Social Insecurity

Today’s post comes from a reader’s question concerning the likelihood of the Baby Boomer generation getting all of the promised benefits of social security…

The long-term efficacy of social security isn’t a popular question for Americans because it rightly terrifies them.  But there are several points that must be made…

Social security is in trouble. And not 15 years from now, but NOW!

In 2014, the social security administration took in $786 billion through the FICA tax. That’s a lot of money. Unfortunately, it was $73 billion short of the amount needed to pay the claims of $859 billion. For the first time in its history, Social security is in deficit mode.

Now, before you think this was a one-time event, let me set the record straight. Between now and 2026, the social security administration will run up a cumulative deficit of $1.6 trillion!

Here’s where this gets interesting…

We’ve been told for decades that the social security trust fund holds trillion in assets (cumulative social security surplus revenues since 1935) that are collecting interest. At the end of 2014, we were told the trust fund owned more than $2.8 trillion of assets.

Unfortunately, this is incorrect. There is not a single dollar in the social security trust fund. Nada. Zip. Zilch. So, where did the money go?

It was used for general budget activities such as defense spending and studying the mating habits of fruit flies. Now, I can already hear the comments from the political crowd saying I’m wrong. After all, the Social Security Act of 1935 mandated that the funds collected under the program could only be used by social security.

Not true.

In the landmark case whereupon the Supreme Court ruled favorably on the constitutionality of Social Security (Helvering v. Davis, 1937), the Court ruled that Social Security was not a ‘contributory’ insurance program. The Court ruled, “The proceeds of both the employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way.” (italics mine)

In other words, the United States government can (and does) use social security taxes any way it deems appropriate. There are no laws requiring that social security money be used solely for social security purposes. The federal government has used this money to pay for increased federal spending at all levels of the federal government – from defense spending to pay raises for government employees.

Still, Americans have a ‘right’ to collect their social security in old age, right?

Again, not true.

You see, in another Supreme Court ruling (Fleming v. Nestor, 1960), the Supreme Court ruled that workers have no legally binding or contractual rights to their Social Security benefits. Furthermore, the Supreme Court indicated that social security benefits could be cut or eliminated at any time.

Specifically, the Court said, “To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever changing conditions which it demands. It is apparent that the non-contractual interest of an employee covered by the [Social Security] Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments.” (italics mine)

In layman’s terms, you have NO legal right to ‘your’ social security. Never have. Never will.

Now, this doesn’t mean the government is going to suddenly stop paying social security benefits. Not for now, anyway. That would be political suicide for anybody to suggest an end to this system.

But the system is in imminent trouble. And unlike in the past where politicians could kick the can down the road far enough that they could retire before the problems became evident, this is no longer the case.

You see, social security has had two problems from the start that no amount of political posturing could solve. The first problem was the retirement age. In 1935 when the program was designed, the retirement age was set at 65. The government used this age because they knew most people in 1930s America wouldn’t live long enough to collect benefits. This is due to the average life expectancy being just 59 years in 1935. And sadly, the framers of social security didn’t address the possibility that life expectancies would increase. Today, the life expectancy in the United States is 78.8 years.

The second major problem from the start of the program is one of demographics. Here again the framers failed to take into consideration demographic trends throughout much of the 20th Century. When social security began, there were 41.9 workers for every retiree. Actuarially, it isn’t difficult to fund a program where more than 40 workers support a single retiree. In 2015, there are just 2.8 workers supporting every person collecting social security benefits. In fifteen years, the ratio will be 2:1. No amount of financial smoke and mirrors will prevent the system from collapsing under its own weight.

Now let me take a moment to channel a political commentator at MSNBC…

Sir, the social security trust fund is well funded through 2075. You’re just using scare tactics to frighten old people into believing the system won’t meet its promises for all Americans. You clearly have a political axe to grind.

So let’s look at the trust fund assets.

According to the social security trustees, there is $2.8 trillion in surplus funds on the books at the Social Security Administration. But it’s important to remember that these assets are book assets, not actual dollars. The dollars were spent the minute the government collected the taxes.

Now, in exchange for the actual dollars, the Treasury Department gave the Social Security Administration a paper ‘IOU” redeemable at a future date – including the payment of interest on the principal amount. In other words, the left hand of the government took money from the right hand of government, and promised to pay it back at some future date. Until the payment is made, the ‘borrowed’ funds would earn interest.

But remember, not a single dime of the money has ever been invested in anything, including the government’s own bonds. And the interest being credited to the government? Phantom. It isn’t real. The interest being credited to the surplus is nothing more than an accounting fiction.

Let me tell you, any company doing its books in this manner would see its managers rightly prosecuted and jailed. Fortunately, the day of reckoning for the government fraudsters is fast approaching, and I think some jail time for politicians is desperately needed.

But this brings up the question of how the government expected to pay the debts of the trust fund seeing that there were no real assets in the trust fund. Great question.

The fraudsters thought they could grow GDP fast enough (and big enough) while projecting implausible payroll tax revenues to cover future needs. What kind of GDP growth are we talking about? How about 5.1% annual GDP growth (on a nominal basis)!

Yep, the government expects to see annual GDP growth of 5.1% every year over the next 12-years to replace the interest not actually accruing on the social security trust funds. But there’s a problem that anyone other than a government fraudster could see a mile away…

The actual annual GDP growth rate of the United States of America hasn’t come anywhere near a nominal 5.1% rate in any year for the entirety of the 21st Century. Furthermore, coupled with ever-growing government regulations and a falling labor force participation rate, the government has a zero chance of growing GDP at sufficient levels over the next 12-years. It’s nothing short of a pipedream.

What this means is that the government had to print money to cover last year’s $73 billion shortfall.

Now, in the scheme of things, a $73 billion deficit in Washington DC is nothing. We’re used to the inability of elected officials and Ivy League lawyers to balance a budget.

The problem, however, is that Barack Obama has left the nation in even worse financial shape than George W. Bush. The year after Barack Obama leaves office, the government estimates that budget deficits will total $8 trillion in 12-years. And that’s NOT including social security spending.

Printing $73 billion is easy enough to hide from taxpayers and credit rating agencies. Printing $8 trillion borders on the insane. It can’t be done without destroying the economy.

And without the ability to effectively print their way out of a hole, the government will finally be forced to come clean to the American people. Of course, this means there will significant pain for people born after 1960.

We’re going to see benefit cuts of at least 33% in the next 12-15 years. And if you expect to retire at age 67 (actual retirement age for those born after 1960), good luck with that. The retirement age will have to go to 69 or higher (age 72 is consistent with the math) to keep the system in operation. And for those hoping to retire early on reduced benefits, eligibility will likely move to 64 years of age or higher (66 is likely).

That’s the good news…

If you were born after 1970, you had better plan your retirement with the expectation that whatever system is in force by then will pay a fraction of the benefits today’s retirees receive.

Simply put, you were born too late to get the same free ride as your parents and grandparents.

On the other hand, you will get the privilege of paying the bills of the four or five generations of retirees that voted idiots into office. And that’s thanks enough.

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