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Social Security… or Insecurity?

A lucid discussion on how to save social security in the midst of financial chaos with the dollar is certainly lacking with the current Republocrat establishment.  Following their silly “desperado economics” policies, both Democrat and Republican politicians shy away from this topic as the undeniable consequences are perceived to yet be years away.

This presentation briefly reviews the history of social security, examine its problems, and I will suggest a solution in the conclusion.  Please bear in mind my suggestion is merely a suggestion – a mature, nationwide discussion on social security needs to be held.  This presentation can be downloaded in PDF format from Scribd or from here.  Some of the graphics are a bit blurry – my apologies – but at the bottom of the article there is a slideviewer embedded.

While the original concept of “social security” was begun in earnest during Bismarck’s Germany, in America the program was formally begun when President Franklin Delano Roosevelt signed the Social Security Act into law on August 14, 1935 in the midst of the Great Depression by stating, “We can never insure 100% of the population against 100% of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”  The way the scheme would work was by taxing current salaries to pay stipends to both retirees and (in theory) themselves following retirement.

An economist, Milton Friedman, used to frequently state that there is no such thing as a free lunch.  Social security began as a bona fide Ponzi scheme on January 31, 1940 when the first monthly retirement check was issued to Ida May Fuller of Ludlow, Vermont.

Fuller, a legal secretary, retired in November 1939. She started collecting benefits in January 1940 at age 65 and lived to be 100 years old, dying in 1975.  Fuller worked for three years under the Social Security program. The accumulated taxes on her salary during those three years was a total of $24.75. Her initial monthly check was $22.54. During her lifetime she collected a total of $22,888.92 in Social Security benefits.

However, as much as the scheme was to Fuller’s benefit, it was certainly no free lunch — Fuller’s unearned benefits obviously came from the labor of others.

Such a scheme is not sustainable over the long-term, and sure enough, under Democrat President Jimmy Carter in 1977, the social security program faced its first insolvency.  By raising the payroll FICA tax from 2% to >6%, Carter boldly proclaimed: “This legislation will guarantee that from 1980 to the year 2030, the Social Security funds will be sound.”

Not exactly until 2030.  Just six years later, Republican President Ronald Reagan would face social security’s second insolvency.  Reagan was forced to accelerate the Carter FICA tax increases, raise the retirement age, and began manipulation of the CPI (Consumer Price Index).  This brings us to an important point that cannot be understated.

The government via the banking system creates dollars whenever it wishes to do so.  The dollar is not backed by anything.  These new dollars increase the money supply, which in turn tends to increase the prices of all goods and services.  When retirees who paid into social security collected on the program, they found that the prices of food, clothing, and shelter had risen.  The government, by measuring prices nationwide, increased social security payments by the annual inflation number from the CPI statistic.

As John Williams’ Shadowstats website demonstrates, the government manipulated the CPI characteristics by the above four methods.

  • With “basket weighing changes,” the government would reduce or expand the weighing percentages of a component in its favor.
  • The “Let Them Eat Hamburger” substitution method is done during recessions where bureaucrats rationalize that citizens will prefer hamburger over filet mignon – or ribeye steak – when they cannot afford it so easily.  This is an illogical practice when trying to measure price increases – remember, the CPI is meant to capture price increases for a specific basket of goods.
  • “Intervention Analyses” are done by the government to “normalize” or “correct” any price data.  For instance, while the price of gasoline can fluctuate wildly, the government always seems to understate the CPI when the gas price is soaring.
  • The “Thrill of Hedonics” is absurd.  In order to rationalize the higher cost of a new clothes dryer, the government claims its extra features – digital keypad instead of a spin knob, higher energy efficiency, etc. – neutralize any increase in price.  Check out this report on dryer “quality adjustments” paid for by your tax dollars.

The bottom line is that Williams’ work indicates that social security payments to current retirees should be nearly twice as high to compensate for the purchasing power of the dollars paid into the program while the retiree was working.

Many people living on social security have told me that they favor “lockbox” accounts so Congress cannot raid the Social Security Fund for its spending.  While this idea is certainly attractive, what would happen if one were to even bury a container of cash and then dig it up for retirement?  Again, the purchasing power of the buried dollars would have been destroyed by time, as this chart on the “Real Interest Rate” demonstrates.

When the inflation is higher than the interest rate on a bank account, the real interest rate is negative.  When the interest one could obtain from a savings account is greater than inflation by the money-printing of new dollars, there is a positive “real” interest rate.  Per the estimates from this article, the “real” interest rate has been negative since 1990, despite the government claims of low inflation.

This next slide is crucial to understand.  When the federal government does its accounting, it uses “cash-based” accounting instead of the “accrual” method used by most companies under GAAP (Generally Accepted Accounting Principles).  Cash-based accounting effectively gives a cash-in versus cash-out snapshot of government’s finances.  However, accrual-based accounting is needed for programs like Social Security and Medicare which have future liabilities (payouts to retirees) and future income (in the form of taxes on citizens).

While the gross federal debt figure used by the media was $12 trillion in 2009 ($13 trillion at present), this in no way represents the true federal debt.  Under GAAP accounting and including Social Security and Medicare, the true deficit for 2009 was not $1.4 trillion but was instead $4.3 trillion.  The “small government” Republicans under Bush own the history’s largest-ever deficit with $11.0 trillion due to warfare spending and the prescription plan expansion of Medicare Part D.  (Source with data taken from USTreasury report here)

This slide demonstrates that Social Security is currently undergoing a rapid shift in the number of beneficiaries per 100 workers.  While the historical was about 30 beneficiaries for every 100 workers from 1970-2009, this will now ramp >45 as the Baby Boomer generation begins retiring.  This graph is taken directly from the government’s 2009 Social Security Trustees Report on page 162/254.

The true national debt of unfunded liabilities accumulated by the Social Security and Medicare programs is $107 trillion, taken from a Treasury Department document on page 178/254.   The Social Security (OASDI) segment is $17.5 trillion, while Medicare accounts for the remainder.

However, even on a cash-basis, the social insurance funding is unsustainable.  From the IRS 1040 form, 30% of all taxes (inlays) were social-insurance-related, while 37% of all outlays were social-insurance-related in 2009.  Of course, in 2009 the outlays were much larger than inlays due to deficit spending by over a trillion dollars. (Page 101/105)

Due to the current institutional unemployment situation created BY the federal government, tax revenues are dropping.  If the government interventions are that discourage employment are not removed, additional decreases can be expected.  (Page 29/254)

Next, let’s examine the traditional political solutions that incorporate the “kick-the-can” to the next generation strategy, as the next generation is typically helpless to vote against it.  As outlined above, the government can still continue to manipulate the CPI figures to decrease the total payouts to beneficiaries.  If not enough dollars exist, the government can resort to printing dollars, which debases the currency used by everyone.  Please remember this solution is no panacea – when dollars are printed, the prices of goods rise, so over the long run the government’s money-printing is to no avail.

Other political solutions include raising the retirement age, raising the FICA flat tax rate from 15.3% to a yet higher rate, or raising the maximum payroll tax limit – currently social security taxation ends after the first $106,800 earned in a calendar year.

However, the statesman must examine the social security problem from a different angle than a traditional politician.  One must always begin with the end in mind, and it is my opinion, after surveying the long history of social insurance in America and elsewhere, that the current program should be ended but certainly not in an abrupt manner.

We must start by acknowledging the social contract.  Although the contract was not a mutual one, those who were forced to pay dollars into the plans for many years.  The purchasing power of these dollars has been depleted over time, making the actions of government hardly separable from robbery.

Likewise, the generation now entering the workforce to pay these beneficiaries can see the charade for what it is — they assume they will be treated worse than the current set of retirees, and there are few recent college graduates who believe they will see the benefits listed in their social security report.

The only politically-viable solution to phase social security out while salvaging the safety net for the retired is to make the entire Social Security program optional to the public and have a gradual phase-out over the next 40 years.  This means that the higher in age a beneficiary is, the higher percentage of promised payout would be made.  Below a certain age, this would be less than 100% and would continue to decrease with age.  As an example, 100% of benefits would be paid for >60 years, 90% of benefits for >50 years, and so on.  Those who opt out of the system – in exchange for control over 12.4% of their pay in the present – lose their claim to the dollars that were previously paid into the system.

In conclusion, unfortunately Social Security is not the sole challenge faced by America.  If it were, the country would be in excellent shape as the Social Security problem is – by itself – not particularly problematic.  However, the key risk is the integrity of the dollar.  Without sound money – or a stop to the printing presses – my message is the future of the social insurances is severely at risk.

In my congressional race, I am the only candidate who has a sensible plan (or for that matter, any plan!!) on how to address the challenges facing Social Security.  I am also the only candidate offering the novel-yet-simple “Our Open Office” concept which could be used to gather feedback and new ideas from citizens.

[For another presentation on how to downsize the government, please see this presentation here.]

Jake Towne – Social In Security Talk in Palmer (June 2010)

Disclosure: No positions