electoral clarity, to buy a Bush win, to front run the social security privatization. My response has been to examine my positions and to force myself to get even flatter. The tape will offer a better risk reward later.

I will chime in here with my two cents on Social Security privatization. I am not sure the net flows will be so large for the markets. The plan will be offered as an option and currently nothing prevents savers from buying equities privately. Technically they could even own equities on leverage via the futures against their expected future social security income. I don't think anyone does this but it is an option for anyone that preferred equity risk to U.S. Gov't risk. The larger impact to me seems on the budget side as this program will make it more difficult for the Gov't to lump social security in general revenues. That is probably good long-term but could be extremely painful in the short run.

I would close with an interesting data point that came to light yesterday from Hewitt Associates. "On November 3, the Hewitt 401(k) Index logged the largest daily movement of money into equity funds since January of this year, with 0.13% of 401(k) balances transferring on a net basis. " This statement surprised me in a couple of ways. I am amazed that the average 401k investor was patiently waiting for the election to be done before moving funds and I am amazed they took rapid and decisive action the day after the election. Couldn't they have just shifted the allocation of future contributions to reflect their bullishness rather than the quick one day shift? Would have made more sense if the jobs number had come out the Friday before the election so they could be sure the economy was not falling apart. Not quite sure what to make of it since it is past but I thought it was an interesting statistic. No doubt that caused a large portion of our move higher and does a lot to explain how the tape remains so extended.