Cumberland Advisors Market Commentary –  Deficit About to Worsen

Author: David R. Kotok, Post Date: April 30, 2019
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The Bloomberg Close ended its April 22 daily report with the following:

“What retirement? For the first time in 57 years, the participation rate in the U.S. labor force of retirement-age workers has cracked the 20% mark, according to a new report. As of February, the ranks of people 65 or older who are working or seeking paid work doubled from a low of 10% back in early 1985. Rickety social safety nets, inadequate savings and sky-high health costs are all conspiring to make the concept of leaving the workforce something to be more feared than desired.” (source: https://www.bloomberg.com/news/articles/2019-04-22/america-s-elderly-are-twice-as-likely-to-work-now-than-in-1985)

Cumberland Advisors Market Commentary

Why worry? According to the April 22 Wall Street Journal,

“The Social Security program’s costs will exceed its income in 2020 for the first time since 1982, forcing the program to dip into its nearly $3 trillion trust fund to cover benefits. The shortfall comes two years later than projected last year – when the program was expected to dip into the fund, but ended up in the black. But by 2035, those reserves will be depleted and Social Security will no longer be able to pay its full scheduled benefits.” (source, WSJ {Subscription req.}: https://www.wsj.com/articles/social-security-trust-fund-to-be-depleted-in-2035-trustees-say-11555946113)

In one year, this watershed moment for the Social Security trust fund will begin to have a small negative impact on the US Treasury market. At first, the impact will not really be noticed in bond pricing, but it is destined to worsen each and every year. When will the market start to anticipate the trend? What will the change in pricing be? Will it affect the FX rates between the US dollar and other world currencies? Is there a period ahead when higher taxes will be necessary to try to stem the damage?

The Committee for a Responsible Federal Budget (CRFB) has just published a paper that summarizes and comments on the looming issues with Social Security. Called “Analysis of the 2019 Social Security Trustees’ Report,” the April 22, 2019, paper pulls no punches – I suggest readers have two stiff shots of scotch or vodka with this one. Maya MacGuineas, CRFB president, has kindly given us permission to share the entire report with our readers. The report is here: http://www.crfb.org/papers/analysis-2019-social-security-trustees-report.

Remember, there is an arbitrary and politically driven budget accounting method that has allowed the Social Security and other trust funds to dampen the size of publicly stated deficits. Politically motivated financial legerdemain is ending and the reverse negative effect is about to commence.

David R. Kotok
Chairman and Chief Investment Officer
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