First-time in history… Social Security Will Payout More than it Receives in 2010!

While states like Florida, Texas and California are contemplating changing their Teacher Retirement System benefits to remain solvent, other states also are debating what to do about their budget shortfalls. Those states that offer their employees both Social Security benefits and retirement programs are carefully looking at the government’s recent report on Social Security.  

The Social Security Administration just released a report that the system this year will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.

Stephen C. Goss, chief actuary of the Social Security Administration, said retirees would keep receiving their checks as usual. The problem is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.

 

Is this the Tipping Point That Results in Benefit Cuts?

Analysts have long tried to predict the year when Social Security would pay out more than it took in because they view it as a tipping point — the first step of a long, slow march to insolvency, unless Congress strengthens the program’s finances.

 

“When the level of the trust fund gets to zero, you have to cut benefits,” Alan Greenspan, former chairman of the Federal Reserve Board.

Social Security’s annual report last year projected revenue would more than cover payouts until at least 2016 because economists expected a quicker, stronger recovery from the crisis. Officials foresaw an average unemployment rate of 8.2 percent in 2009 and 8.8 percent this year, though unemployment is hovering at nearly 10 percent.

Although Social Security is often said to have a “trust fund,” the term really serves as an accounting device, to track the pay-as-you-go program’s revenue and outlays over time. Its so-called balance is, in fact, a history of its vast cash flows: the sum of all of its revenue in the past, minus all of its outlays. The balance is currently about $2.5 trillion because after the early 1980s the program had surplus revenue, year after year.

Now that accumulated revenue will slowly start to shrink, as outlays start to exceed revenue. By law, Social Security cannot pay out more than its balance in any given year.

A $29 Billion Shortfall This Year

Mr. Goss, the actuary, emphasized that even the $29 billion shortfall projected for this year was small, relative to the roughly $700 billion that would flow in and out of the system. The system, he added, has a balance of about $2.5 trillion that will take decades to deplete. Mr. Goss said that large cushion could start to grow again if the economy recovers briskly.

 

Indeed, the Congressional Budget Office’s projection shows the ravages of the recession easing in the next few years, with small surpluses reappearing briefly in 2014 and 2015.

After that, demographic forces are expected to overtake the fund, as more and more baby boomers leave the work force, stop paying into the program and start collecting their benefits. At that point, outlays will exceed revenue every year, no matter how well the economy performs.

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Week in Review: Stocks steady after EU backs IMF aid plan for Greece

U.S. economic news

Housing sector could be drag on U.S. recovery

The U.S. Department of Commerce revised its estimate of U.S. gross domestic product downward to a 5.6% annual rate for the fourth quarter of 2009. Even so, the numbers showed that the U.S. economy grew the most in six years. The GDP report also showed that corporate earnings increased 8%, which was the biggest year-over-year gain in 25 years.

Durable goods orders rose in February for the third month, while inventories and backlogs climbed by the most in a year. The rise is an indication that the manufacturing rebound will continue to power the U.S. recovery.

In February new home sales unexpectedly fell 2.2% to record lows as blizzards, unemployment, and foreclosures kept buyers away. These sales have suffered as consumers have gravitated to heavily discounted existing or foreclosed homes. New home sales are now 6.4% below their lows of last year, while sales of previously owned homes are up 10.8% from last year's low. Sales of previously owned homes fell 0.6% from January and were below the levels seen last fall, when the expected expiration of a home-buyer tax credit sparked a flurry of buying.

U.S. and global corporate news

Wall Street firms suspected in municipal bond probe; Tiffany's profits double; Lukoil pulls out of Iran


JPMorgan Chase, Lehman Brothers Holdings, and UBS were among more than a dozen Wall Street banks and investment firms suspected of involvement in bid rigging and price fixing in the municipal derivatives market, according to documents filed in a U.S. Department of Justice criminal antitrust case.


Tiffany & Co. reported that its fourth-quarter profits more than doubled as sales climbed. The jeweler also benefited from the absence of a restructuring charge that it paid last year. The company announced its plans to open 17 stores this year.

The Russian oil company OAO Lukoil Holdings booked a $63 million impairment loss after U.S. sanctions against Iran forced it to abandon its Anaran project in Iran. Lukoil also said that its full-year net profit fell 23% because of lower oil prices. Lukoil's statement comes after a string of Western companies, including Royal Dutch Shell and Ingersoll-Rand, said they would abstain from signing oil contracts as new sanctions against Iran loom.


Bertelsmann AG, Europe's largest media company, posted its first net loss in decades because of a decline in advertising markets and higher charges. The closely held company posted a net loss of 82 million euros in 2009 after a net profit of 142 million euros in 2008.

Global economic news

European leaders this week put the International Monetary Fund on standby to help Greece out of its debt crisis. The move is in opposition to the European Central Bank's call that Europe solve the crisis on its own. Officials have endorsed a Franco-German proposal to give Greece a mix of IMF and bilateral loans at market interest rates. Earlier in the week, the euro fell to a 10-month low as European leaders struggled to find a solution to Greece's financial crisis.

Fitch Ratings cut Portugal's credit grade to "AA-" with a negative outlook for the first time. In a statement, Fitch said that a "sizable fiscal shock against a backdrop of relative macroeconomic and structural weakness has reduced Portugal's creditworthiness." Fitch also said that the prospects for Portugal's economic recovery are weaker than its 15 European Union peers.

Japan's consumer prices fell for a twelfth month in February. The decline puts additional pressure on the Bank of Japan to do more to end deflation, which is hurting the country's economic recovery.


Stay focused and diversified


In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The views expressed here are those of MFS^®and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any MFS investment product. Individual securities mentioned are for illustrative purposes only and may not be relied upon as investment advice or as an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual, or quarterly report.


Past performance is no guarantee of future results.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; boston.com.

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Market Summary: March 22, 2010

The Markets

After eight straight up days, the Dow finally caught up with the other domestic indexes in reaching a new year-long high. Only the small cap Russell 2000 slipped this week, though trading volume was once again lackluster and all of the indexes stumbled slightly on Friday.

Market/Index	2009 Close	Prior Week	As of 3/19	Week Change	YTD Change
DJIA	10428.05	10624.69	10741.98	1.10%	3.01%
NASDAQ	2269.15	2367.66	2374.41	.29%	4.64%
S&P 500	1115.10	1149.99	1159.90	.86%	4.02%
Russell 2000	625.39	676.59	673.89	-.40%	7.76%
Global Dow	1984.48	1989.34	2001.01	.59%	.83%
Fed. Funds	.25%	.25%	.25%	0 bps	0 bps
10-year Treasuries	3.85%	3.71%	3.70%	-1 bps	-15 bps

Last Week's Headlines

• A crucial vote in the House of Representatives moved the hotly debated health care reform bill closer to a Presidential signature that could come as soon as this week.
• Industrial production was up only 0.1% in February. That was much lower than January's 0.9% increase, but the Federal Reserve Board attributed at least some of that decline to bad weather in the Northeast and South. Even so, production was up 1.7% from a year ago, though the nation used slightly less of its manufacturing capacity (72.7%).
• February's blizzards also sidelined residential builders. Fewer new projects in the South (down 15.5%) and Northeast (-9.6%) helped cut housing starts nationwide by 5.9% from the previous month. The biggest decline was in multifamily housing, the U.S. Department of Commerce said; starts of buildings with five or more units fell 43.1%.
• The Federal Reserve Board's Open Market Committee left its target interest rate stable and gave no indication of changing its intention to end its purchases of mortgage-backed securities by the end of the month.
• Inflation at the wholesale level dropped 0.6% in February from the month before, led by lower energy prices. However, the Producer Price Index was up 4.4% year over year, according to the Bureau of Labor Statistics. Meanwhile, February's Consumer Price Index (CPI) was unchanged from January, putting the annual inflation rate at 2.1%. Excluding volatile food and energy prices, annual consumer inflation was at its lowest level (1.3%) since this time six years ago.
• The Conference Board's Index of Leading Economic Indicators was up 0.1% in February. That's its 11th straight increase, though the rate of improvement has begun to moderate.

Eye on the Week Ahead

As the end of the quarter next week draws near, institutional investors will begin fine-tuning their portfolios. Also, investors doubtless will assess the impact of the health care bill vote on companies in industries such as insurance, health care and pharmaceuticals.

Key data releases: Home resales (3/23); new-home sales, durable goods orders (3/24); final Q4 GDP (3/26).

Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

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