Social Security’s Bleak Future Is Inevitable

The Republican Party’s attempts to “fix” the Affordable Care Act (Obamacare) have been nothing short of disastrous. And if it weren’t for the seriousness of the issue, it would be downright hilarious.

Whether you agree the government has a role in healthcare or not, it should be clear to everyone that the federal government has no idea how to solve the myriad problems they themselves create.

Incompetent Washington bureaucrats have only made health care worse in America. And sadly, these same bureaucrats will do everything in their power to maintain the status quo. But their incompetence isn’t just relegated to the healthcare debate. 

The problems in healthcare mirror the problems of Social Security (OASDI) — although social security’s unfunded liabilities are orders of magnitude the size and scope of healthcare. Unfortunately, the end-result will be the same.

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What Is That End?
A few weeks ago, The Social Security Board of Trustees recently released their annual report on the health of social security. The results should concern every American, but none more so than Americans born after 1970.

The report showed that 171 million Americans (or roughly half the population) paid into the program via their FICA taxes in 2016. Together, they paid taxes totaling $869 billion to social security last year.

On the other side are the recipients of Social Security benefits. These include American retirees as well as those collecting survivor and disability benefits. Last year, there were more than 61 million people on the receiving end of social security.

And here’s where the problem starts. 

The 61 million people receiving benefits collected more than $922 billion — or $53 billion more than the government collected in taxes. To offset this difference, the government sold $88 billion in Treasury securities. 

Next year, the Trustees expect the deficit to grow to $60 billion. That will require the issuance of another roughly $100 billion in Treasury bonds. In other words, the national debt is growing because of Social Security, something our progressive friends on the left deny with fervor. 

Why? They’ve been misled to believe that the trust fund holds enough money to offset Social Security deficits caused by retiring Baby Boomers. They believe the trust fund will guarantee benefits until 2034. 

Here’s Why They’re Wrong
The social security trust fund is nothing more than a financial ledger detailing the cumulative surpluses over the life of the program. To grasp this, you need to understand the 1937 Supreme Court ruling on Helvering vs. Davis

#-ad_banner-#In this case, the Supreme Court ruled that Social Security was not a contributory insurance program. The Court ruled, “The proceeds of both the employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way.” 

In other words, politicians have been free to use FICA taxes to fund any government program they choose. And they violate no law by doing so. FICA taxes have NEVER been set aside to pay the future claims of retirees. The program is nothing more than a payroll tax on employees and a welfare program for its recipients. 

So what about the trust fund?

Currently the “trust fund” claims to hold assets worth about $2.8 trillion. Now, if these were marketable assets, they would be sufficient to fund the program’s deficits without raising the national debt. But the problem is they aren’t marketable. 

A Web Of Bad Economics
Whenever the Treasury sells bonds to the public, the buyer loans the government the par value of the bond ($1,000). In other words, real money changes hands.

Now, in exchange for providing this money to the government, the buyer is entitled to receive semi-annual interest payments based on the coupon of the bond. So, if a buyer loans the government $1,000 at a coupon rate of 3% for 10-years, the buyer will receive two payments of $15 each year for the next ten years. 

Of course, once the bond matures, the buyer receives the last payment of $15 in addition to the return of the original $1,000 loan amount (principal). 

Unfortunately, the last time the government used marketable bonds for Social Security was 1980. Since then the Treasury has issued non-marketable bonds.

A non-marketable bond is a security the Treasury sells to itself. But there’s no exchange of money to make the loan. In other words, the Treasury doesn’t receive the par value of the loan ($1,000) from the Social Security administration. Nevertheless, the Treasury obligates itself to pay the principal and semi-annual interest payments to the Social Security administration. In economic terms, we say these bonds are unfunded. 

At present, the total unfunded liabilities of social security are $12.5 trillion, according to the most recent Trustee report. But since the $2.8 trillion trust fund itself is also unfunded, the actual unfunded liabilities of social security grew to $15.3 trillion in 2016.

That’s a nearly 13% increase over the 2015 numbers. Worse, that amount will grow exponentially as the last of the Baby Boomers hit retirement. So where will the Treasury get the money for future benefits?

The government will have to do what it does best. Beg, borrow, and steal. Mostly borrow. But at some point, the debt-to-GDP level will be such that no intelligent investor (or government, like China) will even consider buying our bonds. The risk will be too high, not to mention the interest rate to find suckers dumb enough to buy them. 

When that happens, the whole system comes crashing down. 

What does it all mean for those born after 1970? If you have any desire to live out your golden years with dignity, you’ll need to take your retirement planning into your own hands. Your future absolutely depends on it.

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