Social Security Revisited

Posted by Clyde Middleton on Jan 24 2009 Filed under Economy, Politics. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

Can the government fix Social Security? Better asked: Do they have any interest in fixing it? Rather than offer solutions, Liberals repeatedly demonize any attempts to fix the system through privatization. They seek to accomplish the unthinkable by convincing Americans that private ownership is somehow scarier than government ownership. And somehow they (with the aid of the liberal MSM) have succeeded. It appears that they would rather push the issue to the next Congress, the next Administration. But with significant deficits on the horizon, it can’t be pushed for long. If Obama has 8 years in office, he will leave in January 2017 – the very year deficits are due to begin. Seems like he has no choice but to address it.

The democrats have executive and legislative control. They now own this issue. President Reagan began the national discussion but only served to mend for a time yet not fix the problem.

“Problem”? Yes. Social Security is a Ponzi scheme as surely as Madoff’s $50 billion investment house. Let’s go through the cash flow. First, go here if you need a good overview.

Social Security is presently running a “surplus,” that is, it brings in more money from our paychecks than it pays out in benefits. Ordinarily, one would think this a good thing – a surplus is invested and those earnings increase the residual through the “time value of money” concept. But there is no investing occurring:

The accumulation of surpluses in the trust fund gives an exaggerated notion of Social Security’s ability to pay its way. These surpluses have been loaned to the U.S. Treasury in order to finance current government spending. In exchange, the trust fund receives from the Treasury nonmarketable securities that are useless as a means of forward funding. These “special issue” securities have no market price (they are not traded) and are backed by nothing of tangible value.

Rather than being placed into an escrow account, every dime of surplus is being used by the government to pay for current non-SS expenses. We’ve known this for a long time. The concept tossed around of a “lock box” was nothing but political grist. The money is ponzied through the government. How much cash is the government siphoning, and when will it dry up? Here’s some selected years (Actual and Estimate (e), US$ Billion):

The government is pulling not quite $100 billion in cash a year right now, and returning IOUs. The consensus from several articles indicates that 2017 is the tipping point between surplus and deficit. According to the link above, 20 years from now, in 2029, the annual deficit will reach half a trillion dollars. That’s more than President Bush’s last deficit for running the entire government and a couple of wars.

Here’s another crack at the some numbers:

• $4.0 trillion: This is the net present value of Social Security’s unfunded obligations through 2079. In other words, this is the amount of money that the government would need to have on hand and invested today so that it could make Social Security solvent when combined with the Trust Fund bonds and future payroll taxes.

• $5.7 trillion: This is the net present value of Social Security’s cash-flow shortfall through 2079. In other words, this is the amount of money that the government would need to have on hand and invest today so that it could pay Social Security’s promised future benefits through 2079 and pay back $1.7 trillion for the Trust Fund’s bonds.

• $5.0 trillion: This is the sum of the payments, in 2004 dollars, that the government will have to repay to the Trust Fund between 2017, when Social Security’s cash flow goes negative, and 2041, when the Trust Fund’s bond holdings are finally spent. In other words, this is the total cost to keep Social Security going even before the Trust Fund is empty.

• $12.8 trillion: This is the net present value of Social Security’s cash-flow shortfall: in other words, the amount of the money that the government would need to collect and invest today so that it could pay Social Security’s promised future benefits forever.

• $25.8 trillion: This number is Social Security’s total negative cash flow through 2079, in 2004 dollars. It does not account for Social Security’s continuing shortfalls after 2079.

How big are these numbers? The entire GDP of the US is presently $14 trillion. Yes, there’s some rather significant numbers on the table. The system as is will not work.

How do they fix it? Increase revenue (up the tax), decrease cost (reduce benefits), or a combination of both. The only other possibility is to phase out the program – further discussed below.

Let’s change gears from what the government does to what we get.

Who qualifies for Social Security retirement benefits? “For every $780 of wages you earn in any given year, you get one credit, up to four per year. Once you have 40 credits, you are eligible to receive full benefits when you reach age 65.”

What do you get in benefits? The actual amount reflects your earnings (get your individual statement here), so let’s go this route – What don’t you get? When you die, your Social Security income ends. Why is that important? Consider a person that worked from age 18 to age 60. They paid into Social Security their entire working life, and then die prior to reaching retirement. What do they get? Zero. Sure, I’m ignoring the $300 funeral benefit. In fairness, perhaps their surviving spouse can tap into the benefits if he or she doesn’t have their own. But the issue is this: The payments made into Social Security carry no cash value. A person can pay in tens of thousands of dollars over decades and her heirs would receive nothing. My father paid in for almost five decades and got five years of checks.

That is the birthplace of the privatization argument – which is the phasing-out of Social Security. If you have a mutual fund – ignoring Social Security for a moment – when you die, the full balance goes to your heirs. Nothing is lost. Social Security is asking us to trade our cash value for an annuity. Our cash value can create its own annuity, so the trade better be on good financial terms.

Here’s the return on investment for the Social Security funds paid in presuming a person lives to the mortality tables. See Table 1 – Present Law Scenario in the link. Of course, if you die before the Actuarial Table says you are supposed to die, well, the return drops – yes, live longer the return increases.

“??” – The source data is blank on these items.

I haven’t played with it, but here is a calculator that you determine your personal ROI.

With these income data, it seems that most of us are in the 2% to 4% Social Security ROI range – assuming we live to the Mortality Table.

So here’s the comparison: 2% to 4% return with forfeiture of your principal upon death v. market rate of return and keeping your principal upon death. Another comparison is this: Let the government keep your money with a promise to pay you v. keeping the money yourself.

The second comparison is easy. So what about market return? How about lending it to the government with interest? Somewhat ironic. Here’s the chart on T-bills:

I’m not running the numbers – eyeball the damn thing – seems historically much higher than Social Security (we know interest rates are artificially low right now), plus you keep all your principal at the end. No forfeiture clause. Die at 40, 60, or 80 – all yours. Mutual funds are available to spread the investment risk. Remember, this is not rocket science – we already do it with IRAs.

Another issue is this: Assume we were private now. From the SS Revenue numbers above, next year we would be pushing almost $800 billion more into the private sector. Now THAT is stimulus we can count on.

Social Security seems to be a good deal for the poor. As poverty is left behind, Social Security is less and less attractive. As a parent, I would rather have that nest egg building to leave my children rather than give it to Congress to build a Mob Museum in Las Vegas.

Share

Save

Related Posts

1. LP News, Wed 8/11/10 – Dems to run on Social Security? Please do.
2. Court clears suit to affirm voluntary Medicare, Social Security
3. ICYMI: CBO corrects Reid’s claim to savings as double-counting
4. Rep. Pence: “Defense Bill A Vehicle for Liberal Social Policies Wholly Unrelated to Our Country’s National Security
5. Sarah Palin does the right thing

Short URL: http://libertypundits.net/?p=2893