Tag Archives: Insolvency

It’s official: the Federal Reserve is insolvent, by Simon Black

By mark-to-market accounting, or as it’s sometimes known, honest accounting, the Fed’s losses on its bond portfolio are greater than it’s capital. In other words, it’s broke. From Simon Black at sovereignman.com:

In the year 1157, the Republic of Venice was in the midst of war and in desperate need of funds.

It wasn’t the first time in history that a government needed to borrow money to fight a war. But the Venetians came up with an innovative idea:

Every citizen who loaned money to the government was to receive an official paper certificate guaranteeing that the state would make interest payments.

Those certificates could then be transferred to other people… and the government would make payments to whoever held the certificate at the time.

In this way, the loan that an investor made to the government essentially became an asset– one that he could sell to another investor in the future.

This was the first real government bond. And the idea ultimately created a robust market of investors who would buy and sell these securities.

When a government’s fortunes changed and its ability to make interest payments was in doubt, the price of the bond fell. When confidence was high, bond prices rose.

It’s not much different today. Governments still borrow money by issuing bonds, and those bonds trade in a robust marketplace where countless investors buy and sell on a daily basis.

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Social Security Fails, by John Stossel

Within most of our lifetimes, on present course Social Security will be unable to meet its obligations. From John Stossel at theburningplatform.com:

Social Security is running out of money.

You may not believe that, but it’s a fact.

That FICA money taken from your paycheck was not saved for you in a “trust fund.” Politicians misled us. They spent every penny the moment it came in.

This started as soon as they created Social Security. They assumed that FICA payments from young workers would cover the cost of sending checks to older people. After all, at the time, most Americans died before they reached 65.

Now, however, people keep living longer. There just aren’t enough young people to cover my Social Security checks.

So Social Security is going broke. This year, the program went into the red for the first time.

Presidents routinely promise to fix this problem.

George W. Bush said he’d “strengthen and save” Social Security. Barack Obama said he’d “safeguard” it, and Donald Trump said that he’ll “save” it.

But none has done anything to save it.

“There is a plan out there to save it, but it requires some tough choices,” says Heritage Foundation budget analyst Romina Boccia.

Heritage proposes cutting payments to rich people and raising the retirement age to 70.

Good luck with that. Seniors vote. Most vote against politicians who suggest cutting benefits.

This summer, interviewing people for my new video about Social Security’s coming bankruptcy, was the first time I had heard the majority of such a group say they were aware there is a problem. One said, “We’re already at a trillion dollars (deficit) … (I)t’s almost like a big Ponzi scheme.”

Actually, more like a pyramid scheme. Ponzi schemes secretly take your money. But the Social Security trick is written into the law — there for anyone who bothers to look.

Social Security isn’t the only hard choice ahead of us. Medicare will run out of money in just eight years. At that point, benefits will automatically be cut. Social Security hits its wall in 15 years.

Amazingly, as we approach this disaster, Democrats say — spend even more.

To continue reading: Social Security Fails

Social Security requires a bailout that’s 60x greater than the 2008 emergency bank bailout, by Simon Black

By official measures Social Security is going broke, and those measures incorporate overly optimistic assumptions. From Simon Black at sovereignman.com:

A few weeks ago the Board of Trustees of Social Security sent a formal letter to the United States Senate and House of Representatives to issue a dire warning: Social Security is running out of money.

Given that tens of millions of Americans depend on this public pension program as their sole source of retirement income, you’d think this would have been front page news…

… and that every newspaper in the country would have reprinted this ominous projection out of a basic journalistic duty to keep the public informed about an issue that will affect nearly everyone.

But that didn’t happen.

The story was hardly picked up.

It’s astonishing how little attention this issue receives considering it will end up being one of the biggest financial crises in US history.

That’s not hyperbole either– the numbers are very clear.

The US government itself calculates that the long-term Social Security shortfall exceeds $46 TRILLION.

In other words, in order to be able to pay the benefits they’ve promised, Social Security needs a $46 trillion bailout.

Fat chance.

That amount is over TWICE the national debt, and nearly THREE times the size of the entire US economy.

Moreover, it’s nearly SIXTY times the size of the bailout that the banking system received back in 2008.

So this is a pretty big deal.

More importantly, even though the Social Security Trustees acknowledge that the fund is running out of money, their projections are still wildly optimistic.

In order to build their long-term financial models, Social Security’s administrators have to make certain assumptions about the future.

What will interest rates be in the future?
What will the population growth rate be?
How high (or low) will inflation be?

These variables can dramatically impact the outcome for Social Security.

To continue reading: Social Security requires a bailout that’s 60x greater than the 2008 emergency bank bailout


Social Security Will Be Paying Out More Than It Receives In Just Five Years, by Mac Slavo

One interesting fact: Social Security taxes have been raised more than twenty times since the program’s inception and it’s still going broke. There’s a lesson there for those who think the solution to governments’ fiscal woes is raising taxes. From Mac Slavo at shtfplan.com:

When social security was first implemented in the 1930’s, America was a very different country. Especially in regards to demographics. The average life expectancy was roughly 18 years younger than it is now, and birth rates were a bit higher than they are now. By the 1950’s, the fertility rate was twice as high as it is in the 21st century.

In other words, for the first few decades, social security seemed very sustainable. Most people would only live long enough to benefit from it for a few years, and there was an abundance of young workers who could pay into the system. Those days are long gone. As birth rates plummet and people live longer, (which otherwise should be considered a positive development) social security’s future is looking more and more bleak.

No matter how you slice it, it doesn’t seem possible to keep social security funded. In fact, social security is going to start paying out more money than it receives in just a few short years. It may even be insolvent before the baby boomer generation dies off.

According to the Social Security Board of Trustees, the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) Trust Funds will be depleted in 2034.

When this happens, only 77 percent of benefits will be payable. That estimate is no change from last year’s estimate.

In addition, the Disability Insurance trust fund will be depleted in 2028, which is an improvement from last year’s estimate of 2023. Once that fund is depleted, 93 percent of benefits will be paid.

Right now, Social Security continues to take in through revenue more than it pays it through benefits, which is expected to continue until 2022. Once Social Security begins to pay out more than it takes in, it will be forced to liquidate the assets held by the trust funds.

In 2016, Social Security generated $957 billion in income. It only paid out $922 billion including $911 billion in benefits to 61 million beneficiaries.

To continue reading: Social Security Will Be Paying Out More Than It Receives In Just Five Years


U.S. About to Hit $20 Trillion in Debt: Here’s How It Affects You, by Shaun Bradley

If the US government does not get a handle on its debt, it will eventually blow apart your savings and your retirement, perhaps sooner rather than later. It’s just that simple. From Shaun Bradley at theantimedia.org:

As the vulture pundits in the mainstream media pick apart hollow political scandals, the essential bankruptcy of the federal government looms just ahead. The national debt is creeping toward 20 trillion dollars, and the United State’s largest problem is once again staring the world in the face.

Just before the government was slated to shut down in 2015 (as it did in 2013), Congress was able to pass a delay on the debt ceiling decision until March 15th of this year — Wednesday of this week. Recurring uncertainty caused by events like this has implications that extend far beyond our own borders. The amount of leverage in the current system has already forced foreign holders of U.S. debt to question the real value of America’s full faith and credit.

2016 was a record-setting year for the liquidation of foreign-held U.S. bonds, topping out at nearly $405 billion. The selling was led by China, America’s second-biggest creditor, which currently holds over $1 trillion of U.S. debt, almost 28% of the total held by foreign central banks. They weren’t alone, though, and even the U.S.’ number one lender, Japan, has rolled back their positions to protect themselves as the reality of U.S. insolvency comes into focus. A gradual change has been set in motion, and the global superpower status of the United States may be systematically eroded — not militarily, but economically.

If the government does shut down again, the Treasury Department reportedly has as little as $66 billion in reserves and just enough income from taxes to meet its essential obligations. Entitlements like social security and Medicare will likely be unaffected, but if lawmakers can’t collaborate to pass some kind of resolution, the power to allocate additional federal spending will largely be turned over to President Trump. The initial hiring freeze on federal employees that was implemented shortly after his inauguration could be just a taste of what’s to come.

To continue reading: U.S. About to Hit $20 Trillion in Debt: Here’s How It Affects You

The Equal Sign Can Be a Real Bitch, by Robert Gore

If one had to choose a single symbol to represent the apex of human thought and achievement, a strong candidate would be the equal sign: =. That sign says that the symbols and mathematical operations to the left of it are equal to the symbols and mathematical operations to the right. Furthermore, to retain equality, anything done to the left side of the equation must be done to the right side. The equation is the heart of elementary arithmetic, the most complex principals of mathematics and science and their real world applications, and everything in between. Only logical challenge can disprove an asserted equality, and no amount of wishing will turn an inequality into an equality. The equal sign represents humanity’s capacity for ruthlessly pristine logic.

Many people shun mathematics, science, and logic, seeking refuge in their antitheses. A good part of human intellectual history has been attempts to either ignore equalities or turn inequalities into equalities. Forgiving, sloppy, delusional illogic is usually collective. Every age has its particular refuges. Our age has rejected the mathematics of debt. What can logically not occur, a perpetual inequality—consumption greater than production— has become the foundation of the global economy. As the tagline for Zero Hedge notes: “On a long enough timeline the survival rate for everyone drops to zero.” In the same vein, on a long enough timeline, consumption equals production. Understand that equality, and the future comes into stark relief.

Housing was the focal point of the last debt crisis. Old age funding—pensions and medical care programs—may well play that role during the next one. The math is straightforward: over time contributions and investment returns (if any) must equal promised benefits. The current reality is also straightforward: aggregate contributions, even if augmented by sterling investment returns, will be nowhere near enough to fund promised benefits. Current government and central bank policies exacerbate the predicament, making the achievement of even minimal investment returns problematic. The pay-as-you-go structure of many old age funds, such as Social Security and Medicare, does not allow for any investment returns at all.

It is easy for politicians to promise benefits and assume high investment returns. It is much harder to make the required contributions, whose benefits are long term and promise no immediate political payoff, and to actually realize the assumed investment returns. Underfunding of an old age fund can persist for years, especially if the fund borrows money. At any positive interest rate, borrowing further unbalances the equation; debt service will always outweigh the funds received. Debt only delays the day when promises are broken and the benefits paid out are realigned with what the fund actually has. Greece, Detroit, and Puerto Rico are the first chapters of what promises to be a very thick book.

Many of the governments facing actuarial imbalance do their best to make it worse. Contributions to old age funds come from the real economy, which is also where investment returns are generated. If there is a government on the planet that has improved the functioning of its economy over the last few decades, SLL is unaware of it. Dwindling growth (charitably defined as that benchmarked by official government figures) in the US, Europe, Japan, and China confirms that assertion. The ever-expanding Federal Register is emblematic of regulators gone wild, not just in the US, but around the world, and debt is a “gift” that keeps on taking. Most of the world’s $225 trillion pile of debt has paid for consumption or zero sum speculation. By definition these activities do not generate a return in excess of debt service, consequently their associated debt acts as an economic drag.

Central banks pushing down interest rates, in many cases to negative territory, kills old age funds dependent on investment returns. Most such funds are still assuming they can generate an annual 6 or 7 percent return, but if interest rates on safe debt are in the 2, 1, or -1 percent range, they have to take more risk to hit their targets. Taking more risk means investing more in equities and long-dated bonds. By most measures stocks are at the high end of their valuation ranges, and investing in them is especially dicey with governments and mounting debt gumming up economies. Long-dated bonds are most subject to interest rate risk should central banks find themselves unable to continue suppressing rates.

Such suppression encourages debt and discourages saving. Debt only makes sense when it is used to generate a return greater than the costs of debt service. Saving that funds productive investment is the true foundation of long term progress and economic growth. Dwindling savings further erodes the ability of the real economy to fund the contributions necessary to maintain old age funds’ solvency. If having children is thought of as “saving” for old age security, and in less developed countries that is often the literal case, then contributions are also facing a demographic “savings” deficit. In virtually every developed country, including China, over the next few decades the percentage of elderly will dramatically increase relative to the younger population that will supposedly support them (see links here and here).

Promised old age benefits are for income and medical care, and the funding gap for the latter is even greater than the former. In the US, decades of government intervention in medicine have produced almost complete separation of those receiving care from those paying for it, competition-destroying, cost-increasing concentration in the medical, drug, and insurance industries, and now Obamacare, which has exacerbated existing problems and created new ones. It relies on the healthy subsidizing the unhealthy and the more affluent subsidizing the less. Not surprisingly, the healthy and affluent are either shunning or subverting the system and insurance companies are fleeing unprofitable markets. Those who remain are seeking hefty premium increases. So add costly, convoluted, and inefficient medical and health insurance systems to the factors contributing to the unsustainable old age funding inequality.

That inequality propels mounting global debt, which has papered over shortfalls. That works until it doesn’t. Crashing commodity prices, sputtering economies, the frantic, counterproductive exertions of governments and central banks, and rising dependency ratios (the ratio of the dependent to those who support them) mean the reckoning is at hand. Whether or not anybody wants it or plans for it, benefits are going to align with the actual resources available to pay them, just as house prices aligned with economic reality during the last crisis. Unfortunately, this alignment will be far more severe than that one.

That equal sign can be a real bitch.


TGP_photo 2 FB




“This Is Going To Be A National Crisis” – One Of The Largest U.S. Pension Funds Set To Cut Retiree Benefits, by Tyler Durden

Get used to headlines like the one above. There will be innumerable pension shortfalls, leading to increased contributions, slashed benefits, and in dire cases, bankruptcies. From Tyler Durden at zerohedge.com:

A dark storm is brewing in the world of private pensions, and all hell could break loose when it finally hits.

As the Washington Post reports, the Central States Pension Fund, which handles retirement benefits for current and former Teamster union truck drivers across various states including Texas, Michigan, Wisconsin, Missouri, New York, and Minnesota, and is one of the largest pension funds in the nation, has filed an application to cut participant benefits, which would be effective July 1 2016, as it “projects” it will become officially insolvent by 2025. In 2015, the fund returned -0.81%, underperforming the 0.37% return of its benchmark.

Over a quarter of a million people depend on their pension being handled by the CSPF; for most it is their only source of fixed income.

Pension funds applying to lower promised benefits is a new development, albeit not unexpected (we warned of this mounting issue numerous times in the past). For many years there existed federal protections which shielded pensions from being cut, but that all changed in December 2014, when folded neatly into a $1.1 trillion government spending bill, was a proposal to allow multi employer pension plans to cut pension benefits so long as they are projected to run out of money in the next 10 to 20 years. Between rising benefit payouts as participants become eligible, the global financial crisis, and the current interest rate environment, it was certainly just a matter of time before these steps were taken to allow pension plans to cut benefits to stave off insolvency.

The Central States Pension Fund is currently paying out $3.46 in pension benefits for every $1 it receives from employers, which has resulted in the fund paying out $2 billion more in benefits than it receives in employer contributions each year.

As a result, Thomas Nyhan, executive director of the Central States Pension Fund said that the fund could become insolvent by 2025 if nothing is done. The fund currently pays out $2.8 billion a year in benefits according to Nyhan, and if the plan becomes insolvent it would overwhelm the Pension Benefit Guaranty Corporation (designed by the government to absorb insolvent plans and continue paying benefits), who at the end of fiscal 2015 only had $1.9 billion in total assets itself. Incidentally as we also pointed out last month, the PBGC projects that they will also be insolvent by 2025 – it appears there is something very foreboding about that particular year.

To continue reading: “This Is Going To Be A National Crisis” – One Of The Largest U.S. Pension Funds Set To Cut Retiree Benefits