The only viable Social Security is your friends.
That being said, we might also talk about that other so-called Social Security system -- which if the truth be told is more accurately known (originally entitled) as the Old Age Survivors Health and Disability Insurance program (OASHDI). [In other words, it was intended to be an insurance program, not a guaranteed retirement package!]
One: The very nature of the Social Security system is that mathematically, the numbers just don’t add up to representing good news for retirees beyond about 2012 A.D..
Two: The second point of discussion is whether or not Social Security may survive longer, but only at the expense of a massively scaled down version.
Three: The disparity between the generations may also threaten the current system when the junior citizens rebel against the demands of the senior citizens.
Four: The integrity of any retirement system, which has no legal, fiduciary responsibilities to the beneficiaries, has to be seriously questioned.
Five: The trust fund itself -- in terms of how it is nvested in the interim between receipt and payout -- is very likely a house of cards in the path of a hurricane.
Consider each of these points in some detail:
A fascinating and well researched article appeared in the Atlantic Monthly in May, 1996. Some of the more interesting facts presented there included a “medium cost scenario” in which Social Security would remain solvent only until the year 2013. Thereafter, Social Security (including Medicare) would have deficits reaching by the year 2030 some $1.7 Trillion, by 2040, $3.2 Trillion, and by 2050, $5.7 Trillion per year!
These figures are the “medium cost scenario”. In an alternate “high cost scenario”, for example, by 2040 Social Security taxes would require between 35 and 55% of total payrolls (as opposed to the roughly 15% being withdrawn now) just in order to meet its current (1996) obligations. Another way of stating this is that the ratio of the number of employees paying Social Security taxes to the number of retirees receiving benefits was originally about 7, was 2 3/4 in 1996, and will be about 1 1/2 by 2015.
An alternative way of looking at this was included in Barron’s newsmagazine (a sister publication of The Wall Street Journal). Here the scenario was simpler. During the time period from 2005 until 2015, the Social Security system would have to pay out (in 1996 dollars) ten trillion dollars in benefits. Some years would see amounts going out far in excess of a trillion dollars per year. And 2005 comes a lot sooner than 2030!
These numbers are all based on Official Social Security Projections, which include the facts that: 1) 2009 is the first year of the arrival of the WWII Baby Boom Wave onto the retirement scene, and 2) 2013 is the year Social Security becomes to run a deficit, i.e. the money going out exceeds the money coming in.
In 1995, the Advisory Council on Social Security Technical Panel on Trends and Issues in Retirement Savings said in its Final Report, “The social security system is not in long-term actuarial balance. The Social Security Trustees, using their intermediate assumptions, project that currently legislated Old Age, Survivors, and Disability Insurance (OASDI) tax revenues will be less than currently legislated benefits after the year 2013. Projected benefits begin to exceed the sum of OASDI taxes and interest earned in 2020, resulting in a decline in the OASDI Trust Funds, and projected depletion in 2030... Some combination of benefit decreases and/or revenue increases will be required to close this gap.”
Further on, the report noted, “Because the social security system is not in long-term actuarial balance, significant adjustments in future contribution levels and/or benefit outlays will be necessary. Social security benefit cuts (either directly or through further delays in retirement ages) are one option.” [emphasis added]
All of the reports mentioned thus far derive from the 1995-1996 time frame. Since that time, there have been legislative action to correct the problem. The results are realized in the “2002 OASDI Trustees Report”.
The major findings of the report were: 1) At the end of December 2001, Social Security’s trust fund grew to $1.2 trillion with the assets being held in “special issue U.S. Treasury securities,” 2) “Under the intermediate assumptions the... Trust Funds, individually and combined, are expected to be adequately financed over the next 10 years, with large and increasing annual surpluses over the period,” 3) the trust fund was expected to peak at $3,382 billion at the beginning of 2011, and 4) under the high cost assumptions the DI (Disability Insurance) fund would be exhausted in 2015 and the OASI (Old Age Survivors Insurance) fund in 3032.
How did the political magicians manage this? A 92 year old surviving widow was taking in some $2,600 per month as of July 2002. Someone retiring at age 65 in 2002 -- and who had paid the maximum amount into Social Security for 35 years -- will be receiving something on the order of $1,661 per month. The latter individual, of course, is entitled to more than a surviving widow (all other things -- and times -- being equal).
Apparently, there has been a massive reduction in benefits. This could be the wave of the future, such that by never admitting a problem, the benefits are reduced each year and the bulk of the funding problems are solved. This scenario is greatly aided by the fact that most people have no idea how to calculate their benefit -- even knowing all of their wages from the past -- and thus are not tracking the steady reduction of their benefit package.
The inevitable insolvency of Social Security is a foregone conclusion by anyone who has studied the matter, and who, at the same time, is courageous enough to admit it. Obviously, Congress is, by definition, not in the latter category. Of course, our public servants do not have to rely on the Social Security system, and instead have their own pensions covered by the government on a totally separate financing arrangement. Thus Social Security going down the tubes is really not something they’re losing sleep over.
Practically speaking, Social Security probably has only a few more years before wholesale rebellion by those who are paying the bills -- who, incidentally, are fewer and fewer in comparison to those receiving Social Security benefits. But this is only a hint of the real problem. What happens when it becomes common knowledge that the Senior citizens are living quite well at the expense of those appropriately called Junior Citizens?
For example, 40% of Social Security Benefits go to households with incomes above the median national income for all households. At the same time, for a combined $30,000 income, senior households pay $790 in taxes annually, while “junior” households with the same income pay $7,035! Finally, Medicare represents a $310,000 windfall on average for today’s retirees. This windfall is progressively higher for retirees who retired in earlier years -- the earlier the retirement, the larger the windfall, reaching the range of $500,000 for the most elderly retirees.
The Barron’s article (mentioned above) also pointed out that the average retired couple in their early seventies had twice the income and five times the net worth of a family of four with the young parents in their thirties.
There are undoubtedly retirees who are very much in need of their Social Security. But the excessive payments to retirees who are very much not in need is what is jeopardizing those who need their monthly checks. It’s very important to realize that the original name of “Social Security” was “Old Age, Survivors, Disability, and Health Insurance” (OASHDI). Note the word, “insurance”. Not a guaranteed payout, but one there as a safety net if all the efforts toward providing for one’s retirement failed or came up short. The fact that “insurance” and its implications has been dropped from the Social Security lingo is due in large part to the American Association of Retired Persons who have used their political clout to steal from the children and grandchildren of the elderly.
Dietrich Bonhoeffer, a German theologian, once said that “The ultimate test of a moral society is the kind of world that it leaves for its children.” In our society, the kind of world the senior generation is leaving the junior one is a world with massive debt and an insolvent Social Security system (among a plethora of other disasters).
In every respect, the Social Security System is a Ponzi Scheme or Pyramid Scam -- both of which are highly illegal throughout the nation. The fact the American Association of Retired Persons has actively and strongly encouraged the federal government to commit this continuing crime, is not likely to endear senior citizens to their juniors. There is even the potential for a generational war, between the haves (i.e. the Senior citizens) and the have-considerably-less generation (the Junior citizens).
In the final analysis, the only viable Social Security available to the Baby Boom and later generations is going to be their friends. Unfortunately, there is the very real potential that many of these friends of the Juniors citizens will not be the retirees who preceded them.
An enlightening news article (Fort Collins Coloradoan, July 20, 2001) reported on a preliminary conclusion of a presidential commission on the Social Security system. The opening paragraphs of the article read:
“WASHINGTON -- Social Security cannot meet its promise to future retirees without reducing benefits, increasing taxes or massive governmental borrowing, a presidential commission said in a preliminary report Thursday.
“The report said Social Security faces a ‘fiscal crisis and a crisis of confidence’ if it is not overhauled soon. It also laid the groundwork for a final report later this fall to recommend a plan to let younger workers invest a portion of their payroll taxes in the stock market.
“‘The system is broken,’ wrote the commission’s co-chairmen, former Sen. Daniel Patrick Moynihan, D-N.Y., and Richard Parsons, an executive at AOL Time Warner and a Republican.
“The report said workers and retirees do not own their benefits and have no legal claim to them.”
Reread the last sentence. Surprise!
In other words, Social Security is not a nest egg for retirement. Retirees have no legal claim to anything in the Social Security system. The presidential commission’s makes this point in the following paragraph:
“What they have is a political promise that can be changed at any time, by any amount for any reason, said the report, written by staff members with input from commission members.” [emphasis added]
Small wonder that there is a “crisis of confidence” as well as a fiscal crisis. Fundamentally a Crisis in American Government. No one should wonder why anyone who has studied the system should find the system untenable.
Again, the only viable social security is your circle of friends.
But it gets worse. Later in the newspaper report, it says:
“The start of baby boomers’ retirement in the coming decade will put a strain on the pay-as-you-go system. By 2016, Social Security will collect less in payroll taxes than it will pay out in benefits and will have to rely on its trust fund of government bonds. The program is projected to run out of cash in 2038.”
“The draft report argues that the trust fund contains only promises of future funds and no real assets because the surpluses were lent to the federal treasury to cover budget deficits.” [emphasis added]
“Social Security could redeem government bonds in the trust fund to pay full benefits until 2038, but revenue must be raised to do so, which means tax increases or borrowing, the report said.
“‘What is important economically is not the amount of bonds in the fund but the real resources backing these bonds.”
There are several points to be made here:
1) The 2016 date for the pay-as-you-go system is only valid if the assumptions on which they are based are true. Variations in inflation and other economic variables (none of which can be predicted with anything resembling accuracy) could drastically change the date -- including having to dig into the “trust fund” to pay current bills long before 2016. Furthermore, the estimates a year later suggest a 2013 date!
2) The current emphasis of the report is to promote the idea that “People can do better if they own their own retirement nest egg,” i.e. invest in the stock market instead of Social Security. But if they do this, then a large percentage of the Social Security income will be diverted to privately-controlled investments, and thus the day of reckoning for those already on Social Security will be much, much earlier than 2016.
3) If the Baby Boom Generation begins investing its retirement money in the stock market, and everyone knows this, then what are the expectations for the value of the stock market when it comes time for everyone to begin divesting themselves of stock in order to fund their retirement? With everyone knowing that between 2005 and 2010, there will be the beginning of a massive withdrawal of funds, the only direction for the Dow Jones Industrial Average (and every other average) will be down.
4) The current excess money being collected by Social Security is being funneled into a exceedingly high risk venture, i.e. the federal debt. It is paying for deficits when the current administration used an illusionary 1.35 trillion dollar surplus for political purposes [and when the surplus is now a several hundred billion dollar deficit], instead of paying off the massive multi-trillion dollar national debt. Expectations that the Social Security program will actually be able to redeem their federal bonds -- some 3.4 trillion dollars worth! -- may not be based on reality.
5) The real key is that there are NO REAL RESOURCES backing anything; neither bonds nor the Social Security trust fund. It’s nothing but a promise of blue sky.
“‘Social Security must ultimately come to rely on real financial assets to provide benefits, not just political promises,’ presidential economic adviser Lawrence Lindsey said in a speech at the Federal Reserve Bank of Philadelphia.
“Added Treasury Secretary Paul O’Neill: ‘It’s just wrong to mislead people with promises of ‘trust the government, you’ll be fine.’ ‘ “
These words have the ring of truth, even if the reason for their utterances are likely to be based on promoting the White House plan to allow much of the future income to Social Security being diverted to other areas -- specifically the stock market.
“Opponents accused the White House and the commission of trying to manufacture a crisis, scare the public and make the stock market idea easier to sell.
“The report ‘puts forward a fundamentally flawed and biased view’ of Social Security, said AARP Executive Director William D. Novelli. ‘It implies that the program is riskier than private investment. It recycles old alarmist arguments that portray the financial shape of Social Security in the worst possible light.”
Just as Lindsey and O’Neill cannot be trusted to say the truth -- due to their grotesque conflict of interest and involvement in the White House’s political agenda of priming the stock market for the greatest crash in history -- neither can Novelli be trusted, when his primary aim is to keep the money flowing for his constituents, i.e. the American Association of Retired Persons. [Of course, O’Neill has now been replaced by Snow.]
<http://money.cnn.com/2002/10/10/retirement/social_security_abstract/index.htm>, aka MONEY Magazine, has weighed in with its own take. Walter Updegrave (I love that name!) has recently penned an article entitled, “Your greatest retirement fear; Can you count on Social Security?” [October 11, 2002]
NEW YORK (MONEY Magazine) - If you want to rile Dean Baker, co-director of the Center for Economic and Policy Research, just suggest that the Social Security system is in dire straits. Sitting in one of the center’s cluttered fifth-floor offices in the Dupont Circle neighborhood of Washington, D.C., Baker is obviously incensed at the notion. “The idea that the system is on some precipice is just not true,” he said.
Just a few blocks across town, Michael Tanner, director of the Cato Institute’s Project on Social Security Privatization, sees the situation, shall we say, somewhat differently. “Taxpayers are putting money into a program that cannot pay the benefits promised to them,” he says. “That’s a problem they’re facing now, not just down the road.” Tanner believes the system needs to be redesigned as soon as possible to allow working Americans to invest some portion of their Social Security taxes in stocks and bonds.
Welcome to the great Social Security debate, which amounts to nothing less than a battle for the soul of the system. At issue is what type of retirement program we will rely on: a “social insurance” plan much like Social Security today, in which workers support retirees in the expectation that the next generation of workers will do the same for them -- or a system that operates more like pension funds do, investing money today to accumulate assets that will support us when we retire. [The latter is a very bad idea! When the baby boom generation wants its retirement, they will need to sell those stocks and bonds, and the markets anticipating this sell off will collapse -- plummet to the bottom!]
To know what we should do next, you first have to understand how the system works. [Duh!] What follows is an adaptation of a story that ran in the Fall 2002 issue of MONEY Magazine. For the complete version, click here.
How the system works
Social Security is massive in scope. It churns out checks that average $720 a month to more than 46 million people, a number that includes not just 32 million retirees and their dependents, but nearly 7 million survivors of deceased workers and 7 million people with disabilities. The program’s design, however, is fairly simple. It collects money from workers in the form of payroll taxes -- currently 12.4 percent, split equally between employers and employees, on a maximum of $84,900 in pay -- and receives a portion of the taxes that higher-income retirees pay on their benefits.
If the system takes in more in taxes than it needs to pay out, the excess is used to purchase Treasury bonds that can be redeemed at face value at any time, even if interest rates have climbed. Those bonds make up the famed Social Security trust fund.
Where we stand
For the moment at least, Social Security is in good shape. [Dream on!] This year alone, the administration projects it will collect $545 billion and pay out $465 billion, boosting the value of the bonds held by the Social Security trust fund to $1.4 trillion. This situation will begin to reverse itself in 15 years, as benefit payments start to outstrip income and surpluses give way to deficits. There are several factors contributing to this reversal of fortune. First, earlier generations of retirees received overly generous payments. Second, birth rates have declined while life expectancies are on the rise. [emphasis added]
What all that means, according to estimates by the Social Security trustees, is that beginning in 2017 the system will have to start relying on the interest on its cache of Treasury bonds and then cash in the bonds themselves to cover benefits. The trustees calculate that the trust fund will last until 2041.
That doesn’t mean Social Security would be bankrupt, however, as is sometimes reported in the press. Payroll and income taxes will continue to flow in just as before. It’s just that those taxes won’t be enough to pay full benefits; they would provide just under 75 percent of what’s currently scheduled.
The situation would worsen from there, as costs begin to outstrip income to the system. A tax hike to make up the difference would be a short-term fix and potentially leave future generations to grapple with a deficit more than twice as large as the one we face today.
So what’s the solution? Creating private accounts within Social Security has plenty of vocal supporters -- but it also faces high political hurdles. Its champions want to give you the option to invest some portion of your payroll taxes in an account that you, not the government, would own. In effect, you’d be saving for your own retirement, much the way you do when you invest in IRAs and 401(k)s. You would also have access to a broad range of investment options, such as stock and bond funds. [Real estate?]
Last December, the President’s Commission to Strengthen Social Security recommended three models of private accounts in December 2001, one of which -- Model 2 -- is generating the most interest. Without going into the plan’s myriad details, here's the gist of how it would work.
You could voluntarily direct 4 percent of your Social Security payroll taxes into a personal account, up to a maximum of $1,000 a year. The rest of your taxes would continue to go into the Social Security system. You would decide how to invest the money in your private account, presumably divvying it up between stock and bond funds. If you chose this option, however, you would have to give up a portion of your traditional Social Security benefits.
Would you be better off under this system than our current one? The commission says workers opting for personal accounts can reasonably expect to collect larger benefits than those who stick with traditional Social Security.
But privatization would have to tap general tax revenue, at least temporarily, to keep the trust fund solvent. That’s because letting people now in the work force fund private accounts means diverting some payroll taxes from the Social Security system. That, in turn, means the government would have to come up with other money to pay current retirees.
What it means for you
So what are we to make of all this -- the conflicting visions, the jumble of numbers, the projections that stretch out longer than most of us will live? The place to begin is with this sober assessment: Even if 2017 seems far off, in the world of retirement planning, 15 years is not the distant future. And although approaches to fixing the system are dramatically different, there are two common threads: First, you can expect to continue to earn Social Security benefits. But second, they will be getting smaller.
Still, benefits for people already retired or nearing retirement are by and large secure -- any cuts would likely be indirect, in the form of higher taxes. The rest of us, however, are much more likely to see our benefits scaled back from what we’re expecting. It’s not unreasonable to factor in cuts of, say, 25 percent or so into your long-term planning -- and then ramp up your own savings to close that gap.
Otherwise the two main options to reform Social Security present different risks and potential pitfalls -- both to individuals and to the retirement system as a whole.
Let’s start with private accounts. In return for the freedom to invest your own money, you have to take on market risk in yet another part of your retirement portfolio. Even if you invest wisely throughout your career, a market setback on the eve of your retirement could force you to scale back your standard of living considerably, as many retirees have had to do recently. [emphasis added]
And it’s important to remember that we can’t all boost our returns by investing in stocks. If hundreds of thousands of private-account owners begin funneling vast amounts of money into the stock market, all other things being equal, stock prices would rise, dampening the potential for future returns, while the opposite would happen with other assets such as bonds. So we can’t boost the returns to society as a whole simply by shifting from one asset class to another. Stocks can’t save Social Security.
Finally, it’s possible that, as people see the balances of their private accounts swell, they might feel so flush that they save less in other accounts, much the same way the American savings rate dropped during the 1990s bull market.
Sticking with the current system may seem like a more certain bet -- at least one portion of your retirement is not riding directly on the financial markets. Today you can go to the Social Security Administration’s benefits calculator, plug in some information about yourself and get a precise dollar figure of the benefit you’re scheduled to receive. But this figure is no more certain than the commission’s private-account projections. More than 40 years ago the Supreme Court ruled that policy makers can change the benefit formula to reflect shifting conditions. So Congress can cut benefits anytime and has done so several times over the years. [emphasis added] Lawmakers don’t come out and say this openly, of course, but by raising the age at which participants can collect full benefits or by subjecting Social Security benefits to taxes, that’s what they’ve done.
Eventually, we’re going to have to make some decisions, as a nation and as individuals. The future of Social Security -- and by extension the retirement security of this and future generations of Americans -- hangs in the balance. And the longer we put off dealing with reforms, the tougher the adjustment will be, no matter what type of retirement system we choose.
All of the numbers, assumptions, and other diversions which suggest we have another ten to fifteen years left before the Federal Government has to begin using higher taxes in order to pay the Social Security debt, are inherently flawed. Specifically, they do not account for George Bush’s massive tax rebate of 2001, the economic aftermath of 9-11-2001, and the recession which began in 2001 and continued into 2002. The disastrous economic news has been effectively eclipsed by the “war on terror”, but this is temporary at best.
There is no real solution.
Simply put, the demographics and mathematics do not have a political agenda, but they can be counted on to guarantee that we will soon see the catastrophic collapse of the worlds greatest “Ponzi Scheme” (the ultimate scam whereby early investors are paid off by later investors, without all the invested money ever producing anything of value).
On top of the irrefutable laws of mathematics is the crisis of confidence, the stunning Crisis in American Government, whereby the individuals being fleeced by the current Social Security System decide they are not sheep and thus quit paying into the system. I.e. the “crisis of confidence” should speed up the day of reckoning considerably.
A good guess is that “OASHDI” will be history (except for the charges, counter charges, and denials) on or before the end of 2012 A.D..
In the meantime, be kind to your current friends, make more friends, and keep in touch with everybody.
2003© Copyright Dan Sewell Ward, All Rights Reserved [Feedback]