In a previous post we highlighted the fact that with payroll taxes substantially reduced, the social security administration will very soon have to begin selling some of it $2+ trillion holdings of US debt to meet social security benefit obligations. The 2008 annual report of the Social Security Trustees says:
“The drawdown of Social Security and HI Trust Fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident.
We are increasingly concerned about inaction on the financial challenges facing the Social Security and Medicare programs. The longer action is delayed, the greater will be the required adjustments, the larger the burden on future generations, and the more severe the detrimental economic impact on our nation.
The annual cost of Social Security benefits represented 4.3 percent of Gross Domestic Product (GDP) in 2007 and is projected to increase to 6.1 percent of GDP in 2035, and then decline to 5.8 percent of GDP by 2048 and remain at that level.”
This report does not have the CBO’s recently adjusted numbers taken into account. A little math: Assuming 4.3% of a 14 trillion GDP level implies that social security benefit obligations are around $600B per year. If (say) half that many treasuries ($300B) are sold to meet the obligations next year, that’s a potential problem as big as the possibility the one that China might reduce its purchases of US debt.