Political Calculations
Unexpectedly Intriguing!
May 28, 2015

Given its established trend, we anticipate that Social Security's Disability Insurance Trust Fund will be fully depleted in or shortly after October 2016. When that happens, Social Security's Trustees have indicated that the payments to individuals receiving its Disability Insurance benefits will be reduced by nearly one-fifth.

As recently as 2008, Social Security's Trustees believed that its Disability Insurance (DI) Trust Fund would have enough money to last until 2025. Even in 2009, on the eve of the official end of the so-called "Great Recession", the Trustees indicated that the DI Trust Fund would last into 2020.

So what happened? Why is Social Security's disability trust fund running out of money so much more quickly than Social Security's actuaries ever expected?

The primary reason why Social Security's DI Trust Fund is now on track to be fully depleted so many years earlier than had been expected has a lot to do with the surge of Americans who lost their jobs during the Great Recession, who then went on to fully exhaust the unemployment insurance benefits that had been made available to them as the U.S. economy failed to meaningfully recover under President Obama's economic policies. Without the prospect of finding jobs as their unemployment benefits ran out, many applied for welfare disability benefits to replace the money they had been getting through unemployment.

And because being classified as disabled would remove such individuals from being counted as both unemployed and part of the U.S. civilian labor force, the Obama administration had a strong incentive to get the program's administrators to look the other way at the disability insurance applications for benefits that were being made as jobless benefits were expiring, as the resulting math would considerably reduce the official unemployment rates reported by the U.S. Bureau of Labor Statistics.

To show how that played out, we've tapped Social Security's data on the number of Disability Insurance beneficiaries by age at the end of each year from 2005 through 2014, which would allow us to do some accounting for the age demographics of the U.S. population, where we'll focus on the members of the Baby Boom Generation - Americans born in the years from 1946 through 1964. Our first chart shows the number of Social Security's Disability Insurance beneficiaries by age for each of these years.

Number of Disabled Workers Receiving Social Security Disability Benefits by Single Year of Age, 2005-2014

In our next chart, we calculated the net change from one year to the next for each of the birth year cohorts covered by the data, where we would take the number of 31-year old disability benefit recipients in 2009 and subtract the number of 30-year old disability benefit recipients in 2008 from it.

Net Change in Number of Disabled Workers Receiving Social Security Disability Benefits from Previous Year, Within Same Age Cohort, 2006-2014

The key bit of information to take away from this chart is that regardless of year, individuals seeking Social Security disability insurance benefits Age 50 and over are predominantly the ones who are awarded it. This is directly due to how the program is managed, where the Social Security Administration is much more aggressive in challenging the disability claims of individuals under Age 50 than it is for individuals who are Age 50 or older.

We next set 2006 as our baseline reference year for measuring differences over time, as that year would provide a good representation of the rate at which disability insurance beneficiaries would typically be added during a relatively healthy economic period of time, as the nation's economy grew at a real rate of 2.7% as over 3.2 million jobs were added over the previous year.

Having set our baseline, we next calculated the "surplus" of disability beneficiaries by age with respect to the net change that was recorded in 2006. The results of our math are presented in our third chart, which because that's a lot of data to digest, we've opted to animate:

Number of

Let's go year by year, beginning with 2007:

  • 2007: Very little change from 2006, except for Ages 60 and 61, which is mainly notable because these are the ages at which Americans born at the leading edge of the Baby Boom, 1946 and 1947, would turn those ages. Other than that observation however, there is no real difference from the data recorded in 2006, which should be expected because the economy grew throughout the year, peaking in December 2007.
  • 2008: The first year of the "Great Recession", which took hold after December 2007, saw a net increase in the number of individuals across the board, regardless of age, with the largest increases occurring above Age 43. Coincidentally, the youngest Baby Boomers would be at least Age 44 in 2008.
  • 2009: This year saw the largest job losses during the Great Recession, which continued after the U.S. economy officially began "growing" again in June 2009. Note that the net change in the number of individuals now receiving disability benefits grew uniformly for those between the ages of 21 and 43, which is something that could only happen if the welfare program's administrators were purposefully looking the other way, as there were no Baby Boomers younger than Age 45 in 2009.
  • 2010: The number of "surplus" individuals receiving disability benefits continued to grow in 2010, once again, across the entire spectrum of ages. 2010 coincides with the beginning of when those who lost their jobs in 2008 would begin having their extended emergency unemployment insurance run out after 99 weeks. Once again, the near uniformity of the surplus disability insurance beneficiaries for the younger age ranges suggest that the program's administrators had an allowance for adding people to the nation's disability rolls.
  • 2011: The first declines in the number of "surplus" individuals receiving disability benefits begin for those under Age 55, while continuing to rise for those over Age 55. This year would coincide with the expiration of 99 weeks of unemployment benefits for workers laid off as part of the implosion of the U.S. automotive industry in late 2008, early 2009.
  • 2012: For individuals Age 47 and under, the number of "surplus" disability benefit recipients fall back to the level they had been in 2006. Meanwhile, the number of "surplus" disability recipients also begins to fall for individuals Age 48 and older, which corresponds, once again, to the age of the youngest Baby Boomers. The numbers remain highly elevated, which indicates that the period of economic distress following the "Great Recession" was continuing.
  • 2013: The number of "surplus" individuals joining the ranks of those collecting Social Security disability insurance benefits continued to fall as the U.S. economy improved - so much so that we actually see the number of "surplus" new individuals between Age 34 and 49 falls below the numbers than had been recorded in 2006. The end of 2013 also saw the end of the federal government's "emergency" extended unemployment benefits.
  • 2014: The number of "surplus" disability beneficiaries continues to fall across the board as the pace of new job creation picked up considerably in 2014, but now, the numbers are such that there are considerably fewer individuals being added to the ranks of the disabled in the age range from 21 through 54 than were in 2006. That's remarkable in that the youngest baby boomers turned Age 50 in 2014 - if the number of people going onto disability was demographically driven, given the program's guidelines, we shouldn't see any of the number of new beneficiaries Age 50 or older drop below their 2006 levels.

What these numbers tell us is that the state of the economy is the determining factor behind the pace at which individuals have been added to the ranks of those collecting DI benefits, rather than say, the incidence of disabilities in the U.S. population. Also, we see that while the age demographic data explains why we observe higher numbers of people above a given age threshold being added to the disability rolls, that they're being added is primarily driven by the nation's employment situation.

What that observation confirms is that Social Security's disability insurance program was operated as somthing of a dumping ground for the nation's long term unemployed after they exhausted their very generous extended unemployment benefits following the end of the Great Recession. Particularly if they were above the key Age 50 threshold that determines the level of challenge their disability claims would face, but surprisingly for a very large percentage of younger Americans.

In fact, if we total up the number of all the "surplus" number of Social Security disability insurance beneficiaries from 2007 through 2013 for those Age 21 through 64, we find that 913,207 more Americans were put onto the nation's disability rolls above and beyond what would have been considered to be typical numbers in 2006, which would account for why the Social Security trust fund has been depleted so much faster than expected. It is only in 2014 that we find fewer Americans being added on net than what we would have been typical in 2006, but that would also coincide with the best year for jobs recorded since the Great Recession began, proving our point that the nation's employment situation is the main determinant of the rate at which Social Security awards disability benefits.

Before we conclude, we have one last observation. If we go back to our first chart and look at the overall changes in the number of Social Security disability benefit recipients over time, we confirm that except for the oldest Baby Boomers who were collecting disability benefits, who have since aged out of the program and are now receiving Social Security pension benefits instead, the vast majority of those who were added to Social Security's disability rolls during the period from 2008 through 2013 are still on them.

In 2012, the Obama administration indicated that this situation is unlikely to ever change under current rules. In March 2014, Social Security proposed tightening some of their rules for awarding disability benefits, in apparent response to a 2011 Wall Street Journal article, but doesn't appear to have implemented the proposed changes that year.

Notes

[1] Our projections are consistent with the Social Security Trustees' Intermediate Assumptions, where they anticipate the Disability Insurance (DI) Trust Fund becoming depleted in the fourth quarter of 2016. In their 2014 Annual Report, they project that the program only has enough revenue to support benefits at 81% of their current level without any additional funds being available to be tapped from the DI trust fund, which is documented in Table IV.B3 of the report. In the absence of Congressional action, all recipients of Social Security's Disability Insurance benefits would therefore have their monthly payments slashed by 19% after the DI Trust fund is depleted.

Data Sources

U.S. Social Security Administration. Benefits Paid by Type of Beneficiary. Disabled Worker. Monthly. All Years. [Online Database]. Accessed 20 May 2015.

U.S. Social Security Administration. Disabled worker beneficiaries in current payment status at the end of December, distributed by age and sex. [Online Database: 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014]. Accessed 20 May 2015.

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May 27, 2015

Via The Telegraph: a world map showing the national debt burden by country around the globe:

Some excerpts from the related article, which quotes Andrew Wilson, the head of Goldman Sachs' Europe, Middle East and Africa Asset Management division:

"There is too much debt and this represents a risk to economies. Consequently, there is a clear need to generate growth to work that debt off but, as demographics change, new ways of thinking at a policy level are required to do this," he said....

"The demographics in most major economies – including the US, in Europe and Japan - are a major issue – and present us with the question of how we are going to pay down the huge debt burden. With life expectancy increasing rapidly, we no longer have the young, working populations required to sustain a debt-driven economic model in the same way as we've managed to do in the past."

Wilson went on to offer his solution:

Mr Wilson said there was hope for countries with high debt burdens. "The demographic shift means that we need to look to more creative policy, including immigration and workforce expansion in order to find ways to pay down debt.

It has often been suggested that many of U.S. President Obama's policies are actually authored in the offices of Goldman Sachs, which has been described as a "political organization masquerading as an investment bank". Which if you think about it, explains an awful lot - especially when you see a Venn diagram showing the overlap of Obama administration members and upper echelon Goldman Sachs' employees.

But then, since Goldman Sachs is a prime broker of U.S. government-issued debt securities, such unique subservience might be best understood as a show of respect for those upon whom you are dependent. Especially where the nation's debt is concerned.

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May 26, 2015

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500 at approximately the midpoint of the current quarter. Today, we'll confirm that the expected earnings per share for the S&P 500 throughout 2015 has continued to fall from the levels that Standard and Poor had projected they would be back in February 2015.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2010-2016, Snapshot on 21 May 2015

The table below quantifies the carnage for what can now be described as a deepening earnings recession, which Standard & Poor continues to forecast will run through the third quarter of 2015:

Expected Future Earnings per Share for the S&P 500
Future Quarter 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4
On 13 November 2014 $109.96 $118.23 $124.48 $131.07 $134.89
On 15 February 2015 $102.89 $103.34 $103.77 $105.00 $112.03
On 21 May 2015 $102.31 $99.25 $98.79 $99.49 $106.61
Change in Expectations Since 13 November 2014 (mid 2014-Q4) $7.65 $18.98 $25.69 $31.58 $28.28

Much of the decline in earnings expectations is tied to the decline in global oil prices, which primarily affects the oil industry, and also affects the business outlook for financial institutions and capital equipment manufacturers.

What we find especially curious however is that S&P would currently appear to expect an exceptionally robust recovery in the S&P 500's earnings per share beginning in the fourth quarter of 2015, largely driven by the energy-related sector of the S&P 500 index. Based on what we see in the expected future for crude oil prices through the end of 2015, we don't think that earnings recovery based on improving revenues is well supported, unless a significant amount of cost reduction occurs within the industry. Since that reduction in economic activity would ripple outward from the energy sector and negatively affect other sectors of the economy, we think that the overall earnings for the S&P 500 would be likely to perform much less well than S&P currently expects.

Data Source

Silverblatt, Howard. S&P Indices Market Attribute Series. S&P 500 Monthly Performance Data. S&P 500 Earnings and Estimate Report. [Excel Spreadsheet]. Last Updated 21 May 2015. Accessed 22 May 2015.

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May 22, 2015

Did you ever wonder what gift you could possibly get for the guy who has everything?

Victorinox Swiss Army SwissChamp XAVT

The Victorinox Swiss Army SwissChamp XAVT is available on Amazon, where as of this writing on 22 May 2015, may be obtained at a discount of $100.01 off its regular price of $480.

Victorinox Swiss Army SwissChamp XAVT - Side View, with Tools Open

And though it features 80 tools, including a ball point pen, barometer, altimeter, pharmaceutical spatula and corkscrew in addition to both a large and small blade, it's not quite as impressive as the Wenger 16999 Swiss Army Knife Giant, which features 7 more, but alas, is not available as of this writing.

And that's why this is the Ultimate Swiss Army Knife You Can Buy Today!


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May 21, 2015
Apollo Group Logo - Source: http://www.sec.gov/Archives/edgar/data/929887/000092988713000150/apol-aug312013x10k.htm

We're breaking news today as it appears that the Apollo Group (NASDAQ: APOL), the parent company of the for-profit University of Phoenix, the largest private educational institution in the United States, has had a major setback in its technology-based strategy to retain students and improve graduation rates in its Associate's degree programs, which have seen a dramatic decline in enrollment since peaking in 2010.

The setback is tied to the Apollo Education Group's August 2011 $75 million acquisition of Carnegie Learning, a developer of computer-based math instruction. The New York Times described the motivation for the Apollo Group's purchase.

Hoping to keep more of its students from dropping out, the Apollo Group, which operates the profit-making University of Phoenix, said Tuesday that it would pay $75 million to buy Carnegie Learning, which offers computer-based math instruction.

Carnegie Learning, based in Pittsburgh, was founded in 1998 by scientists from Carnegie Mellon University who developed an approach to teaching math that combines classroom work with computer instruction. Its Cognitive Tutor software analyzes students' weaknesses as they work through problems and offers new problems until they are ready to move on.

"Math is a subject where we see a lot of students having difficulty" at the college level, said Gregory W. Cappelli, Apollo's co-chief executive. "We think by adding the Carnegie Learning solution into our platform, we'll really help our students to have better outcomes in math."

The acquisition was an integral part of the Apollo Group's billion dollar bet on its development of an adaptive learning platform, part of its internally developed "Learning Genome Project", in which it would seek to personalize the learning experience of the students enrolled in its classes.

The Apollo Group implemented Carnegie Learning's Adaptive Math Practice system in its University of Phoenix' Associate's degree program math classes in the period from October 2013 (PDF document) through December 2013 (PDF document), replacing the My Math Lab system developed by Pearson Higher Learning (NYSE: PSO) that it had previously used.

On 27 February 2015, University of Phoenix faculty members were notified (PDF document) that Carnegie Learning's Adaptive Math Practice system would be phased out of use in its Associate's degree program math classes with a transition back to Pearson's My Math Lab system beginning on 1 April 2015, which would be completed by 1 June 2015.

The notification indicates that the change was based upon negative feedback provided by students and faculty members, and that a pilot effort to transition math classes in the University of Phoenix' Bachelors degree program from the Carnegie Learning system back to Pearson's My Math Lab system earlier in 2015 had been successful in drastically reducing technical support tickets.

That technical situation must have been extraordinarily bad for the Apollo Group to return the system that it had previously attributed to be a cause of its declining enrollment. According to Pearson, access to a MyMathLab course costs $85.50 per student. With our estimate of the University of Phoenix' Associate's degree program enrollment of 66,000, the Apollo Group may be required to pay Pearson as much as $5.6 million over the course of a full year to abandon its Adaptive Math Practice system, which perhaps gives a sense of how costly those technical support tickets were.

The setback is particularly significant in that it was such a clear part of the business strategy behind the Apollo Group's effort to develop a Learning Management System (LMS) that could be sold to other educational institutions.

Facing new regulations and slowing enrollment for their degree programs, companies like the Apollo Group, parent of the University of Phoenix, are quietly developing or expanding other educational services that they could sell to nonprofit colleges and corporations, moves that could signal the future direction of the for-profit college industry.

Among other things, that means it might not be long before the Apollo Group seeks out other colleges as customers for the electronic learning platform it has spent years and millions of dollars developing. A company spokesman said licensing that platform to other colleges is one of the many options its new Apollo Educational Services division is exploring. Although the entire Phoenix student body won't be fully on the new platform until spring, Apollo has been inviting higher-education leaders to its San Francisco development center to show off the new system for the past several months.

"We'd love to partner with existing educational institutions. We'd love to partner with global companies," says Mark Brenner, Apollo's senior vice president for external affairs.

With the apparent failure of Carnegie Learning's Adaptive Math Practice system in its own classes, that option would no longer appear to be as viable in the near term for the Apollo Group as it had previously appeared.

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