The Implosion in Social Security
The problem with the U.S. economy today is that everyone is borrowing from tomorrow to pay for today. Consumers have been doing it for years by purchasing things on credit and the government is doing it by running up a huge deficit to pay for stimulus programs and aid to banks.
However, the worst example of this sort of "I'll gladly pay you Tuesday for a hamburger today" type of dangerous thinking is Social Security. Few things in the world bother me more than this ponzi scheme. It is really nothing more than another hidden tax. What do you suppose the odds of me actually receiving one slim dime from Social Security are when I retire a million years from now? I peg them somewhere between slim and none, yet every single month I pay so that the government can steal from the Social Security fund to pay for today's programs. It's even worse for people who are self-employed like many of my friends are. They get hammered from both sides.
Rather than saving up for a period of time when Baby Boomers begin to suck the system dry, for years the government has been using the money from Social Security surpluses to pay for its current programs. It takes social security taxes in on the promise that it will pay them back to taxpayers some day when they need them in retirement and then they spend the money on whatever they want. The odds of the government changing the rules of the game and pulling the plug on younger (OK I'm not that young any more, but I'm young enough) workers are 100%.
Everyone assumes that major problems with the Social Security system won't happen until many years from now. Just last year, the Congressional Budget Office (CBO) estimated that the system would have a $703 billion surplus from 2009-18. Oops, it looks like the CBO has already revised this estimate. It now estimates that Social Insecurity will only have a surplus of $83 billion during that time period.
Take a look at the table above for the CBO's new projection. Not only are the numbers are a complete mess, but they assume no cost of living adjustment for '10, '11, or '12. What happens if inflation rears its ugly head again? Even worse, these projections assume that the U.S. economy will return to normal growth in 2010. If either of these optimistic assumptions are off, the numbers look a lot worse.
In short, the CBO's Social Security 2008 estimates were off by $700 billion! This money is going to have to come from somewhere. It is politically unpopular to reduce benefits, so odds are that some sort of tax increase will be needed to plug this hole. There's no such thing as a free lunch. Between the massive hole in Social Security and the massive spending on stimulus / liquidity programs eventually taxes will head higher, possibly much higher. These higher taxes will serve as a drag on economic growth.
I don't think that this is the end of the world as we know it, but I do think that we are headed into a stagnant period of much slower growth than we have experienced over the past several decades. This is why I usually stay away from stocks with high P/E ratios (or other forms of valuation). Growth stocks are going to have a tough time keeping pace with the high standards that they have set in the recent past. I would much rather take dividend payments and interest payments today than assume that a company will grow significantly and that someone will be willing to pay me significantly more for its stock than I paid for it some time down the road. A bird in hand is worth two in the bush as the old saying goes.
Much of the above data comes from John Mauldin's fantastic weekly e-letter. I have another gem from this week's issue that talks about why the recovery in corporate profits will be slow for later on today.