Social Security Default: 2027

Social Security Default: 2027

Improbable as it might seem, there’s bipartisan movement afoot in Washington to shore up the Social Security system.

As you might be aware, the old-age-and-survivors trust fund is on track to be depleted by 2032 — beyond which benefits would have to be cut by an estimated 22%.

Two bills are floating around Capitol Hill right now — each with bipartisan sponsorship. Neither likely has a chance of passage this year — but next year might well be a different story.

Key point: If Democrats win the House this November, that actually increases the odds that some sort of deal will come about.

Social Security reforms never take place when one party controls the White House and both houses of Congress. They happen only when both parties can share responsibility.

The major overhaul the program got in 1983 — when full retirement age was lifted from 65 — happened only because President Ronald Reagan and House Speaker Tip O’Neill were willing to take the heat.

Smaller tweaks to the program also occurred during periods of “divided government” — under Bill Clinton in 2000 and Barack Obama in 2015.

Note well: Two of these reforms took place the year before a presidential election and the third took place during a presidential election year. 

So if reform is going to happen before the 2032 deadline gets too close… 2027 would be the year.

So… what do these two bills propose?

One of them doesn’t deserve much of our attention today. It simply passes off responsibility for reforms to one of those bipartisan “blue-ribbon panels” that’s supposed to do all the hard work and then come back to Congress with an actual bill that would keep the program funded for another 50–75 years.

Which, by the way, was the vehicle that made the major reforms of 1983 possible.

Under the other bill, Social Security would default on one of its major promises.

From The Wall Street Journal: “Sens. Bernie Moreno (R., Ohio) and Elizabeth Warren (D., Mass.) are proposing eliminating the cap on Social Security payroll taxes. The 12.4% tax, split between employees and employers, ends once wages and self-employment income hit $184,500 this year.”

This idea isn’t exactly new. Since 2019, Democrats have been pushing a plan to reapply payroll tax on pay of $400,000 and up. The idea was that over time, inflation would close the “doughnut hole” and all income would be subject to payroll tax.

So what is new is the idea of just scrapping the cap in one fell swoop.

The details are, to say the least, fuzzy. Again from the Journal: “They haven’t released a bill or said whether they would expand the tax to investment income. They also haven’t said whether they are only proposing a tax increase or whether they would keep the current program structure, where having more income subject to taxes would qualify those top-end workers for larger future benefits.”

Assuming it’s a tax increase — certainly that’s what Democrats want — this change would transform Social Security into something its architects back in the 1930s wouldn’t recognize.

It would no longer be a social-insurance scheme. It would become just another welfare giveaway — because the higher taxes you’d pay during your working years would no longer translate to higher benefits in retirement.

“In a required-savings program, there is a reasonably close relationship between taxes paid and benefits received, while in an income-redistribution program this relationship is not close,” Baylor business professor emeritus William Reichenstein explained to Reuters in 2019.

And get this: Eliminating the payroll tax cap still wouldn’t fully shore up the system’s finances.

“If enacted now,” says The Wall Street Journal, “a plan removing the cap and denying new benefits to affected workers would close about two-thirds of the long-term hole.”

For years, your editor has said Social Security is fixable — but only with a combination of higher taxes and higher retirement age.

Even then it would still be a Ponzi scheme — revenue coming in the door from working-age folks going out the door immediately for retirement-age folks. But it could be made a sustainable Ponzi scheme through the end of the century.

Again, strange as it might seem on the surface, 2027 is the year when changes are most likely in store. We’ll keep you posted…

An Orderly Panic

When the following news alert lit up my iPad last night…

… the first thing that came to mind was Nelson Muntz.

It didn’t get any better today. The yield on a 10-year Treasury note busted past its January 2025 high of 4.8% Now we’re at the highest levels seen since November 2023.

You’re going to see a lot of chatter the next couple of weeks about the Federal Reserve and what it will do to short-term interest rates at its next meeting on Sept. 16 — on the assumption that whatever it does will affect longer-term interest rates like the 10-year T-note, which in turn impacts all manner of interest rates including mortgages.

But that relationship has broken down over the last two years.

Beginning in the early 1980s, every time the Fed cut short-term interest rates, the 10-year yield fell in sympathy.

No longer: Since September 2024 the Fed has cut short-term rates from 5.5% to 3.75%. But the yield on a 10-year T-note has risen from 3.6% then to 4.8% today. In fact, the yield began rising the exact day the Fed started cutting rates two years ago.

That was the market issuing a no-confidence vote that the federal government would ever get a handle on the national debt, no matter who won the 2024 election: “80% of the increase in long rates since September has potentially been driven by worries about fiscal policy,” Apollo Global Management’s Torsten Slok told Bloomberg.

Which means even if the Fed cuts in two weeks — and right now, futures traders are betting on a hike — mortgage rates might still be stuck over 6.75%.

You can’t really call what’s happening in the bond market right now a panic, the media’s breathless coverage notwithstanding. Maybe an orderly panic. 

The MOVE index — which measures underlying volatility in the bond market the way the VIX does in the stock market — sits at 78 this morning. It takes levels approaching 140 to signal an imminent dislocation to the bond market. The last time that happened was nearly 18 months ago with the “Liberation Day” tariff announcement.

For the moment, the jitters in the bond market are not reaching the stock market.

The S&P 500 is up about a half percent at 7,666. The increases in the Nasdaq and the Dow look similar.

Precious metals are trying to stage a recovery after their drubbing last Friday — gold up about 1% to $4,369 and silver back within sight of $65. But digital non-dollar assets are losing ground — Bitcoin at $77,442 and Ethereum back under $2,400.

U.S. oil futures are over $90 for the first time since July. Traders appear unmoved by the latest Barak Ravid “scoop” at Axios claiming 40 vessels transited the Strait of Hormuz yesterday… nor Energy Secretary Chris Wright’s claim today that 17 million barrels of oil crossed the Strait.

Meanwhile the weekly inventory data from the Energy Department shows that private-sector reserves shrank nearly — 4.5 million barrels last week, in contrast with expectations for a small build. Meanwhile another 3.1 million barrels were drained from the government’s Strategic Petroleum Reserve, bringing the total down to its lowest since November 1982.

At least for now, the tit-for-tat airstrikes between U.S. and Iranian forces have let up. 

The Oil Boom in… Argentina?

While the Latin American oil headlines this week have been about Venezuela — Chevron announced this morning it will sink $7 billion into the country over the next five years — the better near-term opportunity lies further south.

“For decades, Argentina has been known to investors for its inflation, debt defaults and currency crises,” says Paradigm trading pro Enrique Abeyta.

“But thousands of feet beneath Patagonia lies Vaca Muerta, which translates to ‘dead cow’ in Spanish. It’s a massive shale formation holding the world's fourth-largest shale oil reserves and second-largest shale gas reserves.”

And it’s quietly taking off. “Production is soaring. Pipelines are going up. Billions of dollars of investment are pouring in. And some of the world's biggest energy companies are taking notice.”

Daily production has grown to 850,000 barrels, up from half a million a decade ago.

Enrique is eyeing several opportunities for both Breaking Profits and The Maverick — companies easily available on U.S. exchanges. In the meantime, he says you might want to consider Vaca Muerta’s dominant operator — the state-controlled YPF (YPF).

And don’t overlook the oil field services companies. “Halliburton (HAL) and SLB (SLB) are already major providers of the hydraulic fracturing services needed to unlock Vaca Muerta,” Enrique says.

Thought for the Day

Well said…

Mailbag: Crisis and Control

Last Friday’s edition prompted the following reflections from a reader…

“Hi Dave — I remembered the line from that official Dylan Ratigan quoted (kudos to the official for being honest but Dylan should name him) and I wondered if the government really ‘controls’ our access to food, water, energy, etc. 

“How could they ever create a situation where people don’t have access to basic stuff (except for situations where it’s harder to get stuff like natural or financial disasters, etc.)? Even if they tried to restrict some things to some people via a CBDC/social credit system (this horror may be coming sooner than people think), people would resist, wouldn’t they? At least in many states and cities.

“So I find it hard to imagine that even in some kind of emergency, government could or would willingly restrict access to any basic things people need. They would lose what’s left of their legitimacy in that case and, ironically, find it much harder to control people. I don’t know what that official was thinking. Seems a bit delusional to me, probably like many others.

“As for the Iran war, one has to wonder what’s the real reason Trump is going so far. Is he really being that badly misled by his neocon advisers? I would think Vance or some military staff would try to instill some sense in him. 

“Is it just his ego? What does he think is gonna happen in the midterms when people are pissed off about gas prices and inflation? He seems like he doesn’t even care. 

“One also has to wonder about deeper motives such as the fact many politicians are funded by AIPAC, the pro-Israel lobby. But what’s the point when your side loses due to an unpopular war?

“Or could it be something else, such as possible Israeli blackmail? Many people thought Russia had something on Trump but maybe Israel actually has something on U.S. officials. And maybe U.S. spy agencies do too. What do you think?”

Dave responds: The powers-that-be would not and cannot impose any sort of “control grid” out of the blue. As you say, there would be resistance.

But during a crisis? When people fear for their lives and or livelihoods? That’s when they can swing into action.

Really, that was the crux of my “cynicism” issue last year. The extreme new measures imposed in the wake of 9/11, the 2008 financial crisis and COVID were made possible only by a crisis atmosphere and widespread fear.

As for Trump, the picture has been clear for months now: Israeli Prime Minister Benjamin Netanyahu came to Washington in February, promising that a “decapitation” strike on Tehran’s leadership would have the same instantaneous effects as the kidnapping of Maduro in Venezuela. 

Few on Trump’s team bought it. Tulsi Gabbard warned explicitly about most of the ill consequences that have in fact followed — a more hardline leadership, the Strait of Hormuz closed and so on. 

But hubris is a powerful drug. And Trump’s Pentagon chief and handpicked chair of the Joint Chiefs told him they could pull it off. And here we are six months later, with Netanyahu bragging about the role he played in bringing us to this juncture.

You don’t need to go down any blackmail rabbit holes. The available facts and evidence are jaw-dropping enough.