Social Security: Searching for the Truth.

This article on the current state of Social Security appeared on Yahoo Finance a few days ago. It sounds a lot like most mainstream articles on Social Security sound; hints of an inner problem with the system, but no attempt to rock the boat. Reading articles like this, you’d assume there was really no problem at all. Read on as I dissect the finer points of this article.

“Social Security is not in financial trouble, at least not under the current laws that govern the retirement program. That’s the unequivocal answer from Steve Goss, chief actuary for the Social Security Administration…”

I will clear the air immediately: This man is wrong. Social Security is in financial trouble. Goss is either lying, or he is an ignoramus. Take your pick.

“But what about all the headlines about the Social Security Trust Fund will run out of money in 2033? Goss explained that Social Security benefits that are paid each year to retirees and beneficiaries are primarily funded from two sources — payroll taxes collected from workers each year, and the Social Security Trust Fund. Of these two sources, payroll taxes shoulder most of the burden, making Social Security primarily a pay-as-you-go system.”

This is true. Social Security is a pay-as-you-go system. It takes wealth from younger individuals and gives it to older individuals. It is the world’s largest wealth-transferring program.

“Even if Congress doesn’t act to prevent the Social Security Trust Fund from running dry in a future year, there will still be workers paying taxes into the system, and those taxes will fund the benefits that are due to retirees and beneficiaries.”

Fact: The Trust Fund is arguably already dry. The Trust Fund began running a deficit in 2010. It is officially losing value. There is no cash in the Trust Fund. The Trust Fund has no marketable assets. The “assets” in the Trust Fund are IOUs from the U.S. Treasury. Only the Treasury can buy them. Some have described this situation as a husband writing his wife an IOU; this is an accurate description. No clear-headed investor would call that an asset. What happens if the husband goes bankrupt? How much are the IOUs worth then?

“Social Security is not legally permitted to borrow money, so there are no sources of funding other than current taxes and the Trust Fund. Consequently, if the Trust Fund runs dry, under the law benefit payments must be reduced to the level that can be sustained by tax receipts in a given year.”

Either the federal government defaults and cuts benefits, or raises taxes to meet the obligation. When the Trust Fund runs out of IOUs, this is the decision that will have to be made.

“If taxes in a given year exceed benefit payments, then the surplus is added to the Trust Fund. Likewise, if taxes fall short of benefit payments due for the year, the Trust Fund makes up the difference — until it runs dry. For many years Social Security operated with a surplus, building up the Trust Fund to about $2.7 trillion as of the beginning of 2013.”

“For many years Social Security operated with a surplus…” Social Security has gone bust twice already; once in 1977, and again in 1983. At those times, they hiked payroll taxes. Raising taxes to produce a surplus doesn’t count. What happens to businesses if they continually hike prices to make ends meet?

“Because future taxes are projected to fall short of benefit payments, Goss and his actuarial team project that the combined Social Security Trust fund will run dry in 2033. At that time, benefits to retirees and other beneficiaries in that year would need to be reduced by about 23 percent in aggregate. While that certainly isn’t good news, it doesn’t mean that Social Security will totally run out of money and won’t be able to pay any benefits.”

You hear that? “…Reduced by about 23 percent in aggregate.” In shorter terms, this means default. This means they will pay us 23 percent less than they make us pay for. This means you are losing money out of every paycheck to a system that will never be able to repay. That most certainly is not good news. Nobody should be okay with this.

“The problem is that projected taxes after the trust reserves are fully depleted in 2033 are estimated to fall short of projected benefits by 23 percent… In this case, the benefits paid out must balance with income — the taxes paid by workers into the system — and benefits would need to be reduced in order to match income.”

Correct. Either taxes go up, benefits go down, or the government begins cutting off other benefits beginning with programs tied to the least powerful voting blocs.

“After 2030, taxes paid into the system are projected to be about 4.7 percent of GDP, but the benefits paid will be about 6.1 percent of GDP. To close this gap, either taxes need to be increased by about one-third, benefits need to be reduced by about one-fourth, or there needs to be some equivalent combination of revenue increases and benefit reductions.”

In order to honor the benefits promised under current law, federal income taxes for each taxpayer would have to increase by about 81%. This means the future tax load would be nearly double what it is now. I am certain politicians would attempt to pin the majority of this burden on the wealthy. At that time, being rich and American could be a taxing experience to say the least (pun intended). The flight of rich people from France that we see now is what America would look like at that time.

“The fix is easy to say, and harder for lawmakers to make. We need to reallocate about 1.5 percent of all the goods and services produced by our country. This doesn’t seem like an insurmountable problem. And the sooner our leaders make the necessary changes, the better we’ll be able to adjust our plans accordingly and get on with life.”

People have been saying “the time is now” for years. If the time has always been “now”, then why have no changes ever been made? The only changes have been in tax increases, which is not a solution at all. Is it really because of disagreeable politicians refusing to cooperate… or is it because there is actually no solution at all, and politicians realize this?

It seems like part of the unspoken journalists’ code that any article on Social Security has to include some caveat to the effect of “We can save Social Security with a few changes, if only we act now!” This is favorite line of politicians as well, blaming Social Security’s shortcomings on gridlock in Washington and an inability to make changes. This is all baloney. There is no way to “save” Social Security. It is a Ponzi scheme. So is Medicare/Medicaid. These programs are doomed to go bust. The closest thing to a solution would be to pull the plug on the programs, which will not happen until the existence of these programs is so painful that ending them finally becomes politically feasible.

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