Skip to comments.Vanity: Social Security - How does it work? (and is it solvent?)
Posted on 08/07/2011 8:08:14 PM PDT by bt_dooftlook
Can some Freeper please explain how SS works to me? So far, there are two theories...
2. Social Security payments come in to the SSA; what is not needed to pay current retirees is used to purchase special treasury securities which go into the trust fund; the cash goes to the Treasury where, as part of the General Fund, they disguise the true size of the Federal annual deficit. Should there come a time when current social security receipts cannot cover current social security disbursements, the SSA will redeem securities from its trust fund to make up the difference; the Treasury, which is obligated by law to redeem the special SSA securities on demand, must either give cash from the General Fund to the SSA to cover the principal and interest of the securities or, if there is not enough cash in the general fund, float government debt to cover the difference.
If (1) is true, then Obama was lying about not making payments to seniors on Aug. 3.
If (2) is true, and SS truly is a pay-as-you-go system, then SS will consume an ever larger portion of the federal budget as baby boomers retire, driving out all discretionary spending (especially defense), or taxes will have to go up dramatically in the absence of Congress taking steps to rein in SS and other "entitlements".
So which is it?
Is there a Freeeper out there with direct knowledge of the system?
Is there some 3rd way that I've overlooked?
a dishonest and usually illegal business in which many people are persuaded to invest their money and the money of later investors is used to pay the people who invested first called also (US) Ponzi scheme
2, except that they also have the option of printing money, and at some point, the IOUs run out so that there will not be enough money to pay the benefits unless they either increase taxes or keep printing money even though they are not redeeming the IOUs.
LBJ raided the trust fund to pay for his WAR, promising to py it back, which never happened. It is my understanding that the Social Security money collected is still dumped into the General Fund, making it in effect pay as you go.
do a search on “Panzi Scheme”
The correct answer is: DOOR NUMBER 2!! Social security entitlements must be cut to bring the deficit down. It’s unlikely they will be cut for current beneficiaries, although the inflation component will be reduced or eliminated. For other Americans, especially those not yet 50 years old, it’s likely that the retirement age will be raised by at least several years, and benefits may also be cut. We can’t afford it anymore.
“So which is it? “
Easy question. It’s pay as you go now, and future revenue will not even come close to paying.
We’re broke...but who cares, we’ll just print our way out of it.
Ask yourself this: Why would they say SS couldn't be paid during this whole debt ceiling debate? That's your answer right there, in plain sight.
If there was a trust fund, it would not have been an issue, or at least an immeidate issue along with everything else that was supposedly not going to get paid.
You'll only find articles on Boehner and Lindsey Graham.
Social Security is a fradulent ponzi scheme that has robbed me of $369,568.39 in cash that could have provided a better life for my family since 1972 up until 2009. Since then I have been forced to make other generous “contributions” to the “fund” since I am both employer and employee. Invested on my own at a mere 6% simple interest compounded annually, my “contributions” could have provided a present value of $838,009.43. There is nothing in my account but a worthless IOU at this time.
I have at least paid in part for my parent’s benefits but also a whole lot of people I don’t know or even care about. Many of whom I would not walk across the street Pee on if they were on fire.
Is Vanity really serious to ask about SS?
It doesn't and it's not.
I believe the Supreme Court ruled that SS is akin to a pay as you go system, much like welfare. My memory suggests this ruling came in the late 1950s or early 1960s. Your number 2 is apparently the best of the two choices given my understanding.
Look up “Ponzi Scheme”. The short and nasty is that the federal government has spent ALL of the SS contributions ever collected. There is no money in the “trust fund”. Just a bunch of IOU’s that you and I have to pay. The Treasury relies on tax money collected (SS and other taxes) last month to pay this month’s bills.
A couple of weeks ago, I crunched the numbers of someone making $10/hr working 40 hrs per week. If that person was able to invest 12% of his income into an investment fund earning 6% until he/she retired, that person could draw a monthly check of $2300/month from age 65 through age 95. I don’t know a single retiree who draws that much from Social Security. And if the person dies, his family gets an actual inheritance so that future generations will not be born into poverty. There is no such inheritance with Social Security. The cycle of poverty is continued generation after generation.
Pretty much the truth. I’ve crunched the same numbers years ago. For the squeamish, just about any investment house worth its salt would sell that insurance as well and make money, lots of money in all probability.
So tell me again why we have SS, Medicare and Medicade instead of some reasonably regulated reinsurance business?
Oh yeah, I forgot about the guy that says, “I’m from the government. I’m here to f...elp you.”
Funny, I’ve thought this way since I was a little kid. I like to think it is rubbed off self-sufficiency from my homesteader grandfather, pulled up by his bootstraps father and in-your-face independent mother.
My latest statement says that if I retire at 66, I'll get $2062/month. If I wait until 70, I'll get $2865/ month.
Of all the people I know who have retired, none have waited past 62.
Keep in mind that this person only makes the equivalent of $400/wk his entire life. I will assume you make more than that, yet you will receive less. Social Security is criminal. If an investment firm gave that type of return, it’s entire executive board would be spending the next 40 years in prison.
Depends on how you look at it. All the excess money that was collected via the SS payroll tax has been spent via the the general fund by congress. They replaced that money with IOU’s. Of course congress does not have the money to pay it back.
But don’t forget that the SS tax is still being collected. So new money is still coming in. My understanding is that at this time it is pretty close to enough to pay current obligations. But the line has been crossed now where it is not quite enough. Since there is a surge in people retiring, and a reduction in employed people...Then It will very soon go very upside down. At that time the SS fund should have been able to rely on “Saved” money to make up the difference until something like 2037. But as I said that money has already been stolen and spent. So the only way congress can replace it is to borrow more on the national debt. Then that debt becomes all of our debt for which we pay interest besides. So we pay for social security twice because of what congress has done.
If we had not raised the debt ceiling then we still could have payed almost all of social security at this time via the SS tax from pay checks. That is of course, unless congress and treasury continued to steal that money for the general fund. And therefore made a direct choice not to use that money to pay current social security benefits.
I hope that helps.
>>> You’ll only find articles on Boehner and Lindsey Graham.
hehe... oops... I mispelled that.
Yeah... I looked up Panzi and found Boehner’s picture.
I originally meant to spell Ponzi.
If you Google Galveston county and Social Security, you find a Texas county that dropped out of SS in the '70's to save their own retirement and now clerks and garbage men drive diesel pusher motor homes around the country between cruises. On SS they would have gotten about $1500 a month whether they needed it or not.
The general fund is just a term that describes the “pot” of money that congress draws from. Even borrowed money can be considered to be part of the general fund. But also tax revenue goes into it.
Yes I know, obviously, that congress is borrowing 1.9 trillion a year to keep that fund solvent. As well as the fact they have been borrowing from(robbing) social security for years to keep the general fund solvent. I am not saying that social security has not been a pyramid scheme. It has as you say been paying out more to individuals than they paid in. But the way that was accomplished was by charging more from people who are currently paying in, but not yet collecting SS. Until the last year or so it has been self sustaining and more. Otherwise their would have been nothing to rob. At the end of this scheme of course is the fact that the people that paid in the most will never get to collect a dime unless as you say.. The rate paid out is drastically reduced. Making this one of the most unfair schemes of all times. Those who paid in the most will collect little or nothing at all.
You know that the original mandate of the federal reserve was to maintain inflation at zero percent. If they had done that instead of playing games to artificially spike the economy and also to play banker bailout- Then Social security could have paid enough. If you understand what I am saying then you will understand that if the Federal reserve had done its job(and followed its mandate) then a loaf of bread would still cost 5 cents. And the average person would still earn less than 100 dollars a week. But all savings would maintain purchasing power through the ages. That is the way it should be. And SS would have worked under those terms if it had not been robbed. And people who saved money would never lose the value of the money they worked hard to save. That coupled with living within our means and not borrowing money would have meant that our economy would have flowed pretty evenly with only minor ups and downs(based on over/under production).
Due to the extreme poverty of the elderly, and lack of jobs, the original approach was discarded, and switch was to make it a pay-go system. Envisioned to be like a continually flowing pipeline. The system has been adjusted many times since first established with respect to benefits, contributions, and retirement age to name a few.
The system has been pay-go for a long time, and the extra has been invested in special issue US government non-negotiable bonds, backed by the full faith and credit of the US government. Paying of Social Security is Mandatory, so Obama could not legally prevent the checks from going out.
The trust fund owns an asset, and the government has the debt. Hence part of the National Debt figure includes the debt owed to the social security trust fund. These bonds by law can not be used for anything else.
General fund issues-Initially Social Security could be described as an off-balance sheet item. During the LBJ administration, this changed to be included in reporting the financial position of the USA. Of course while it's running a surplus, it helps to make the government financials look better with respect to the budget.
LBJ inherited Vietnam from Kennedy, but what he really wanted was to initiate his war on poverty. He was also determined that he would not be the President that would go down in history as losing a war to a lesser adversary. Kinda like Bush. A War and new government programs to pay for.
The fund went in the red earlier than expected, one factor being the large number of unemployed reducing the current receipts. Current estimates are that the fund will last till around 2037 or 2038. If nothing is done, then all retirees will take an immediate benefit cut of almost 25%.
Currently income subject to social security tax is capped at about $106 thousand. Wages above this amount are not included when calculating the benefit. I think I read that Obama favors eliminating the cap entirely.
This would increase immediate extra cash for the system, but would also include a higher benefit for these higher income people. Of course, if they had to pay on the wage, but the benefit was not increased, it would help even more.
Converting to a private system would put more strain on the system and cause more debt during any transition period, and the USA can not afford it at the present time. It could have been done during the Clinton Admin.
Social Security fix is easy compared to Health Care. Just raise the retirement age to reflect that people are living longer. Raise the cap on income. Maybe raise the payroll tax by 1% shared equally between worker and employee. Some change to reduce Cola might also figure in. Some combination of these things.
What is really hard, and what is really pointing to long-term insolvency is health care. Funds stripped from Medicare, rising health care cost, additional Obamacare costs, demographics(baby-boomers)are all converging to create a perfect storm.
Obama refuses to delay or change any of his health-care program. Pelozi and Reid won't allow anything to impact either current medicare medicaid or the new spending. Republicans won't raise taxes. The system is deadlocked until the election, unless someone gives.
The most the commission will be able to do most likely is find the additional $2 trillion cuts. No long-term solution till after the election, if the control of the senate, and the presidency flips to Republicans. Since they did not distinguish themselves last time, it is not clear that the will to implement long-term solutions exits.
Most of the people on social security are not OLD PEOPLE....
You got millions of quasi-disabled.. and pseudo-disabled.. and others not disabled at all..
Additional info. The labor unions and liberals originally opposed this program. It was corporate republicans who helped the administration, many from insurance companies.
Also we have illegals getting it now and we have immigrants with green cards getting it. We have put kids on SSI because they act up in class and get Ritalin now. Many adults that have never paid in get it because somebody says they are retarded. It has just become a mess.
I'm retired now and waiting to draw mine a couple of years from now, but I would have gladly given mine up at 45-50 if they would have let me put my money and my business match in my 401K. I would be much better off and the taxpayer wouldn't have to worry about me.
What America needs to learn quickly is, if the gubmint doesn't get involved, they can't mess it up, they can't run out of money, and they won't have waste and fraud. If we just eliminate these programs, the problems will go away. If Medicare has $100 billion a year in waste and fraud, then get out of Medicare. If you feel the need, send everybody a check to buy their own. The costs would miraculously be the same as the check the gubmint sends and you would screw yourself if you wasted it. How did we get educated before the Education Dept? We produced more oil without the Energy Dept than afterward. Give me a month and I would cut the government 50% or even more. We don't need most of the stuff they do and all we are doing is paying bureaucrats to download porn for 30 years and then pay them to retire for more money than I ever made. Why is Cisco laying off 20k people and no one has lost their job in DC? Just mandate a 10% cut if nothing else. That way they would have to work at least 3-4 hours a day.
Thank you for the detailed response; I am not sure how to take your paragraph 3 - it seems to me that the Treasury would need to get cash from somewhere to give to SSA when SSA redeems a security, and that the reason it couldn’t guarantee payment is that they didn’t have cash on hand and needed to sell new debt to make payments. If it is truly pay-go, then it is a double-curse - not only did the previous surpluses hide government deficits, but, now that it is going negative, it will exacerbate the deficit.
Well I totally agree that whatever the government has their hand in turns to crap.
If it is truly pay-go, then it is a double-curse - not only did the previous surpluses hide government deficits, but, now that it is going negative, it will exacerbate the deficit.”
Sorry to be late in responding. Been on vacation. The government gets cash from people paying FICA tax. Since the 1980’s, the cash received has been enough to pay the retirees with money left over.
That extra is used to purchase the special issue bonds. Those bonds can be redeemed when the Treasury needs more money than the current cash received to pay retirees.
The government can not run out of cash, because they have the ability to print it. The USA is unique in this regard, because we are the world's reserve currency. Our monetary policy, and printing has a big impact on our citizens and other countries. Still, until another reserve currency is set up, we can not default on the debt. We can just print money.
So we are paying our creditors back with a devalued dollar. Another thing that is saving us is that so many other countries are even worse than we are. Hence people have stayed in safe haven Treasuries.
I am not an expert, and don't understand all this as well as I would like. It has been more than 30 years since I studied this stuff in college.
The payment of these bonds is not so different that redemption of any other government securities. We pay it with fiat money. It is not backed by gold or anything else other than the faith the world has in us.
That is why it was so irresponsible of Obama and the Treasury Secretary to run around talking about a possibility of default, instead of government shut down.
Of course, some people believe that this is a deliberate move to cause the world to lose faith, so that a global currency can be established to replace the dollar.
So, if I understand you correctly, you are saying that the government, which must, by law, honor claims for SS, would have made payments after Aug. 2 (absent a debt ceiling agreement) simply by printing money (that is, by having the Fed buy T-bills)?
This would work in the shor-term, but would, in the long-term, destroy the value of the dollar, which would beggar savers and anyone invested in dollar-denominated assets. On the “plus” side (if such a thing can be called a “plus”), it would allow the government to inflate away its outstanding pile of debt, maintaining the fiction that it was “honoring” its commitment to the “full faith and credit of the US”.
Of course, as soon as creditors (and potential creditors) got wind of the scheme, they would refuse to lend money or demand a higher interest rate, which would saddle future generations with much larger debt and pricing current debt (oftentimes linked to T-bill rates) beyond reach (which would cripple businesses).
And, as you noted, this is only possible because the US dollar is the world’s reserve currency; once we lose that, then we are well and truly f_cked.
Would it be fair (in your opinion) to say that raising the debt ceiling $2.4 Trillion is in fact a $2.4 Trillion tax hike, since it must be repaid (with interest to boot!)?
Yes, more or less to everything you just said. The leaders of the other countries are very aware, and have been critical of USA policies for quite some time. Did you ever in the past hear the phrase Japan acted to “defend” the dollar, or some other country acted to “defend” the dollar? It wasn't because they love us.
I read the other day, that the dollar lost 15% during QE2. The USA did experience great inflation during the 1970’s and 1980’s. It was crushing to middle and low-income families. Worse than any tax increase I ever experienced.
Yet the news is full of talk about tax increases and spending cuts, but nary a word about the likely inflation, and the relation to monetary policy. It's like a magician who keeps your attention focused on something else, while he pulls a card from his sleeve.
Social Security has minor problems compared to health care and projected increases in the health care spending even without Obama Care. Simply raising the retirement age, deleting the salary cap, adjusting the cola, and/or raising the payroll tax 1% split evenly between employer and employee are some available choices to combine and use for social security.
After Medicare was implemented, Insurance companies quit offering health insurance policies to people who qualified for Medicare. It is not great insurance by itself, but combined with a supplement from private insurance, it is good and relatively inexpensive overall to the people who pay the premiums.
There is no premium for Part A(hospitalization). Part B is around $100.00. Part D varies. A supplement using the most popular F choice costs around $198.00 per month.
Demographics and modern technology are combining to insure that health care spending is unsustainable, but if the most expensive last 5 years of everyone’s life were eliminated, then it's not so bleak.
The talking heads are all bemoaning these expensive last years; None are talking about paying a premium for Part A or raising the premium for part B. Guess they'd rather see old people die or suffer. Of course, they all have enough money that they will be able to pay for the health care they would need when they reach that age.
“....into an investment fund earning 6% “
How do you justify this assumption.
A better assumption would be 1%:
160 hrs a month x $10 per hour x 12% x 40 years
@6% = $382,366 - except you won’t find a 6% investment today
@1% = $113,259
@1%, he’d be able to withdraw $2300 per month for 50 months - a bit more than 4 years.
He could also withdraw his usual $1600 per month for 73 months, or about 6 years.
Or, he could spend it all along the way, collect food stamps, EITC, then claim disability and get SSI, subsidized housing, a free obama cellphone, EBT card, medicaid....
That’s why these programs are popular. Everyone likes to say the government owes them the equivalent of their social security payments with optimally invested returns. They then change their tune with medicare, and insist that the government owes them medical care, no matter what the inflated cost because they “paid”.
No matter what people were told, they were simply current year taxes, with benefits paid with current year taxes.
It is a foregone conclusion that the benefits will not be paid as supposedly promised. It’s just a matter of how they will not be paid - whether not paid outright, through benefit reductions & eliminations, means testing, inflation, or some other creative means.
Everybody cannot have everything they think they are due.
“Guess they’d rather see old people die or suffer.”
When nobody has the money to pay for their care, what do you suggest as the alternative?
This is a serious question to you - I am not advocating killing people, and I have an alternative, but I want to hear yours.
I would rather that the government had stayed out of health care all together. White Cross policies to the elderly at the time medicare was enacted was cheaper and offered better benefits.
Speak up with your solution. I do not feel that I have sufficient research and statistics to even make a recommendation at this point.
As a start, I was wondering what impact charging a premium for part A insurance would have. I also wondered if having an HSA type insurance format would be helpful.
I do know that 90% of the people in Level one ICU during the last month of my Dad’s life chose to voluntarily give up all treatment except pain management, when told the odds were only 50/50.
My solution is the same as yours. People usually flip out when you suggest getting rid of government health care involvement - including medicare/medicaid.
It’s ultimately the only way it will work in a free society, and if you don’t believe that - then you have to accept the government solution of getting only the care they allow you to have, and cutting off care when they say.
But.... absent government, people have to arrange for their own care, and if they don’t, won’t, or can’t then it is up to charity, if it is available - and if it is not, then the result is rather drastic, but less so than with government involvement, I’d submit.
Still, it’s the only way.
If a 1% rate of return is considered realistic, then no one would ever invest. Stocks as a whole have exceeded 6% over the past 40 years.
“If a 1% rate of return is considered realistic, then no one would ever invest. Stocks as a whole have exceeded 6% over the past 40 years.”
Keep in mind that over that time, there were over $14 Trillion in government expenditures that were borrowed.
So the only way we can expect anything like that is if we repudiate the debt, including future benefits.
Since we can’t say we’ll do that, the only way you get the type of returns of which you speak is when we inflate away our debts - in which case 6% will still be nothing in the face of sustained double digit inflation.
The past 30 or so years has been an aberration in the growth of benefits, benefit expectations, and government.
I think for planning purposes, the best assumptions are closer to mine than yours, but everyone is free to make their own assumptions up, just like you and I did.
However, when I retired early to take care of my parents, I qualified for insurance under HIPPA. The cost would have been $3000 per month. They suggested I apply for an individual policy and go through underwriting.
An Insurance company' thus gets around the portability by making the insurance so costly that people are forced into underwriting.
Hubby qualified for the best rates, at about $200.00 per month, but I had some pre-existing conditions, so I currently pay almost $900.00 per month for my $5000.00 deductible 80/20 policy with no dental and no Rx coverage.
I have never paid more than $500 medical experiences since then, but Hubby was hospitalised more than once. So much for their underwriting.
To me it is just like Life Insurance companies used to do.
People paid for years and years. Once they got pretty old, the company would come up with some reason to cancel the policy, and the people were too old or ill to get a new policy.
HSA accounts might be helpful. It is a way that companies can save on premiums by having high deductible policies. They can share part of that by giving part of the savings say $1000.00 to each employee. Which would take care of about 85% of their employees cost.
They could set aside some more of the savings in a hardship fund for those who had unusually high expenses. The money would be pre-tax. The individual policy and the individual fund go with the employee.
Employees can put additional money into the fund, if they want, and unused funds are allowed to accumulate tax free. The fund is tax free when used for medical expenses. Something along these lines might allow for a gradual transition to individual insurance.
I do think a gradual transition to avoid chaos would be necessary. I read that Indiana(I think) saved a lot of money with an HSA, and most of the employees wound up liking the plan.
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