Social Security: The end is here [MUST READ] Editors Note: Todays Daily is special. I had the chance to chat with PBRGs newest investment analyst, Dr. Richard Robinson. Richard is a professor of economics, former professional baseball player, and master speculator. We call him PBRGs secret weapon around the office.
Today, I ask Richard a vital question on everyones mind: Social Security...
J. Reeves: So where does the American public stand with Social Security? Will the baby boomers get all they expect from the program? Dr. Richard Robinson
From Dr. Richard Robinson, chief analyst, Mega Trends Investing: This is a tough question to answer without writing a book.
Social Security is in trouble. And not 15 years from now... right NOW!
In 2014, the Social Security Administration (SSA) took in $786 billion through the FICA tax... $73 billion short of the $859 billion needed to pay claims.
For the first time in history, Social Security is in deficit mode.
By 2026, the SSA will run up a cumulative deficit of $1.6 trillion.
Heres where this gets interesting...
Weve been told for decades the Social Security trust fund holds trillions in assets (cumulative Social Security surplus revenues since 1935) that are collecting interest.
At the end of 2014, we were told the trust fund owned over $2.8 trillion in assets.
This is a lie. There isnt one dollar in the Social Security trust fund. Nada. Zip. Zilch.
So where did the money go?
There are no laws requiring Social Security money be used solely for Social Security purposes. In 1937, the Supreme Court ruled (in Helvering v. Davis) Social Security was not a contributory insurance program:
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.
This means the United States government can (and does) use Social Security taxes in any way it deems appropriate.
The federal government has used this money to pay for increased spending at all levelsfrom defense spending to pay raises for government employees.
Still, Americans have a right to collect their Social Security in old age, right? Court gavel
Not true.
You see, in another Supreme Court ruling in 1960 (Flemming v. Nestor), the Court ruled workers have no legally binding or contractual rights to their Social Security benefits. The Court also indicated Social Security benefits could be cut or eliminated... at any time.
...the non-contractual interest of an employee covered by the [Social Security] Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments.
You have NO legal right to your Social Security. Never have, never will.
Now, this doesnt mean the government will suddenly stop paying Social Security benefits. Not now, anyway. (Suggesting an end to this system is political suicide.)
But the system is in imminent trouble.
In the past, politicians could kick the can down the road far enough that they could retire before the problems became evident. This is no longer the case.
Social Security has had two problems from the start... problems that no amount of political posturing can solve.
The first is retirement age. When the program was designed in 1935, the retirement age was set at 65. At that time, the average life expectancy was just 59 years. Most people wouldnt live long enough to collect benefits.
But the framers of Social Security didnt address the possibility life expectancies would increase. Today, the life expectancy in the United States is 78.8 years.
The second major problem is demographics. When Social Security began, there were 41.9 workers for every retiree. It isnt too difficult to fund a program where more than 40 workers support a single retiree.
But now, in 2015, there are just 2.8 workers supporting every person collecting Social Security benefits.
By 2030, the ratio will be 2:1. No amount of financial smoke and mirrors will prevent the system from collapsing under its own weight.
Some would argue Social Security is well funded through 2075. Theyd argue I use scare tactics because I have a political axe to grind.
So lets look at the Social Security trust fund assets.
According to the Social Security trustees, theres $2.8 trillion in surplus funds on the books. But remember, these are book assets, not actual dollars. The dollars were spent the minute the government collected taxes.
The Treasury Department took in dollars from taxes but paid the Social Security Administration in paper IOUs... redeemable on a future date.
Translation: The left hand of the government took money from the right hand of the government and promised to pay it back on some future date. And, until the payment is made, the borrowed Social Security funds earn interest. Treasury building
But the Treasury hasnt invested a single dime of the borrowed money. Theyve spent it all on current federal spending. And the interest being credited to the SSA? It isnt real... nothing more than an accounting fiction.
Any company doing its books in this manner would see its managers prosecuted and jailed. The day of reckoning for government fraudsters is fast approaching. Some jail time for politicians is desperately needed.
You must be wondering, if there were no real assets in the trust fund, how did the government plan to pay the funds liabilities?
These fraudsters thought they could grow GDP fast enough (and large enough) to cover future needs. The governments projected U.S. GDP growth is 5.1% every year for the next 12 years. That growth is supposed to cover the interest not actually accruing in the trust fund.
But theres a problem with this logic... something anyone other than a government bureaucrat could see a mile away...
The annual GDP growth rate of the United States hasnt come anywhere near a 5.1% rate in any year during the entire the 21st century. Coupled with ever-growing government regulations and a falling labor force participation rate... the government has zero chance of growing GDP at sufficient levels over the next 12 years. Its nothing short of a pipe dream.
This means the government will have to print money. Last year, it printed $73 billion to cover the shortfall.
Now, in the scheme of things, a $73 billion deficit in Washington is nothing. Were used to the inability of our public servants to balance a budget.
But Barack Obama has left the nation in even worse financial shape than George W. Bush did. In the 12 years after Barack Obama leaves office, the government estimates budget deficits will total $8 trillion... NOT including Social Security spending.
Printing $73 billion is easy enough to hide from taxpayers and credit rating agencies. Printing $8 trillion is borderline insane. It cant be done without destroying the economy.
Unable to print their way out of a hole, the government will finally be forced to come clean to the American people. This means significant pain for Americans born after 1960. Treasury building
If you were born after 1960, expect benefit cuts of at least 33% in the next 12-15 years. And if you plan to retire at age 67 (the retirement age for those born after 1960), good luck.
The math shows the retirement age will have to go to 72 to keep the system operating. For those hoping to retire early with reduced benefits, eligibility will likely move to 64 years of age or higher (66 is likely).
Thats the good news...
If you were born after 1970, expect whatever system is in force by your retirement age to pay a fraction of the benefits todays retirees receive.
You were born too late to get the same free ride as your parents and grandparents.
On the other hand, you will get the privilege of paying the bills of the four or five generations of retirees that preceded you. And thats thanks enough.
Poster Comment:
If you are counting on Social Security payments for your retirement, you can kiss your benefits and your butt good-bye. I get disability pay, and no way to know how much longer that will last.