Wednesday, August 24, 2016

The Quickly Approaching Collapse Of Social Security

Having turned 62 last year and now a monthly Social Security check recipient, I am especially interested in protecting that revenue stream that flows into my bank account. Since I paid into the Social Security fund for almost 50 years, I would like to get a lot of that forced payment back as soon as possible. But I have had concerns about the fiscal health of the Social Security process for a number of years, actually proposing three fixes to the whole Social Security Ponzi scheme in my book, “Love My Country, Loathe My Government.”

Why my concern? Two reasons: first, it is no surprise that tens of millions of Americans will soon be entering their golden retirement years and will be pulling down monthly Social Security payments which will put unprecedented financial pressure on the Social Security revenue stream and solvency. 

Second, politicians keep assuring us that the fictional Social Security Trust Fund will not run out of money until the 2030s. Not only do I not trust American politicians when they tell me anything but it is obvious to anyone who knows what the Trust Fund actually is knows that it is already bankrupt and empty, the 2030s claim notwithstanding. 

The Social Security process has been in a negative cash flow a situation for a number of years now, i.e. it has been paying out more than what it is taking in via Social Security taxes. And as the number of Social Security recipients increases over the next few years and the number of people paying Social Security taxes decreases, that cash flow deficit will only grow going forward.

This would be the time when the Trust Fund should kick in. But it has not kicked in since it has nothing in it and the cash flow deficit is being funded with general Federal government tax funds. Back in the 1960s, President Lyndon Johnson and the rest of the political class decided that it would raid the Social Security funds being set aside for future Social Security recipients to use for Johnson’s “Great Society” and the Vietnam War. Thus, they took the wealth and left future Social Security recipients with worthless IOUs from the Treasury Department.

How bad is the financial status of the Social Security process and the lies that the political class and government bureaucrats are telling us? David Stockman, who was the top economic advisor to the Reagan Presidency, recently analyzed the current fiscal situation of Social Security and his findings were not good, as he pointed out that reality in his article: “Funny Money Accounting—-Why Social Security Will Be Bankrupt In 10 Years.” The entire article from Stockman can be accessed at:

But can Stockman be correct? Wouldn’t the Washington politicians tell us what was going on and working on solutions? Ten years is not a long time as millions and millions of Americans enter their retirement years over those ten years. There can only be three reasons for their inactions:

  1. Stockman is wrong and there is no need to get upset and issue a call to action to save Social Security.
  2. The politicians do not understand the dire straits of the situation and/or are too inept to put together a solution.
  3. The politicians are too busy worrying about their careers, self enrichment, and greed and could care less of fixing what is an economic lifeline for millions of Americans.
Let’s review Stockman’s analysis and research to see if we see which of these three options are most likely:

  • The Social Security Trustees recently published their latest view of the whole system and said the trust fund now had life until 2034, a year later than they predicted last time around.
  • Which is really nothing more than fancy accounting since the Social Security OASDI funds (retirement and disability) spent $859 billion in 2014 but only took in via Social Security taxes $786 billion, a negative cash flow of $73 billion.
  • This was almost 10% of the revenue stream.
  • From 2015 through 2026 even the Trustees predict that the OASDI funding mechanisms will run a total $1.6 trillion deficit.
  • Since the Trust fund does not exist, this $1.6 trillion shortfall will have to be paid off by today’s kids and grandkids out of their future job wages and income.
  • These same kids and grandkids will also be paying off the current $20 trillion in Federal government debt that the political class has accumulated for them, doubling that debt load in just the past eight years of the Obama administration.
  • Stockman does a best case scenario where he deliberately and falsely assumes that the Trust fund does have real wealth in it but even with that assumption he forecasts that the trust fund goes dry in 2026, not 2034, an event that would theoretically require an immediate 33% cut in all Social Security payments to align revenues coming in with checks going out.
  • According to Stockman: “In short, the latest untrustworthies report amounts to an accounting and forecasting house of cards that is camouflaging an impending social, political and economic crisis of a magnitude not seen since the Great Depression or even the Civil War.”
Nasty business here, financial hardship for those depending on Social Security in retirement and financial hardship for those still in the workforce who have to pay more and more of their hard earned dollars to support the negative cash flow of the system. This is money that will not be spent on vacations, retail purchases, movies, business start ups, etc., money that is not available to grow a robust economy. Just a massive redistribution of wealth from the young to the old.

But is Stockman right, are things really this bad? He proves his point by looking at the numbers and showing that the Washington bureaucracy is making such outlandish assumptions in their cover up of Social Security’s ailing ways as to be almost criminal:

  • Stockman does agree with the Trustees’ estimate on how much the Federal government will have to pay out for the Social Security system in the next 12 years to cover payments and administrative costs.
  • This outgo is expected to be $15.5 trillion and is needed to cover the number of Social Security beneficiaries that will grow from 59 million to 79 million over the next 12 years.
  • He even agrees with the Trustees inflation assumption of between 2-3% a year which has been the historical run rate since the year 2000.
  • However, his first major disconnect is with the Trustees’ assumption that there is currently $2.790 trillion sitting in this hypothetical trust fund, money that he calls pure “confetti:” "In truth, there is nothing there except government accounting confetti. This figure allegedly represents the accumulated excess of trust fund income over outgo historically, but every dime of that was spent long ago on aircraft carriers, cotton subsidies, green energy boondoggles, prison facilities for pot smokers, education grants, NSA’s cellphone snoops, space launches and the rest of Washington’s general government spending machine.”
  • But now the math gets really crazy. Given there is nothing in the trust fund of value, the Trustees assumed that this nothing will earn $1.2 trillion in interest income over the next 12 years.
  • Let’s get crazier. This $1.2 trillion in interest computes out to an interest rate of 3.5% a year, a number that no one in the world is earning on interest income. For example, even a 10 year Treasury bond is paying out at a rate of only 1.4% today, far less than half of the interest rate that the Trustees assumed they would get and they do not even have a an asset to gain interest on.
  • But the most crazy assumption relative to all of the Trustees’ assumptions is yet to come. They assume that the national economy, the GDP, will grow at an annual rate of 5.1% every year for the next 12 years.
  • Given that the long term annual national growth rate is just over 3%, and only 2.8% since 2008, there is likely to be at least one recession in the next 12 years, and the attainment of 5% annual growth in a single year rarely happens, this assumption is laughable, it is what Stockman calls the “skunk in the woodpile.”
  • But they have to make this wild assumption in order to grow the economy and thus the Social Security revenue stream to meet their phantom 2034 goal for the non-existent trust fund.
  • Stockman’s following chart shows that the Trustees are assuming that for the next twelve years we will have the longest non-recessionary period in the history of the country, 207 months, i.e. not going to happen:

Business Cycle Recoveries Length- Click to enlarge

  • Stockman goes on to point out that there is likely severe deflationary pressure building through the world’s economy that will reduce, not grow nations’ GDPs in the future, putting more pressure on the Social Security revenue stream.
  • By using the 5.1% vs. the more realistic but probably too high 2.8%, the Trustees end up adding an incremental $7 trillion to the U.S. annual economy which mathematically solves a lot of shortfall problems but is totally unrealistic.
  • This is what Stockman calls "goal forecasting" where you start with an answer you need and work backwards to adjust the math assumptions to get you to that desired end answer, even if the resulting assumptions are ridiculous.
You get the idea, please go to the link above for a more in depth look at Stockman’s logical and sane analysis. But his analysis, simply using the Trustees numbers proves that no matter how you cut the data, no matter how you squeeze the assumptions, the government lied when it claimed to keep calm, everything is cool until at least 2034. 

The system is hurtling towards insolvency, it is now and will be forever more in a negative cash flow situation, the Trust Fund does not exist but is earning non-existent revenue on a non-asset, and the economic growth rates needed to keep thing in somewhat of a balance are ludicrous. 

As a result of this gross fiscal mismanagement going back to the 1960s and the Johnson administration, retirees are likely to get shorted what they were promised from the Social Security retirement fund that they diligently and legally paid into for decades. And that shortfall will either have to be made up by new, onerous taxes on our kids and grandkids or those in retirement are looking at a hefty monthly payment reduction.

And nobody, absolutely no one in Washington today or on the campaign trail has a plan. Or the attention span, to start addressing this dire problem. Which leads us to conclude that our third assumption above, “The politicians are too busy worrying about their careers, self enrichment, and greed and could care less of fixing what is an economic lifeline for millions of Americans,” is the reality of today.

To see our proposed changes to save Social Security, please go to where you can pruchase our book, “Love My Country, Loathe My Government: Fifty First Steps To Restoring Our Freedom and Destroying The American Political Class.”

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