|
My wife and I took
Social Security early. We figured we might as well take the money while
it was still available. Current events indicate it was a wise decision.
Social Security is in trouble.
I
read somewhere that Social Security payments started in 1940 with 1
beneficiary per 600 workers. By 2033 it looks as though there will be 1
beneficiary for every 2 workers. Our Social Security "surplus"
is projected to begin its inevitable downward trend in 2009. By 2018
Social Security will be running an operating deficit that will increase
with each passing year. There won't be enough worker income to pay for
the beneficiary outgo.
How did we get into this financial mess?
There
are three basic reasons.
Problem
One: Demographics.
We
keep having babies. After World War 2, returning GI's celebrated the joy
of life by starting the Baby Boom. By 1964 they, and their happily
nubile companions, had started a whole new generation that would shape
the American economy for the next 75 years. The Boomer generation
created outsized demands for diapers, bicycles, schools, cars, college
educations, jobs, housing and health care.
And
so here we are. Next on the Boomer agenda: Retirement.
Between
2008 and 2033 over the hill Boomers, their elders, and the 4.5 million
immigrants who came to America during the same period, will be hitting
the retirement rolls. Twenty three percent of the projected American
population. Eighty five million beneficiaries. They will all need food,
clothing, housing and medical care. Most will also need some form of
senior care before they die.
Problem
Two: Congressional prevarication.
Most
Americans believed they were buying old age and survivors insurance
based on rules set up by the 1935 Social Security Act. Each participant
had a separate account. Wage earners paid into their accounts under the
Federal Insurance Contributions Act (FICA). Self employed individuals
paid into their accounts according to the rules of the Self Employment
Contributions Act (SECA). Each account was backed by the financial
integrity of the U. S. Government. Benefits would be paid according to
the amounts credited to each account. Americans were led to believe that
Social Security would provide a financial foundation for their
retirement.
Big
mistake. Congress used the money to fund the Federal budget. It's gone.
Problem
Three: Social Security accounting is done with smoke and mirrors.
-
First
of all, it has been assumed that future deficits can be financed
with current surpluses. That assumption is false. Our inability to
switch even a portion of Social Security cash flow to private
accounts is a tacit admission that there is no actuarial basis for
the accumulation of individual account benefits. If Social Security
were actuarially solvent, then the adoption of private accounts
would simply mean we would be replacing one asset class with another
investment vehicle.
-
Second,
despite claims to the contrary, there is no such thing as a
"Trust Fund". Social Security "investments" are
merely bookkeeping entries in which one branch of the Federal
Government (the Treasury) promises to repay loans made to another
branch of the Federal Government (Social Security). Congress then
spends the money without regard for the ultimate value of the
underlying "asset" which may in fact be worthless - or not
even exist. Instead of requiring that our Social Security funds be
spent on revenue producing capital investments, Congress has simply
used the money to pay current expenses. Hence, any associated value
is only backed by the "full faith" of the U. S.
Government. Other than taxes, debt, or fund transfers from other
Federal accounts, there is no way to satisfy future claims.
-
Third,
it has always been assumed that the Federal Government of the United
States has sufficient credit to finance future Social Security
payments. That assumption as we will discuss below - is also
false.
Boomers will demand increased benefits.
Read
the Congressional Budget Office (CBO) analysis. About 25 percent of
Boomers are not financially prepared for retirement. They will have to
depend on Social Security for most or all of their income. Another 25
percent of the Boomer generation have some other income: a pension, a
retirement plan, an annuity or two, and/or some money in the bank. They
appear to have with a little luck, careful money management, and the
adoption of a sharply "downsized" lifestyle - the means to
survive their senior years. Retirement financing for the remaining 50
percent of our Boomer generation ranges from "adequate" to
"ample".
But
the CBO's analysis sugar coats the fact that probably 18 to 20 percent
of retirees will be living in poverty, and another 22 to 24 percent will
be living an economically deficient lifestyle. Forty four percent do not
have the means to replace at least half their pre-retirement income.
Over 60 percent will not be able to afford the medical and institutional
costs of old age. These people will have to survive on Social Security,
Medicare, Medicaid, welfare, and whatever income they can scrape
together. It will not be enough.
But
only a fool would think the Boomers will be content to suffer economic
indignity. Not the Me generation. Protest runs in the blood. And when
they do, Congress will do the politically expedient thing: increase the
benefits.
Everybody has a solution.
Congress
has a solution: squabble and pontificate.
The
Congressional Budget Office (CBO) has reported that it believes the
American Social Security program can fund scheduled benefit levels
through 2052. After that date, there will be a growing gap between
Social Security benefit obligations and available funds. Unfortunately,
all too many members of Congress look at this far distant date and
conclude there is no crisis. At least for them. They figure we can fix
Social Security by tweaking the benefits and increasing the tax income.
By the time 2052 rolls around, their success or failure will only be a
page in the historical record.
The
Congressional Budget Office has a solution: work longer.
"Every
additional year of work leaves members of a household with more income,
a shorter retirement to finance out of pocket, more time to save and
earn returns, and higher annual Social Security benefits, which are
largely tax-exempt. Taken together, those factors can substantially
reduce the private assets that the members of the household need to
accumulate to maintain their working-age standard of living in
retirement." (Reference: A series of issue summaries from the
Congressional Budget Office, May 12,
2004.).
The
Administration has a solution: reduce the benefits.
Decrease
the benefits of upper income retirees, make the benefit distribution
more "progressive", require Social Security applicants and
beneficiaries to pass an annual "means" test, increase the
participation age retirement, reduce the rate at which future benefits
accumulate, reduce Social Security payments by understating the rate of
inflation, and so on. In testimony before the House of Representatives
on February 25, 2004, Federal Reserve Chairman Alan Greenspan suggested
that a decrease in Social Security benefits would be
"prudent". To quote: "The degree of uncertainty
about whether future resources will be adequate to meet our current
statutory obligations to the coming generations of retirees is
daunting." ... "I believe that a thorough review of our
spending commitments--and at least some adjustment in those
commitments--is necessary for prudent policy."
As
for the "Private Accounts" proposal, it's been condemned to
legislative hell for no better reason than it would reduce the amount of
money that Congress plans to spend on future Federal Budgets.
Whatever
Congress Does It will fail to fix Social Security.
Unfortunately,
the acrimonious debate over Social Security is being conducted in an
environment of deliberate legislative ignorance. No one wants to deal
with the facts. Not the press. Not the Administration. Not Congress, the
Liberal Establishment, the NeoCons, or the Beltway Bandits. No one wants
to deal with reality.
That's
too bad. Painful as it may be - reality is our future.
It's all in the assumptions.
Look
at it this way. If you and I sat down at the kitchen table to predict
the future of Social Security we would have to do what the CBO, the
Social Security Administration, the American Association of Retired
People, or anyone else does we would have to make a whole bunch of
assumptions. We would have to make estimates of future job creation,
employment, unemployment, immigration, inflation, wages, income, Gross
Domestic Product (GDP), as well as retiree demographics, benefits,
retirement age, and supplemental income. Our kitchen table will be piled
high with sheets of paper on which we have made innumerable calculations
based on historical data.
But
the past will not be the future.
No
one and I mean not a single soul has dared mention the oil
depletion factor. Every set of assumptions has been based on the belief
that the next 25 years will be with some minor adjustments - just
like the last 25 years. That's really, really dumb. The next 25 years
are definitely NOT going to be anything like that last 25 years. And
because of this singular fact, every single published estimate of Social
Security income and outgo is just plain wrong.
Oil
depletion is real. Oil shortages will occur. And they will play havoc
with our economy.
GDP
On
a rate of change basis, GDP growth has been declining since the 1980s.
There is a better than even chance GDP will be negative for one or more
years long before 2025. So here we are, predicting that Social Security
benefits will be a certain percentage of GDP.
What
GDP?
Inflation
Inflation
will derail any Social Security plan. Unless Congress acts to reduce
benefits, higher prices will trigger increased Social Security payments.
But no one has been willing to factor in the inflationary impact of oil
depletion on the economy. Higher prices and shortages will increase the
cost of living. That's for sure. We can even use historical data to
prove our case. Two Middle East confrontations, one in 1974 and one in
1979, produced inflation rates of more than 10 percent.
In
order to stimulate a recessive economy and pay for the cost of
escalating welfare programs, Congress will add to the national debt.
Government spending will increase as a percentage of GDP. Bush, Clinton
and Congress will try to inflate the economy in order to avoid a
recession. What happens to the financial future of Social Security if we
have THAT kind of inflation? And by the way, how will Boomers in the
lower 50 percentile of income be able to cope with non-stop increases in
the cost of living?
Will
the sinister specter of hunger and cold become a regular feature of our
nightly newscasts?
Unemployment
Unemployment
will also derail any Social Security Plan. Oil shortages and higher
prices for petroleum products promise to drive a recessive economy. It
has been assumed that Boomers will work longer, thereby easing the
strain on Social Security funding. But if our economy is recessive, jobs
for older Americans will be scarce. They will be forced to take early
Social Security in order to survive.
And
of course higher rates of unemployment will not only reduce the wage
income that can be taxed to replenish the Social Security fund,
out-of-work Americans will also demand additional unemployment benefits.
It
all adds up to more debt.
The
Federal Debt now stands at more than $7.6 trillion. Of this amount, the
Treasury owes the Social Security "Trust" fund over $1.7
trillion. By 2018, the Federal debt will probably exceed $10.5 trillion.
Annual interest payments will exceed $650 billion. Of these amounts,
Treasury will owe America's Social Security beneficiaries over $3
trillion. Annual interest costs on Social Security debt will exceed $180
billion. Does this mean that America will have a negative net worth?
And
that as they say is the crux of the problem. There will be a
growing pressure to increase Social Security benefits in an era of
decreasing national wealth. Will there be any money in the bank to pay
the bills?
Probably
not.
At
some point the economic impact of oil shortages will trigger panic in
the financial markets. Wealth destroying deflation is inevitable. Our
stinking load of accumulated debt will have to be
"restructured". A bankrupt America will not be able to finance
its Social Security obligations.
The
cultural shock will be incredible.
A Challenge
Neither
the Bush Administration nor the Liberal establishment has faced up to
the truth. All of the Social Security estimates are bogus. Non of the
projections have attempted to assess the economic and cultural chaos of
oil depletion. Congress is engaged in a bizarre debate about a surreal
world that does not, and will not, exist.
So
I close this article with a challenge to the Bush Administration and the
NeoCons; to Senator Kennedy and the Liberals; get real. Either include
the economic and cultural impact of oil depletion in your Social
Security calculations, or prove that oil depletion is a myth.
Otherwise
your acrimonious debate is nothing but political nonsense.
Ronald
R. Cooke
The Cultural Economist
Will
Social Security Bankrupt America?
A Response to Ron Cooke's Article
I
am posting this letter because it is so typical of the responses I have
received to my article on Social Security. It would appear that many of
us do not have much confidence in our Congress or Administration. If we
chose to make public policy based on political expediency, if we
deliberately ignore the challenges of our economic future, and if our
institutions are reluctant to deal with reality, then we Americans are
destined to suffer the consequences.
Ronald
R. Cooke
The Cultural Economist
Dear
Sir,
I
am 35 years old, and I think your article is right on the money. I am
reading the book "Running
on Empty" by Peter Peterson, and it is a fine book about the
economic problems we face as a nation with Social Security, but it does
treat this issue in a vacuum, because it ignores other economic issues
such as oil depletion.
In
2004, I started to really think seriously about my retirement investment
plans. I took a very serious look at Oil Depletion, starting with the
latest book at the time, "The
End of Oil" by Paul Roberts. Nine months later, I have read
probably about 8 other books, countless articles, and have come to the
conclusion that this is a very real issue that is going to dominate the
economic landscape for the rest of my working years. It is so
unthinkable, so unimaginable to people, that there is this tendency to
dismiss it outright as quack science.
The
second major trend I started looking at was demographics. Every
demographics book I have read so far about the aging issue in this
country in and of itself is a tale of economic Armageddon. I have only
read a few such books, and it was most disturbing that none of
them addressed the Oil depletion issue at all.
So,
I am probably one of the very few investors my age who has taken the
unusual step of drawing up a time-line of my working, saving and
investing life, and plotted out when these issues are most likely to hit
in the economy. I will be 65 in the year 2034. Peak Oil will be a
historical event probably around 2006, which will have its own
consequences upon publics savings. The baby boomer generation will have
all retired, and the full force of these unfunded entitlement programs
will have hit our government and economy. The chances are very good that
if I am not careful, whatever I have saved will be wiped out between now
and then in some type of national financial crisis. I can not tell you just
how shocking it is for me to try and contemplate just how I am
going to plan to retire in 2034. I do know this, I have yet to
meet a financial advisor who understands the risks over the next 30
years.
So,
because of factoring in both Social Security, demographics, Peak Oil,
and Peak Natural Gas, and taking into consideration the effects
upon financial investments, banking, the currency system, and the
political structure of America, I came to my own conclusion regarding
savings. I felt like all of the current options of saving for retirement
were at risk of being destroyed by 2034, (401k, IRA, and corporate pension
accounts all appear to be risky in the greater context of the problems
we face over time). So, after 9 months of study, and probably 13 books
of reading I have a safety deposit box at a local bank
collecting Gold and Silver coins. It seems ridiculous, if not absurd to
actually collect bullion coins, a non-interest bearing asset, as the
foundation of my financial portfolio. However, I can not excuse or
rationalize away the financial consequences oil depletion, and aging,
will have upon our world in the next 30 years. Ignoring these issues,
and assuming that nothing bad will happen, makes the outcome very risky.
So instead of playing the game of chasing compounding interest in debt
based instruments such as stocks, bonds, etc, I am seeking to save and
protect as much value as possible in instruments that can endure past
financial and political meltdown.
If
and when the day should come that economic chaos will drive this
type of behavior into the investing public, it will be too late in my
opinion to run down to the local coin store to pick up some bars.
Congress
is not considering the problems, and it really does not have an answer.
People need to individually start taking responsibility again for their
lives, for knowing and understanding what is going on in the world,
and making appropriate plans. We must counter a world filled by people
who only know how to take the advice of the mass media.
David
Tribble
ฉ
2005 Ronald R. Cooke
The Cultural
Economist
Author, "Oil, Jihad &
Destiny" and "Detensive Nation"
Editorial Archive
CONTACT
INFORMATION
Ronald R. Cooke | 13365 Via Del Sol,
Auburn, CA 95602 | Website |
