What The Government Doesn't Want You To Know About Social Security Benefits

by: ColoradoWealthManagementFund

Summary

The Social Security Administration is battling the concept of a legacy debt.

The PAYGO system allows people to inherit debt.

To avoid the public understanding this problem, they produced charts. The charts provide hypothetical portfolios with a fictional asset.

They use big words. The big words overwhelm most readers. The reading level was above a Master’s degree.

I broke it down. This article explains what they did and why it is wrong. It comes in below a sixth grade reading level.

The title will be justified. It will only take 1226 words. The Social Security Administration creates several public documents. These documents provide a credible data source. One of the latest documents blew my mind. It suggested Social Security Benefits were the best asset class for investing. The claim is absurd. There is no basis for this in reality. However, a little creative work makes it look real.

They provided the following chart.

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The goal on this chart is to move up and to the left. We can see the PAYGO asset is "outside" the red line. The PAYGO asset is their model of the value of social security benefits. The next chart suggests that most of the portfolio should be the "PAYGO asset."

What is the PAYGO asset? I will explain as we go. The acronym stands for: "Pay As You Go."

Now, look at the contents of the portfolio.

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The height of each line is the amount of that asset class in the optimal portfolio, based on their historical data. The PAYGO asset is never less than the second largest asset class. This took some first class BS.

Why Would They Bother?

They were responding to other literature. Specifically, they were responding to the "legacy debt" problem. This is a simple problem. The first recipients of Social Security Benefits contributed almost nothing. Instead, the system was "Pay As You Go." That was shortened to PAYGO.

They did not want the public to believe a basic accounting truth. Since the first recipients did not pay, future generations must receive less.

Imagine a scenario with only one person paying at a time. You pay in, and I take money out. When you go to retire, you'll need someone else to pay in. When they retire, they'll need someone else. This is a debt that gets handed from one generation to the next. The government created a debt inheritance. After creating it, they want investors to trust them as asset managers.

This Is Historical Fiction

Readers need to know that these charts are fictional. They use historical data. However, the PAYGO asset is not a real thing. It is a fictional asset. It exists solely to prove a point. I believe the conclusion was the starting point. Once the author knew what they wanted to prove, they built the asset they needed.

How Do They Hide Their Method?

Are you familiar with reading levels? We assess a child's ability to read by grade level.

Shane Snow put together a great piece on reading levels. He looked up several different books and a few references points. These will be familiar to readers. He ran a quick test on those sources to determine the reading level and reading ease.

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The reading level indicates the expected grade level to read the books. A higher score means the content is more difficult. As you can see, the Affordable Care Act ranked as grade level 13. That is a difficult piece. The reading ease metric is a little different. Scores go in the opposite direction. High scores for reading ease indicate something that is easy to read. Simple enough?

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Again, the Affordable Care Act was the most dreadful piece in the test.

There is a simple rule here. If you want someone to understand, break it down. If you do not want people to understand, aim for a high reading level.

How bad was the "article" from the Social Security Administration? I pasted the article into word, removed the notes and sources, and ran the test.

The evidence for those first few charts was too complex. The grade level was 19.3. To put that in perspective, graduating college is 16. Finishing a Master's degree is 18. You'll be working on a doctorate before this stuff makes sense.

If they wanted people to understand it, they could've used easier language.

I Can Read It

I learned financial analysis in an unusual way. I opened up quarterly filings and read them. From start to finish, I went through them. It is a unique skill. Please understand. Reading grade level 19.3 is still terrible. If the topic were not finance and economics, I would not be able to do it.

What Did They Actually Do?

To create the charts they wanted, the author used an imaginary asset. Leimer and Pattison created the original idea for this asset. They published in 1998. Published is the wrong word. The document cited is an "internal memorandum." Wonderful. Their work had the same goal. They created a unique asset that does not exist, and then used an index to represent it.

What Was The Asset?

The PAYGO asset represents fake returns. The wage and salary tax base grew at 3.1% per year since 1940. It grew at 2.9% per year since 1930. These are "real" returns, adjusted for inflation. The premise was that the wage and salary tax base kept growing. Therefore, a claim on a given percentage of it would grow at the same rate.

Of course, those numbers are only averages. They are geometric averages. Compounding uses geometric averages. They are slightly smaller than the regular average.

Why Is That So Wrong?

If the government has the authority to levy taxes, why can't they do that? Can't they just keep taking from people to fund their obligations? The problem lies in the rate of return. Real aggregate wages and salaries grew at those rates. What are "real aggregate wages?" This is the total for all the people in America. If you put every person together, that would be the growth rate.

The problem is that the growth rate is not constant. Of course, they knew that. They modeled the standard deviation. However, they ignored the rules. They didn't look at the bias in the data. There has been a strong trend towards a lower population growth rate. There has also been a strong decline in the growth rate of wages per person.

Was This Article Hard?

I ran the reading level test on this article.

I went for easy. I wanted people to understand. The goal of writing is to convey information.

Sum It Up

The legacy debt is a real concept. The PAYGO system is responsible for the legacy debt.

To provide ammo to anyone that would support them, the SSA provided fictional charts. The charts rely on an imaginary asset.

They argued that a PAYGO system is a great tool. The portfolios used historical growth rates in aggregate wages. The growth rate on those wages is stagnating. Real wage growth is weak and population growth is slowing. There is no proof that this trend is over.

Investors need to remember the first rule of investing. Past returns are no guarantee of future performance. That is especially true when the asset is a fictional construct.

Disclosure: I am/we are long THE IMAGINARY PAYGO ASSET...APPARENTLY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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