Social Security: Disaster Is Closer Than It Appears

Every car sold since I was born carries a warning on the passenger side view mirror: "Objects in the mirror are closer than they appear." Car manufacturers provide this warning because the same mirror produces different views of the same traffic: one accurate and one dangerous.

The Social Security debate has its own set of mirrors, with an illusion actually designed to make the problem look smaller than it is. The difference here, of course, is that car manufacturers see the danger of misreading traffic, whereas those in our government want the public to misread the size of the underfunding of Social Security.

The problem in Social Security is that the system has made more promises than it has money. This problem is expressed as the "shortfall." The figure represents the amount of promises left over after the trust fund has been exhausted. It is total amount of promises in excess of what Social Security can pay.

The Trustees provide information on the "shortfall" in two different forms. One is the 75-year shortfall, and the other is the infinite shortfall. In 2012, the Trustees determined that Social Security has a shortfall of 20.5 trillion dollars over the infinite horizon, whereas the 75-year shortfall is roughly $8.6 trillion. So to believe that the 75-year "shortfall" is meaningful, you have to believe that the vast majority of Social Security's problems lie 76 years or more away.

No one does, of course. Washington uses this view because it makes the problem appear smaller -- about 12 trillion dollars smaller. So it is important for readers to understand how the illusion works.

The illusion works by stating that costs aren't costs. Social Security is financed by making promises to current workers of future benefits. The payroll tax is recognized as revenue today.

“SS is going broke because we have an aging society, which will cause more benefits to be paid out than the revenue we are taking in. Fewer workers to support more retirees. By law, once the SSTF IOUs are exhausted, then benefits must be reduced based on revenue. The gap between benefits promised and revenue produced is the unfunded liability of SS.”

Everyone whines about the baby boomers retiring. Well, they weren’t whining when the boomers were paying into the ponzi scheme.

In other words, it is and has been a ponzi scheme. I am sure a lot of people would be more than happy to accept a cash settle of their SS “investment” along with a modest interest payment for their 40 to 50 years paying into the system.

You suppose the Govt will do that? LOL Don’t hold your breath.

Sorry to be the skunk at the garden party, but here’s a brief explanation of SS (you can decide if your “facts” obfuscate the truth or not):

1. The government funds SS through the Payroll tax (1/2 paid by employer, 1/2 paid by employee or, in the case of self-employed folks, fully paid by the self-employed)
- this tax, roughly 15% of payroll has been slashed for the past two years,ostensibly as a stimulus; this has starved SS of critical funds when it is already “rolling over” (see below for details)

2. Funds collected by SS can lawfully go two places:
a) to pay current beneficiaries, or
b) in the event of a surplus, be invested in special Treasury securities that can only be bought and sold by the SSA
c) when money is invested in Treasury securities, the SSA gets a special obligation bond, and the Treasury puts the cash received into the general funds
d) as long as SS revenues exceed outlays, those moneys placed in the General Fund are used to mask deficit spending.

3. In the event that expenses for current beneficiaries exceed current revenues, the SSA bust, by law, redeem special securities to the extent required to meet all legal obligations.
a) the Treasury must, by law, pay full face value and interest for any special SS bonds presented.
b) if the Treasury does not have sufficient money in the General Fund to cover the full value of the SS bond and interest, it must sell debt to cover the difference.
c) this is why Obama couldn’t guarantee that SS benefits would go out on 8/4/11 if the debt limit wasn’t raised by 8/3.
d) the SS “fund” rolled over in the recent past - that is, outflows exceeded income - and for the next twenty years SS will be adding to the deficit to pay for baby boomers’ retirements.

To reiterate: the “trust fund” is a lie populated by IOU’s that must be redeemed from current tax payments as the original cash gathered by the government for this purpose has already been spent. Those IOU’s will run out around 2030, meaning that the government will no longer be authorized to sell debt to pay retirement benefits.

If you think the money is sitting there for you and your retirement, I think you are mistaken.

YMMV

Even if there were real money in the SSTF, the problem is that SS will still run out of money to fund fully all retirees. It is an actuarial problem. In 1950 there were 16 workers to every retiree, today there are 3.3; and by 2030 there will be 2. The system is unsustainable as currently structured. And Medicare is in far worse shape. The Medicare Trust Fund (Part A) has been running in the red since 2008. And by law, the premiums for Medicare Parts B and D (SMI) pay only 25% of the costs with the remaining 75% coming from the General Fund. If Medicare is not reformed, it will consume the entire federal budget.

People on SS today will receive far more in benefits than they paid in, which is why SS is a Ponzi scheme.

FYI: Here is the SS response to the following question:

Why do some people describe the "special issue" securities held by the trust funds as worthless IOUs? What is SSA's reaction to this criticism?

"Money flowing into the trust funds is invested in U. S. Government securities. Because the government spends this borrowed cash, some people see the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future. Without legislation to restore long-range solvency of the trust funds, redemption of long-term securities prior to maturity would be necessary.

Far from being "worthless IOUs," the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.

Many options are being considered to restore long-range trust fund solvency. These options are being considered now, over 20 years in advance of the year the funds are likely to be exhausted. It is thus likely that legislation will be enacted to restore long-term solvency, making it unlikely that the trust funds' securities will need to be redeemed on a large scale prior to maturity."

Medicare beneficiaries receive three times what they paid into the system.

This graph shows that the average man and woman (average defined in the study as average income over their working lives and living to the average life expectancy) who start receiving benefits in 2010 get over 3 times more in benefits than they pay in to the system! Of importance, the study accounts for inflation by calculating all past taxes and future payments in 2010 dollars to provide an accurate comparison.

If the notion that Medicare recipients are simply "getting back what they paid in" is false then where is the money coming from? Simply, the excess received is being borrowed from younger generations and the cost is more than we can bear

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