Pimco: Social Security Could Tap Out Sooner Than US Projects
First Published Thursday, 26th April 2012 06:17 pm - © 2012 Dow Jones
By Min Zeng
Of Dow Jones NEWSWIRES
NEW YORK -(Dow Jones)- 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: email@example.com; @djfxtrader)
--Michael R. Crittenden and Eric Morath contributed to this article.
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