Life expectancy in 1935, in the United States, for example, was 76.9 for men. Workers relying on the plan for retirement would not receive much each month and were not expected to live long enough to drain the system.

When Social Security was founded, the typical US worker at age 65 could expect to live another 11.9 years. But if today’s official projections are right, by the year 2040 the typical 65-year-old worker can expect to live at least another 19.2 years. If the normal retirement age had been indexed to longevity since 1935, today’s worker would be waiting until age 73 to receive full benefits and tomorrow’s workers even longer.

In a report called “Demographics and Capital Markets Returns,” Robert Arnott and Anne Casscells argue that the crisis is not in Social Security, but in demographics. “When an entire society ages,” suggest Arnott and Casscells, “…the thing that matters most is the ratio between the workers to retirees. Unfortunately, the aging of the baby boom generation, which is a significant bulge in population, will cause a dramatic increase in the ratio between workers to retirees, one that will put enormous strain on society and cause friction between generations.”

In the United States, as in other developed countries, the unfunded benefit liability for public pensions amounts to 100 percent to 250 percent of GDP. It is a ” hidden debt ” far greater than official public debt. Unlike in the private sector, these debts are not amortized as expenses over 30 to 40 years. And it may be worth pointing out that under normal conditions economies do not run such crushing deficits. They only do so in crisis mode.

The annual cost of Social Security benefits represented 4.4 percent of GDP in 2008 and is projected to increase to 6.2 percent of GDP in 2034, and then decline to about 5.8 percent of GDP by 2050 and remain at about that level.

And to the retiring boomers’ other doubts and insecurities, we might add that US health care costs are expected to rise by 7 percent of GDP over the next 40 years – a rate that is more than twice as fast as other developing nations. The “old old,” – those aged 80 and over – are predicted to rise sharply through 2050 and will dramatically increase long – term care costs as well as disability, dependence, and health care expenses.

In fact, by official projections, in 2030, the US government will be spending more on nursing homes than it spends on Social Security today. “Although people justifiably worry about Social Security,” says Victor Fuchs, an economist who studies the health care industry, “paying for old folks’ health care is the real 800-pound gorilla facing the US economy.” Adding projections for Medicare and Medicaid ’s expenditures to those of Social Security could raise the total cost to more than 50 percent of payroll taxes.

The fiscal kickers of health cost inflation and political demand for more long-term care benefits threaten to raise public spending dramatically in the United States. Between 2005 and the fall of 2008, we spent two and a half years chronicling the efforts of David Walker, the former comptroller general of the United States, and Bob Bixby, executive director of the Concord Coalition, to reign in reform and shore up the Social Security and Medicare systems. The project yielded a feature length documentary film, which earned us a trip to the Sundance Film Festival in January of 2008 and another to the Critic’s Choice Awards in Los Angeles a year later. We published a best-selling companion book of the same title in late 2008. You’re encouraged to delve into the numbers we presented in the film and book. They’re truly mindboggling. But in many ways the project was dated the moment we released it to the public.

The credit crisis that reached a fever pitch developed in 2008 pushed the date of insolvency of these programs ever closer. On May 13, 2009, the Medicare Trustees warned that the fund they tap to pay for beneficiaries’ hospital care will be insolvent by 2017 – two years earlier than trustees had predicted the year before. The program has been paying out more than it collects in taxes and interest since last year, in part due to a recession well underway. Medicare would have to deposit $ 13.4 trillion – $ 1 trillion higher than last year’s estimate – into an interest-earning account today in order for the hospital fund to pay its scheduled benefits over the next 75 years. The program’s total unfunded obligation, which includes doctor and prescription drug benefits, is $37.8 trillion. The trustees estimated that in coming years, Medicare spending will rise faster than workers’ earnings or the economy as a whole.

Trustees say that while the financial standing of Social Security decreased more sharply than Medicare last year, the health program remains at greater risk of insolvency. The financial difficulties facing Social Security and Medicare pose serious challenges, the report concluded.

For Social Security, the reform options are relatively well understood but the choices are difficult. Medicare is a bigger challenge. Its cost growth can be contained without sacrificing quality of care only if health care cost growth more generally is contained. But despite the difficulties – indeed, because of the difficulties – it is essential that action be taken soon, particularly to control health care costs.

After the revised Social Security and Medicare announcement the world began to wonder: Can the US hold onto its AAA credit rating?

“The US government has had a triple-A credit rating since 1917,” David Walker, now president and CEO of the Peterson G. Peterson Foundation, commented in the Financial Time s following the release of the Trustees report, ” but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

“First, while comprehensive health care reform is needed, it must not further harm our nation ‘ s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

“Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”

Of course, we must note that the whole credit rating biz is…well…corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S&P, Fitch, and Moody’s) are the same ones that left us all out to dry in 2007. (Of course, mortgage – backed securities get a AAA…housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can, too.

But even Moody’s is starting to hedge their bets. They’ve since created three subdivisions within their AAA rating: resistant, resilient, and vulnerable…a corporate way of saying the good, the bad, and the ugly. While the United States isn’t in the worst of the bunch, it’s certainly not the best.

Source: Social Security? Not Exactly

“So while I look at the housing market as something that gives me grave concern, we are finally beginning to see the seeds of a bottoming,” Alan Greenspan declared Tuesday to a friendly crowd at the National Association of Realtors conference in Washington.

And yet, the Dow slipped another 184 points yesterday, as if utterly ignoring Greenspan’s confident declaration. The tumbling Dow also seemed to be thumbing its nose at Greenspan’s pronouncement that “it’s very easy to see” that the recovery in the capital markets “is going to continue for an indefinite period.”

A couple bad days in the stock market do not make a reliable trend, of course. But unbeknownst to Greenspan, neither do a couple good months. Stock prices have been inflating. There’s no denying that. But meanwhile, the economy has continued to deflate. There is no denying that either. So what is an investor to do? Trust the stock market or trust the economy?

The answer to this question is never clear, except in retrospect. But one thing is always clear: never trust Alan Greenspan’s predictions. “Whatever virtues Greenspan may have displayed during his 19-year tenure as America’s most famous bureaucrat,” we observed in a former edition of the Rude Awakening, “clairvoyance was not one of them. Indeed, his feeble powers of prediction are legendary. Every time he looks into the future, it refuses to look back…

“We admire this cowboy for climbing back onto the same mustang that keeps bucking him off,” we continued, “but that doesn’t mean we expect him to remain in the saddle for very long.”

Indeed, Greenspan seems to spend a good deal more time dusting off his chaps than holding the reins. And yet, the former Fed Chairman continues to draw $100,000 speaking engagements as if he actually had something useful to say. Hiring Greenspan to offer guidance on financial market trends is little like hiring Charlie Manson to lead an anger-management class. There are probably better qualified candidates.

Let us not forget that Mr. Greenspan is the same individual who declared in November of 2006, “Most of the negatives in housing are probably behind us. The fourth quarter should be reasonably good, certainly better than the third quarter.”

Not content to make only a boneheaded prediction about the housing market, Greenspan embellished his November 2006 remarks by volunteering a boneheaded prediction about the U.S. economy. “A lot of people are going to lose their homes,” he said. “It’s a family tragedy. It’s not an economic – or macroeconomic — tragedy.”

Obviously, Greenspan was dead wrong. If he had offered 100 different forecasts in November of 2006, none of them could have been more wrong than the forecast he actually offered. Therefore, the former Fed Chairman’s recent confident assurances about the housing market impart neither confidence nor assurance.

In addition, Greenspan’s latest public appearance seemed to break new ground, as his oracular pronouncements featured more “psycho-babble” then “Fed-speak.” Here’s a representative sample:

“Let me just say that in the most recent period, even after the incredible shock to the world economy that occurred as a consequence of the $35 trillion collapse of equity prices, we saw a bottoming and indeed that bottoming essentially reflected the fact that there is a limit to how far human fear can go.

“All of our history, or I should say our psychological history, shows the fact that we adjust to extraordinary circumstances. And we’re starting to adjust here because history tells us that all measures of fear…tend to have an upside and a downside range; they are range bound. We cannot get too euphoric; we cannot get too fearful. The markets turn on you. And the market started to turn in November of last year and flattened out…and when fear began to ebb, we began to see stock prices move up and this essentially added $10 trillion of market value from March 9th…”

So you see, dear investor, this stock market stuff is not really about dollars and cents after all – and its certainly not about the legacy of colossal errors made by a former Fed Chairman – it’s about the limitations of human fear. Because fear is “range bound,” says Greenspan, so too are the consequences of wayward capitalism. The Dow simply cannot drop to 5,000, if Greenspan’s theory holds, because that would be way too scary.

Ummm…okay.

Your editors have encountered more intelligent theories from 5-year olds. But that does not mean we are rushing to judgment. 5-year olds are right sometimes. But this we know: The future is utterly unknowable, no matter how many predictions Alan Greenspan makes…and no matter how many wacky theories he advances. The future is utterly unknowable…almost.

One thing we know:

Central bankers will print lots of money, especially during times of extreme crisis.

Source: The Stock Market vs. the Economy; Who to Believe

Is it sustainable, though? “The major force in the capital markets, especially in the foreign exchange market, is the deleveraging process,” Chandler said. “And the deleveraging process is one in which they [investors] have to buy the dollar they previously sold.”

The buck held up despite data showing that U.S. manufacturing firms experienced the worst level of output in 26 years. The Institute for Supply Management said its factory index fell to 38.9%, the lowest since 1982, from 43.5% in September. That was far below conomists’ expectations that the index would decline to 41.5%.

But then, the news from across the pond isn’t any better. The closely-watched Markit purchasing managers index for the euro-zone manufacturing sector fell to 41.1 from 45.0 in September. A figure of less than 50 indicates a contraction in activity.

In response, the European Central Bank is widely expected to cut its key lending rate, now at 3.75%, when its governing council meets on Thursday. In addition, the Bank of England is expected to cut its key lending rate by at least a half-point to 4%, also on Thursday, with some even predicting an unprecedented cut of a full percentage point to 3.5%.

Source: Dollar holds gains despite grim manufacturing data -  But the numbers from the eurozone are equally bad

Good day… And a Happy Friday to one and all! No 3-day weekend this week, Shoot Rudy! Today is a “food day” in the office as we celebrate our cake maker, Cheryl’s birthday. I brought Krispy Kremes for the crew, as they truly eat them up whenever I bring them in.

Well… It wasn’t a Tub Thumpin’ Day for the currencies on Thursday, as the dollar was in the driver’s seat doing the Tub Thumpin’! There was a bias to buy dollars all day long and that carried over into the Asian and European markets. The euro is now looking up at 1.55…

The dollar bulls were all dancing in the streets when the 2nd revision to 1st QTR GDP was revised up to .09%, which was bang on expectations. Now, I would have one question for the dollar bulls, if I could just get them to stop with the dancing in the streets, and that is… What’s so good about GDP at .09%? Let’s say, for instance that we didn’t get a preliminary of .06%, and this was the first print… Most observers would gasp for air and turn into Chicken Littles, all screaming that the sky was falling!

Another thing giving the dollar some love these days is the falling Oil prices… Oil dropped to $125.75 yesterday…

But that’s the story Larry… Oh, and the dollar is hogging all of the spotlight these days that dollar bulls failed to see the problems with an interview that took place that doesn’t shed any sunlight on the financial problems in the U.S. Let’s listen in…

“MARGARET POPPER, BLOOMBERG NEWS: It could be huge. You’re talking about the securitization issue and how that market drying up drives up the ability of consumers to shift their debt around. So they’re in essence, facing a liquidity crisis just like Wall Street did in the capital markets is that -

WHITNEY: No doubt. Margaret, there are two things that are going on here, number one, there’s been an over reliance on consumer liquidity coming from the securitization market. So, for example for ever $1 of mortgages that was put on bank balance sheets since 2007, $7 of mortgages, or seven times that rate has been securitized in the broader market.

So, most people think when the securitization market shuts down, oh lets look at the revenue decrease, revenue declines in investment banks. The bigger deal is it constrains consumer liquidity.

Now, the second issue is that regulators that have clearly gaffed on the housing bubble are now going to make up for lost time and are going to make it so prohibitive for credit card lenders to make profits, maybe that’s a good thing long term, but what’s it’s going to do is extract, I think, over $2 trillion of liquidity from the consumer balance sheet. So the consumer is going to get it from all sides, consumer spending is going to decline and I think consumer defaults are really going to pick up.”

OK… Back to me… And… So it’s not just me that thinks we are far from being out of the woods with this whole mortgage mess… Sometimes I feel like I’m all alone on this island shouting to the wind all these thoughts, but obviously no one can hear me… But then I wake up and realize that I have tons of readers that know what’s going on… Too bad the markets aren’t waking up to smell the coffee!

You know, within the past 10 days I’ve mentioned the fact that Treasury yields seem to be on the rise… The fact is they are rising… The 10 year yield moved over 4% to 4.08%… This increase in Treasury yields began in April, albeit slowly… I just don’t see how this helps the mortgage mess… Or the consumer…

Nor would a rate increase from the Fed help the economy / consumer… It might take a small chunk at inflation’s armor, but to stomp our inflation the Fed would have to aggressively go after rates to move them much higher… And… Turn off the Money Supply spigot! But, they can’t do that… It’s like a drug for the Fed Heads… And getting them off the drug will be a tough row to hoe!

OK… So Fed Head Kohn, was speaking yesterday and thought it was important to give the audience a wink and nod that the Fed window would remain open for business… Again, this is one of the things that has the markets all revved up and ready to roll. The removal of “risk”… If a financial institution gets in trouble with the junk they have on their books, no worries, just take it down to the Fed Window, the Fed will take it as collateral and lend money to keep the financial institution going…

My friends over at the 5-Minute Forecast, Addison and Ian, talked about this “collateral” in their newsletter the other day… Addison and Ian do a GREAT job with the 5-Minute Forecast, it’s a must read each day! Anyway, here’s what they printed the other day…

“Illiquid collateralized debt obligations — including mortgage-backed securities,” says our government stats watchdog John Williams, “now total in excess of 20% of the collateral backing the Federal Reserve Notes.”

Yikes. One-fifth of the U.S. currency is backed by fetid CDOs. Think about that.

“According to the Fed,” John explains, “U.S. dollar currency in circulation is estimated at $818 billion, the better portion of which circulates outside the geographic confines of the United States. While the U.S. currency has been a fiat currency for decades, the Federal Reserve Notes presently in circulation are collateralized by securities held by the Fed.

“Those securities traditionally are U.S. Treasury securities.

“Since the onset of the banking solvency crisis and the establishment of various new lending facilities by the U.S. central bank, however, an increasing portion of the U.S. Treasury securities held as collateral has been lent to troubled financial institutions in exchange for largely illiquid collateralized debt obligations.”

OK… Enough of that… But really these are the storm clouds that are brewing, and the markets are ignoring them… I sure hope they get to the storm cellar before the twister touches down… They don’t want to get caught outside the cellar like Dorothy!

One currency bucking the trend to weaken VS the dollar is the Brazilian real… Brazil received some more good news yesterday, when the rating agency Fitch, announced that they were upgrading Brazil to “investment grade”…

This is a huge deal folks… You see, there are pension funds, etc. that DO have investment criteria (unlike our Federal Reserve Bank) of which, buying bonds with investment grade is a standard… So, all these “buyers” that have been shut out of the Brazilian market, are now able to join the rest of the world that has seen Brazil as an investment choice…

So, obviously, the news helped push the real stronger VS the dollar… The real’s performance year-to-date is +8.63%… Not too shabby, eh?

OK… As I’ve been writing, the euro has turned around, and is back above the 1.55 level, so maybe, just maybe, you-never-know (Joaquin Andujar’s favorite word) (a St. Louis joke), someone has said “enough”!

Today, we’ll see Personal Income and Spending data from April… We’ve been spending more than we make for so long now, I just can’t see this changing. We’ll also see the color of the last reading to the U. of Michigan Consumer Confidence for May… I would expect this to remain near the 59.50 index level it hit at the last print, which is its weakest level since 1980.

We’ll pay the devil his due with inflation data in the form of the PCE Deflator, which measures U.S. Personal Consumption Expenditures. This data is expected to fall, which means U.S. Consumer spending slowed… Of course one would think that with higher food and energy prices, they would easily make up any slow down in spending… So, we’ll have to see, eh?

I just think that the U.S. Consumer has been backed into a corner (OK, the Consumer did some backing of its own!) and there are only a few paths out of that corner… One path leads to run-away inflation, one path leads to deflation, one path leads to recession, and another leads to bankruptcy and foreclosures… That’s dire straights right there folks… Whenever I say “dire straights” I think of Mark Knopfler (dire straits), and the song… Money for nothing…. That cracked me up!

Currencies today 5/30/08: A$ .9570, kiwi .7825, C$ 1.0110, euro 1.5520, sterling 1.9745, Swiss .9540, ISK 74.55, rand 7.59, krone 5.1025, SEK 6.0175, forint 155.50, zloty 2.1750, koruna 16.20, yen 105.50, baht 32.50, sing 1.3650, HKD 7.8050, INR 42.50, China 6.9410, pesos 10.33, BRL 1.6370, dollar index 73, Oil $125.85, Silver $16.85, and Gold… $883.15

That’s it for today… So, a Happy Birthday to Cheryl, who has been with us almost since the beginning of EverBank World Markets. My little buddy, Alex, broke out of his slump and got the game winning RBI hit last night… I was holding my breath as he strolled to the plate. His swing had gotten all messed up and I tried to help him (as best I can given my immobility)… But a nice soft liner over the 3rd baseman’s head brought home the winner! Another game tonight and one on Sunday! I just heard on the radio that Harvey Korman died… He was great in Blazing Saddles and High Anxiety!

Cards take two of three from the rival Astros… Now that’s a good thing! Any time you can beat that team! My long time neighbors, Kevin and Lisa, moved out of the “hood” yesterday… I must be running the neighbors away, that’s the second good neighbor that has moved in the past year! UGH! OK… I could go on, but it’s time to go! I hope you have a fabulous Friday!

Chuck Butler

Source: An Upgrade For Brazil!

According to an Oppenheimer research note picked up by Dow Jones MarketWatch: “As more than 80% of corporate funding came from the capital markets during 2007, we can’t help but believe that such a massive extraction of liquidity from the market will have a profound impact on the U.S. economy. [...] As bank balance sheets show similar strain to brokers’ own balance sheets, there is little room in the system to ‘pick up the slack’ vis a vis corporate lending.”

Despite the doom and gloom, i-banks have rallied this week.

“Banks have a lot more things to worry about, however,” says John Stepek. “Even if the latest writedowns represent a beginning to the clear-out, we won’t see a return to the days of easy credit for a long, long time. Lehman Brothers’ rights issue was over-subscribed, but it’s not that surprising, given the terms on offer. The convertible preference shares pay a 7.25% dividend

“The problems in the financial world caused by the credit crisis are now firmly entrenched in the ‘real’ economy. Even in the days before credit derivatives became so widespread, a worsening economic environment was always bad news for banks. With so many other dodgy debt instruments linked to corporate defaults and credit card debt out there, we can expect to see more parcels of toxic debt revealing themselves as conditions worsen.”