The Social Security Trust Fund ran another deficit in September. This time it was $4.13 billion. This is the third month in a row that the Fund has run a deficit. The July –September 2009 shortfall was $10.4 billion. This compares with a surplus for the same period in 08 of $6.8 billion and $12.0 billion in 2007.

The full year 2009 surplus is, as of 9/30, $85 billion. This compares with $128 billion and $132 billion in 2008 and 2007 respectively. So far this year we are running 40% below 2007.

I anticipate that October and November will also be deficit months. The total could be an additional $10 billion. December will be a surplus. I anticipate $35 billion. If that pans out the surplus for the year will be $100-110 billion.

When everything else is in massive deficit why should we care about Social Security? After all, they are still running surpluses. The answer is that the rate and direction of these surpluses have significant implications for the Fund. This is going to dramatically foreshorten the day of reckoning when annual receipts are less than disbursements.

There is little hope of a turnaround. We have a surge of new beneficiaries that are driving up costs. Interest rates will remain low for a long time to come; this is a drag on the Funds earnings over time. But the most critical factor is employment. The Fund is suffering from the recession. They need more workers that contribute payroll taxes. The prevailing view from most economists is that unemployment will remain high for another year. There will be no significant job creation until 2011. That is too far off for the Fund. By then they will be running deficits, once that starts it is very difficult to turn around.

There are two significant implications to this. One is social, the other economic. They are interconnected.

-The only viable solution is significant cutbacks in benefits. There has to be a significant lead-time for this process. There are many people who are approaching retirement on the assumption that they will receive specified benefits. We can't let this process go to the 11th hour and then drop a bomb on 15 million retirees. It is not fair, and there will be hell to pay when it happens.

The end result will be that there will be less money and the age for benefits will be extended. The people who will be most effected deserve a few years of notice. We are getting near the point where that might not be an option. A plan for SS needs to come on the table sooner versus later. The idea that, "SS comes after we fix health care," is wrong. This is a jumble of entitlements. Both of these problems are promises that simply can't be paid for.

We will commit more riches to health care. That means the cupboard will be bare when SS sticks its hand out. About 20% of all our citizens will be 65+ when this happens in a few years. They are also 30% of the voters.

-Zero Hedge had a piece today that is relevant. There was a letter to investors from Kyle Bass of Haywood Advisors. The following is from the letter. The similarities of the US situation to Japan are striking. We are not far behind them on this time line. Between two and four years by my calculation.



The SSTF has wracked up surpluses totaling $2.5 trillion. They own the biggest chunk of America's IOUs. They have funded the deficits in the past. Over the next ten years, when we most need them to buy more, they are going to turn into sellers.