Wednesday, December 17, 2008

Lower Treasury Rates - Affect on Social Security

We all like lower financing rates. It allows us to buy more for less, or keep more of our money. However, with lower Treasury rates comes a price few think about. Social Security’s surplus cash which only amounts to about $60 billion in 2009, possibly less with higher unemployment, will see this new money earning the market rate of 0 to 0.5%. This means the trust fund as it rolls over higher treasury notes, those 10 year notes earning 8 to 9% will now be earning less than 1%. The result is the unfunded liability of SS-OASI just went through the roof. The longer the treasury rate is low, the larger the unfunded liability will grow.

With a 5% treasury rate, the present value of liabilities was about $19 Trillion. With the yield dropping, and about $200 Billion in treasury notes maturing each year, we could see a slight impact of several years on the ability to scheduled benefits in full. The impact is really smaller than many realize. The yearly cash surplus from Social Security OASI is small and decreasing. It will go negative in about seven years.

I guess what is good for the country, low interest rates, is bad for Social Security and Medicare. This should make many rethink the purpose of placing over 80% of one’s potential retirement savings in one single entity that they have no control over.

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