What’s A Trillion Among Friends?

The Congressional Budget Office (CBO) came out with its latest baseline estimates for Social Security (SS) this week.  This is the full report:

cbo on ssa

As an ex Wall Streeter I always go to the ‘Cash Flow’ numbers first, as cash flow is what drives most companies to success or ruin. The same rules apply for SS. I was surprised at the results presented by the CBO. They have a line in their report for Net Cash Flow, and I think they have it wrong. The following is a blowup of what CBO presented in the baseline for the fiscal 2013 Actual Net Cash Flow at SS:

12.13

CBO’s cash flow number for 2013 is a surplus of $38B. But here is how SS presents its fiscal 2013 Net Cash Flow.

ssafiscal2013_edited-1

The difference between CBO and SS on the critical cash flow numbers is $106B in just fiscal 2013. The reason for this big discrepancy is the accounting treatment for interest. CBO includes interest income as a cash item, SS does not. The SS description of Net Cash Flow:

Screen Shot 2014-04-25 at 8.17.10 AM

Should interest be included in the calculation of cash flow for SS? CBO says “yes”, I would agree with SS, and say “no”.  Interest is paid in scrip – not cash. Consider what happens at SS when it receives interest payments (June and December). The December 2013 report from SS:

decemberssa

In December SS received $49B of interest, but the balance of the SS Trust Fund rose by only $36B, the difference is the cash deficit of $13B.

The cash flow numbers are important because they are a measure of how much SS has to borrow from Treasury to get the cash required to make monthly benefit payments. In December the TF got more ‘paper’ totaling $49b, but it had to immediately hock $13b of the paper, so the net SSTF increase was only $36B.

When SS is short of cash it must redeem some of its assets for the money needed to make benefit payments. When it does this Treasury is force to issue more Debt to the Public to cover the cash shortfall. So in December, SS forced an increase in the all import Debt to Public number of $13.4B.

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Disclosure: None.

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