Thursday, November 3, 2011

Social Security's Shortfalls, Pitfalls, And Political Class Pratfalls

Social Security Shortfalls

Social Security's financial situation was in the news recently even if it did not get any big headlines. According to an article in the Washington Post on October 29, 2011, written by Lori Montgomery, the Social Security program turned cash flow negative in 2011. In other words, for the first time in decades, the program will take in less wealth and revenue in Social Security payroll taxes than it will pay out in benefits.

The amount of 2011 shortfall is estimated to be about $46 billion. The current payroll tax holiday in effect will add another $105 billion in negative cash flow and if Obama gets his way to extend the tax holiday, that will add another $267 billion to the Social Security cash flow problem. Thus, the short term hit on the Federal government's cash flow is about $418 billion. This shortfall would place an additional tax burden of about $3,600 on every American household.

As more and more Baby Boomers enter their retirement years, the ratio of retirees to working Americans, those that finance Social Security, will increase, placing additional financial burdens on the system. Despite this reality, the political class continues to either not act responsibly to find a financially viable solution to the ever growing problem or has no clue on how to fix the problem. In either case, the problem is likely to get bigger and bigger as the political class gets more and more afraid to make the courageous decisions to remedy the situation.

From this point forward, until and if the political class fixes this drive towards insolvency, Social Security will add billions and billions of dollars to the country's $15 TRILLION national debt. It will require the Treasury Department to sell more T-bills to people and countries like China to finance this cash flow shortfall.

Social Security Pitfalls

Most Americans think that they have a type of "retirement savings account" with the Federal government. This imaginery savings account supposedly contains all of the money and wealth that has been taken from each American and given to the Federal government to hold "in trust" until each American retires, at which point all of us can live happily ever after.

Americans have this impression of wealth since the government sends them a statement of their "savings account" on a regular basis. This statement implies that each of us is entitled to the monthly amount printed on the statements once they retire.

But the money that was taken from us during our working years has been spent long ago by the American political class, often on special programs and earmarks that did nothing but keep these politicians in office. There is no mountain of gold, millions of stock shares of  shares, or other real wealth in the Social Security trust fund. The $2.6 TRILLION trust fund is nothing more than accounting IOUs from the Treasury Department to the Social Security Administration.

But this pitfall of understanding, is only one that could have dire consequences on our perceptions and expectations of Social Security. Consider:
  • The Social Security official website clearly states that "Congress can change the rules." Thus, your monthly statement is no more than a statement of the rules and laws today, Congress can change the rules and laws, and how much an American receives each month, anytime it wants to. Given the declining financial stability and shortfalls of the program, changes are highly unlikely to include increased benefits in the future. Thus, you can probably assume that your latest statement is a best case scenario.
  • In 1970, the Supreme Court ruled there are no "accrued property rights" inherent in the process. In other words, Social Security payroll taxes collected during your working years don't confer on you a contractual right to any level of benefits when you retire so don't even think about suing for the benefits that may have been promised to you in the past. The Supreme Court has already ruled on the topic.
  • The Supreme Court has also ruled, back in 1937, that Social Security taxes "are to be placed into the Treasury like internal revenue taxes generally, and are not earmarked in any way." Thus, don't think about suing over the "held in trust" propaganda, the Supreme Court back in 1937 had already ruled that the political class can co-mingle and waste Social Security funds just like it does with regular income tax funds.
Lots of pitfalls before we each collect our "savings held in trust" by the Federal government and the American political class. The Washington politicians, the Supreme Court, and reality will keep the pitfalls deep and numerous.

Political Class Pratfalls

The biggest pratfall recently came out of Harry Reid's mouth when he declared that Social Security was in fine shape, having $2.6 TRILLION in assets. But most sensible and intelligent Americans know that the $2.6 TRILLION is an accounting trick illusion. Jeff Jacoby, writing for Townhall on September 7, 2011, said it best:

"But the trust fund's assets are an illusion. Social Security doesn't own $2.6 TRILLION in gold bars or real estate or shares of Google. All it owns is Treasury IOUs. Those IOUs represent $2.6 TRILLION that the government has already spent and promises to spend again. But in order to redeem it again - to redeem those IOUs - Congress will have to raise taxes, cut spending, or go deeper into debt. Which is exactly what Congress would have to do if the Social Security trust fund doesn't exist."

Consider what the Congressional Budget Office recently stated:

"The assets of the Social Security trust fund do not represent any real stock of resources set aside for benefits in the future. The trust fund is a ledger entry, nothing more."

The really scary part of the above two quotes is that Harry Reid apparently does not understand the simple accounting of the Social Security system. He thinks there is $2.6 TRILLION laying around in the Federal government somewhere that we can just simply tap into.

If you do not recognize that a problem even exists or cannot understand the root causes of the problem, like Harry Reid's inability, it is next to impossible to solve the problem. That is the biggest pratfall of all, a supposed leader of the country cannot understand an issue that is simple to understand and will affect just about every American's life.

Shortfalls, pitfalls, and pratfalls. It should be apparent that the American taxpayer and retiree will become the biggest fall guys in the biggest Ponzi scheme of all time, the Social Security Administration.

Three simple steps from "Love My Country, Loathe My Government," would go a long way to fixing the problem:
  1. Raise the retirement age to 70, with hardship exceptions.
  2. Lower the Social Security tax rate but apply it to all forms of income, not just wages, without a cap in order to make the tax more equitable across all income groups, regardless of the source of that income.
  3. Deny benefits and checks to any American with a a net asset value over $3 million in order to preserve resources for those in true of need of Social Security support.
Mr. Reid, take note of how simple and fair it is to fix the process without any pratfalls.



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