Pimco: Social Security Could Tap Out Sooner Than US Projects
April 26 2012 - 2:33PM
Dow Jones News
One of the world's biggest U.S. government-bond investors is
predicting the depletion of the nation's Social Security fund at a
far earlier date than that which is recognized by the fund's
trustees.
In just over a decade, the retirement program may run out of
cash, according to Pacific Investment Management Co., home to the
world's biggest bond fund, based on a number-crunching exercise
that uses different interest-rate assumptions from those used by
the fund trustees.
In their most-recent report, released Monday, the trustees
projected the Social Security Trust Fund would be tapped out in
2033 if no changes are made to the benefit and contributions terms.
That date is three years earlier than their previous
projection.
"The powers that be in Washington need to wake up to reality,"
said Jim Moore, who heads Pimco's department focusing on
liability-driven investment products and penned the eye-popping
report on Pimco's website Thursday.
Moore's bearish forecast for the OASI trust fund--referring to
the Old-Age and Survivors Insurance program, which covers some 94%
American workers--to run out of money in a little more than a
decade is founded on his view that the trustees' assumed 2.9%
10-year forward-inflation-adjusted, or real, interest rate is too
high. The current market-implied-forward-real rate is 1.4%, he
said, citing a valuation based on the pricing of Treasury
Inflation-Protected Securities, or TIPS.
If discounted by the lower rate, the present value of future
benefits would be materially higher and the projected shortfalls
significantly greater, he said.
Moore said his projection is strengthened by Pimco's long-held
expectation for slower growth in the developed world.
To tackle the shortfalls, Moore called for some combination of
reduced benefits in the future, higher retirement ages or higher
taxes.
Pimco, based in Newport Beach, Calif., has more than $1 trillion
in global assets under management. One of the world's biggest asset
management firms, Pimco is part of Allianz SE (ALIZF, ALV.XE,
AZSEY), a global financial-services company based in Germany.
Comments from Pimco's fund managers, especially founder and
co-chief investment officer Bill Gross, are highly scrutinized by
market participants given the company's large presence in the
fixed-income universe.
(Min Zeng writes about global fixed income and currency markets
for Dow Jones Newswires. He can be reached at 212-416-2229 or via
email at: min.zeng@dowjones.com; @djfxtrader)
--Michael R. Crittenden and Eric Morath contributed to this
article.
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