SS impact; CBO: >50% of tax rcpts needed just to pay interest on debt by 2028

[24601NoMore]

Interested in everyone's take on recent forecast by the CBO (mentioned by Gundlach in the recent Yahoo Finance event) that over 50% of all tax receipts will be needed to pay JUST the interest on US debt by 2028.

Gundlach also points out that 70% of all spending is Mandatory - i.e. SS, Medicare, etc.

Obviously, this means at least 20% more outflows than revenues, assuming all else remains constant.

Coupled with the Moody's downgrade on US outlook (to negative from stable) yesterday, what are you all doing in terms of SS strategy?

Gundlach also mentions in the video that "old timers" like him used to think things were going to become unsustainable around 2050..then 2040..then 2030..now late 2020s. So it appears that not only are programs like SS and Medicare even more at risk than ever before, but that our entire financial system is more likely to suffer severe downturns/possible calamity much sooner than ever before.

DW turns 66 next month. We've been planning to do at least FRA (66 1/2) for SS, but have recently been thinking of deferring a bit longer. Now, we're both in the "take it while it's still there to get" mindset..

Others? Does the US financial situation impact your thinking on when to pull SS and reconsider the old advice of waiting to 70? Seems a better chance than ever before that SS could easily have undergone significant adverse changes before most of ever get to 70..if you take SS before that happens, always a chance of being grandfathered in..

Link to Gundlank talk:

 

[TheWizard]

I'm 73 and claimed SS at 70.
I didn't fall for any of the sky is falling pundits...

 

[MichaelB]

Interested in everyone's take on recent forecast by the CBO (mentioned by Gundlach in the recent Yahoo Finance event) that over 50% of all tax receipts will be needed to pay JUST the interest on US debt by 2028.

There is no CBO forecast or projection showing such high interest payments. The most recent 10 year projection (here) shows by 2033 internet payments will equal about 20% of tax receipts.

 

[24601NoMore]

I may have not been as clear as intended..

Gudlach says (starting at ~6:48 in the video I linked) that using the CBO's "own assumptions" and if the Fed does stay "higher for longer" (which they insist they will), the ~50% of Federal debt (roughly 17 trillion) rolling off over the next 36 months will need to get re-financed at much higher rates. Then, if spending remains at roughly current levels (likely), at that point the interest needed to service Federal debt will be at ~50% of all tax receipts.

So, to be more precise..the CBO is not the one forecasting that, but a more complete analysis of the debt re-finance and debt to deficit spending percentages plus CBO assumptions on revenues leads (per Gundlach) to the conclusion that 50%+ of all tax receipts will be needed to service the debt.

There's a lot less interest by Sovereign purchasers in US Treasuries lately. The 30 year had few buyers on this most recent round. Presumably, China and other purchasers are starting to truly wonder if they'll ever get repaid if they do buy our debt.

Just look at our current situation. Interest on debt payments now exceeds 1 TRILLION dollars annually. That's more than our national defense budget. We're already cooked..with no signs of letting up on the gas.

Gundlach is a pretty smart guy. Perhaps one of the smartest financial minds alive today. I personally take a lot of stock in his analysis as he's most likely spot on..

 

[Gumby]

Contrary to the beliefs of some, taxes also can be raised. Just going back to the pre-2017 regime would help.

Additionally there are combinations of things - such as raising the FRA, increasing the FICA payroll tax, increasing the max wage income subject to FICA, etc - that if implemented NOW, would maintain the ability of social security to pay full benefits.

 

[GrayHare]

No one change can rebalance things without making a mess, so the problem will be chipped at from multiple angles, with money printing and increased taxes being two. Would be nice to see reduced spending, but voters like getting free stuff.

 

[W2R]

I'm 73 and claimed SS at 70.
I didn't fall for any of the sky is falling pundits...

+1, except that I'm 75. I am happy with my decision. I don't think the sky is really on the verge of falling. Some people have been repeating the same speculative, fear-mongering statements about this since I was a teenager and probably before then.

Of course, there is always the possibility that I am full of baloney and just don't have a clue. If/when the sky really DOES fall then I suppose that I'll have to deal with it at that time.

Right now everything seems hunky-dory from where I sit. Practicing LBYM and enjoy life to the max seems like a better approach for me right now, than does fussing and worrying about predictions of possible doom'n'gloom.

 

[MichaelB]

I may have not been as clear as intended..

Gudlach says (starting at ~6:48 in the video I linked) that using the CBO's "own assumptions" and if the Fed does stay "higher for longer" (which they insist they will), the ~50% of Federal debt (roughly 17 trillion) rolling off over the next 36 months will need to get re-financed at much higher rates. Then, if spending remains at roughly current levels (likely), at that point the interest needed to service Federal debt will be at ~50% of all tax receipts.

So, to be more precise..the CBO is not the one forecasting that, but a more complete analysis of the debt re-finance and debt to deficit spending percentages plus CBO assumptions on revenues leads (per Gundlach) to the conclusion that 50%+ of all tax receipts will be needed to service the debt.

There's a lot less interest by Sovereign purchasers in US Treasuries lately. The 30 year had few buyers on this most recent round. Presumably, China and other purchasers are starting to truly wonder if they'll ever get repaid if they do buy our debt.

Just look at our current situation. Interest on debt payments now exceeds 1 TRILLION dollars annually. That's more than our national defense budget. We're already cooked..with no signs of letting up on the gas.

Gundlach is a pretty smart guy. Perhaps one of the smartest financial minds alive today. I personally take a lot of stock in his analysis as he's most likely spot on..

Gundlach is indeed a smart guy. In this case, his message is not clear.

He is not using the “CBO’s own numbers”. He’s saying “what if the deficit were even higher than the CBO has projected and the interest rate were to increase above the ones used by the CBO? If they both go up enough the debt servicing would consume half the budget.

This is true, and his math is probably correct, but his assumptions are pretty extreme. This isn’t an outlook, more like a worst case scenario.

If people look at the 10 year CBO projection linked earlier, one thing stands out. The federal gov’t spending on health care is roughly the same amount as the deficit (including interest). The deficit not including interest is about the same as the net federal spending on Medicare. Ours is not so much a deficit problem as it is a “cost of health care problem”.

 

[Sunset]

....

There's a lot less interest by Sovereign purchasers in US Treasuries lately. The 30 year had few buyers on this most recent round. Presumably, China and other purchasers are starting to truly wonder if they'll ever get repaid if they do buy our debt.

.....

There are a lot of reasons why Sovereign purchases may purchase less now...

China is facing deflation, may need to spent their money on fixing issues in country rather than buying investments.
China may be following through with the thought that since they want to be WORLD power economically, they can lend money to 3rd world countries and earn a higher rate of interest AND not support USA at the same time.

 

[Dtail]

Interesting video, but note that Gundlach has also made more than one wrong call on the direction of interest rates.

 

[SecondCor521]

I have no idea what will happen.

I do think that it is inevitable that Congress takes some sort of action on SS at some point.

I wonder how likely it is that existing recipients will be grandfathered in. Seems highly likely on the face of it. But cutting benefits (without using that language) is also probably a very potent knob to turn.

My spreadsheet assumes current benefits minus the 23% haircut, because the "run out of funding" thing is predicted to happen before I hit 70.

 

[flyingaway]

I have been worried about the government deficit and the national debt for a while. I don't know what to do about my retirement investments. But the U.S. government acts like they have a lot of money, gives out a lot of money, waives a lot of loans, etc. I just think if the sky falls, it will fall on the tall guys first.

 

[marko]

I took SS at 62 and haven't looked back. "Take the money and run" has served me well over my lifetime.

But I'm old enough to be able to count perhaps 30 different "end of the world as we know it" predictions that never materialized and can't remember one that did.

I still can't understand why there is an income cap on SS though. I'd usually hit the cap around February or March but seriously wouldn't have minded if I had had to pay it all year. The main argument that it would be unfair to the high earners just doesn't play. Since when do we care about them?! And they already are taxed for a lot of things they'll never use. It would go a long way to financing this mess.

I'd imagine that some day--likely after it's too late-- congress will enact some changes that will ONLY affect those under say, 40 and will leave us oldsters alone.

 

[donheff]

I'm on the, this too shall pass train. Without getting partisan, this is a matter of polarized elected officials refusing to do their jobs. We elect them and get what we ask for. Eventually, we will demand something else. As others have stated, the fixes needed to keep SS solvent are not that complicated. As for Medicare and the health care system overall, based on my wait times under a top-notch plan, it feels like we have been cutting our effective care levels for years. In a couple of decades, we will be back in the 1950s - problem solved.

Edit: sorry for the snark. I spent a few hours in an ER with DW last night and when I came out discovered that the parking lot I chose was closed and sealed for the night. Mr. smart guy figured the physician's office building next to the hospital's main lot would be less full - and it was. A warning sign would help. At least the emergency turned out to be a false alarm.

 

[pb4uski]

The sky is falling. Sell, sell, sell... SELL everything!

 

[pb4uski]

Seriously, everyone has an opinion and it wouldn't be beyond belief that Gundlach says things to try to get markets to move so he can take advantage of the movements.

DW took at her FRA and I'm waiting to 70 (another year and change) and am very comfortable with that path.

 

[wmc1000]

Since we were fortunate enough that FRA SS exceeded our monthly needs without touching retirement money we took it then and our retirement funds kept growing and growing so we haven't had any regrets. If we are fortunate enough to live beyond the breakeven point so be it as we will be slowing down by then and have less needs. Kids and GK's will be the recipients of most of the retirement funds anyway.

 

[scrabbler1]

I took SS at 62 and haven't looked back. "Take the money and run" has served me well over my lifetime.

But I'm old enough to be able to count perhaps 30 different "end of the world as we know it" predictions that never materialized and can't remember one that did.

I still can't understand why there is an income cap on SS though. I'd usually hit the cap around February or March but seriously wouldn't have minded if I had had to pay it all year. The main argument that it would be unfair to the high earners just doesn't play. Since when do we care about them?! And they already are taxed for a lot of things they'll never use. It would go a long way to financing this mess.

I'd imagine that some day--likely after it's too late-- congress will enact some changes that will ONLY affect those under say, 40 and will leave us oldsters alone.

The cap which applies to wage income subject to SS taxes paid also applies to the income used in the SS benefit calculation. That same cap prevents SS from issuing oversized payments to high-wage earners. This is way too often overlooked (or ignored) by those who advocate raising the income cap.

If you raise the cap on wages without raising the same cap in the benefit formula, then you are starting to turn the SS program into a welfare program, one where one's SS taxes paid are not connected to benefits received, or "Thanks for the paying the extra SS taxes; but you won't receive any extra benefits as a result."

 

[Gumby]

You can raise the benefit cap too. Those people are still going to be past the second bend point, so there will still be excess revenue from their payments into the system. Heck, you could make a third bend point and make the percentage 5% above that. No one really understands bend points anyway.

 

[Chuckanut]

Contrary to the beliefs of some, taxes also can be raised. Just going back to the pre-2017 regime would help.

.

Doesn't that happen automatically in 2026 for individual taxpayers? Those tax cuts go POOF! The cuts for businesses remain. That's the way the law was writen.

 

[scrabbler1]

You can raise the benefit cap too. Those people are still going to be past the second bend point, so there will still be excess revenue from their payments into the system. Heck, you could make a third bend point and make the percentage 5% above that. No one really understands bend points anyway.

It would be an interesting actuarial and economic exercise to see if raising the income cap while creating a new bend point saves or costs the system money.

My biggest peeve is how the current income cap is portrayed to be "those higher income folks are getting away with something....." or "those higher income folks are not paying their fair share....." when someone who advocates raising the income cap fails to mention that the same cap has a limiting effect on their benefits later on. It is much harder to describe how the cap on the benefit side works its way into limiting benefits (i.e. bend points, indexed wages, 35-year average, etc.), something which can't be described in a 30-second sound bite on TV.

 

[marko]

If you raise the cap on wages without raising the same cap in the benefit formula, then you are starting to turn the SS program into a welfare program, one where one's SS taxes paid are not connected to benefits received, or "Thanks for the paying the extra SS taxes; but you won't receive any extra benefits as a result."

Well, that was my point. Since when has anyone worried about high earners paying for something and not getting any benefit from it? I just don't see such a conflict that it precludes doing this...to me it's very simple.

I can think of quite a few things that I've paid taxes for that I never got any benefit from.

As noted, I was a (very) high income earner all of my life and I never would've complained about a flat SS tax, even if it brought an asymmetrical benefit. Given the choice, I'll take the high income but there's asymmetrical benefits all around us.

Heck, back in 1972 I was told that SS would be long gone by time I was eligible yet I kept paying into it all those years.

 

[scrabbler1]

Well, that was my point. Since when has anyone worried about high earners paying for something and not getting any benefit from it? I just don't see such a conflict that it precludes doing this...to me it's very simple.

I can think of quite a few things that I've paid taxes for that I never got any benefit from.

As noted, I was a (very) high income earner all of my life and I never would've complained about a flat SS tax, even if it brought an asymmetrical benefit. Given the choice, I'll take the high income but there's asymmetrical benefits all around us.

Heck, back in 1972 I was told that SS would be long gone by time I was eligible yet I kept paying into it all those years.

Saying what I bolded from your post is not the same as what I am saying, which is this:

"The extra SS taxes paid by raising the SS tax cap without increasing the equivalent wage cap will never, ever become part of the benefit formula. Those taxes will never result in any increase in benefits. It is impossible to benefit from the SS program."

I understand that is is very unlikely, if nearly impossible, for me (or you) to ever collect welfare benefits, for example, no matter how much in taxes I pay. But the welfare program is available should I ever need it.

Also, remember that one general pillar of support for SS is that there is a link between what someone pays into the program and what one received, that it isn't a welfare program. Raising the cap on the tax side without raising it in the benefit calculation erodes that support.

I have never had my pay exceed the tax cap although I was getting close to it toward the end of my full-time working years. I don't have any dog in this fight, personally. But while I like "soaking the rich," I have my limits. This is one of those limits.

 

[JBTX]

Interested in everyone's take on recent forecast by the CBO (mentioned by Gundlach in the recent Yahoo Finance event) that over 50% of all tax receipts will be needed to pay JUST the interest on US debt by 2028.

Gundlach also points out that 70% of all spending is Mandatory - i.e. SS, Medicare, etc.

Obviously, this means at least 20% more outflows than revenues, assuming all else remains constant.

Coupled with the Moody's downgrade on US outlook (to negative from stable) yesterday, what are you all doing in terms of SS strategy?

Gundlach also mentions in the video that "old timers" like him used to think things were going to become unsustainable around 2050..then 2040..then 2030..now late 2020s. So it appears that not only are programs like SS and Medicare even more at risk than ever before, but that our entire financial system is more likely to suffer severe downturns/possible calamity much sooner than ever before.

DW turns 66 next month. We've been planning to do at least FRA (66 1/2) for SS, but have recently been thinking of deferring a bit longer. Now, we're both in the "take it while it's still there to get" mindset..

Others? Does the US financial situation impact your thinking on when to pull SS and reconsider the old advice of waiting to 70? Seems a better chance than ever before that SS could easily have undergone significant adverse changes before most of ever get to 70..if you take SS before that happens, always a chance of being grandfathered in..

Link to Gundlank talk:

Gundlach made a bold and successful bet immediately after the GFC investing in certain mortgage backed securities that had been beaten down badly, but still had decent fundamentals, but weren’t widely rated. That has made his comparisons vs the index impressive when looking over 10 years. Since that point, he either roughly equals or lags the overall bond index.

He has in recent years been one of the more bearish ones on macroeconomic issues. I’m not sure that his smart bet 10-15 years ago on a subset of bonds gives him particular insight on these larger issues.

I do think there are valid questions and concerns given the trajectory of deficits and the cost of debt service if rates stay at elevated levels. The math is not pretty. But what that means is hard to predict. If the US is at 150% debt to gdp in 2030 does that mean Armageddon? I don’t know. But at those levels it becomes hard to reverse.

 

[marko]

I understand that is is very unlikely, if nearly impossible, for me (or you) to ever collect welfare benefits, for example, no matter how much in taxes I pay. But the welfare program is available should I ever need it.
.

I'm going to leave it here because I'm obviously missing something. If, as you say, we pay into the welfare system with the highly unlikely event of benefiting from it, why not eliminate the cap, stabilize the system and have the high earners receive their standard benefit at retirement time?

FWIW, I'm quite far from a "soak the rich" mentality having posted here many times on the shortsightedness of that approach. (And being among the rich myself). But to me, this is more like the current graduated income tax, where high earners are taxed more yet receive no greater benefit. If the system is so much at risk that everybody is going to be hurt, it seems to me that removing the cap is a logical option.

The rich would pay more, as usual, with everybody benefiting. IMO, whatever calculations are currently in use are not necessarily sacrosanct.