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The Implosion in Social Security



April 14, 2009 – Comments (10) | RELATED TICKERS: SSN

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.


10 Comments – Post Your Own

#1) On April 14, 2009 at 7:05 AM, kaskoosek (30.18) wrote:

Div paying Yes.

Fixed Income Not so much.

Except if there is significant return to compensate for the printing press.

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#2) On April 14, 2009 at 7:07 AM, Chromantix (90.20) wrote:

+1 for bringing attention to an issue which seems to be ignored by most common news outlets.

I'd be very willing to sign away my right to Social Security "benefits" if only I could opt out of paying any more.

I do not recognize the governments right to forcibly take money away from me for safe keeping.  I wish there were a more effective way of protest, but letters to to my representatives are all I have at my disposal.


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#3) On April 14, 2009 at 7:20 AM, outoffocus (23.84) wrote:

I'd be very willing to sign away my right to Social Security "benefits" if only I could opt out of paying any more.

I know thats right.  Could you imagine how much money I could put in the bank if I didnt have to pay social security???? The closest we came to getting that was Bush's plan to have personal social security accounts. Thats the only policy I EVER agreed with Bush on. 

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#4) On April 14, 2009 at 8:21 AM, devoish (74.57) wrote:

Have you ever seen the small Gov't model in real life?

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#5) On April 14, 2009 at 8:46 AM, catoismymotor (< 20) wrote:

The Social Security system has been transformed into a Ponzi scheme that would make Madoff salivate.

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#6) On April 14, 2009 at 10:01 AM, Gemini846 (34.63) wrote:

The only current way I know to get out of social security income is to be a member of the clergy and object to it on religious grounds. You have to sign a statement that you morally object to receving any handouts from the government. Even then I think only your "clergy" income is exempt so if you have other earned or un-earned income I'm pretty sure you're still subject to tax on it.

I highly suspect that Obama will be looking at raising the bar on money that is exempt. I think the threshold is any money after 109k. In the campaign I'm pretty sure he mentioned getting this number up to 250k or installing some kind of "donut" policy where incomes between 100 and 250 would be exempt but then higher than 250 would start paying again.

I was watching Robin Hood the other night thinking to myself whether or not I agreed with it. Personally I find it rather socialist in nature, but its due to outrage against corrupt right wing government. Sound Familiar?

devoish no I haven't, but after the last century or so of BS I'd be willing to give it a try.

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#7) On April 14, 2009 at 11:00 AM, charlesblazer (30.22) wrote:

Here's a thought... If the true purpose of Social Security is to help care for our seniors in their later years, then a percentage of SS benefits paid-out to a senior (and his spouse) should be recouped upon the death of that senior (and his spouse) through a Social Security Estate Tax.  Seriously, I know it sounds crazy at first, and it would be spectacular political suicide for any politician to suggest it... but I'm happy to help support the seniors who need my help, whereas channeling my money through the leaky tubes of government to someone who then banks it, dies, and passes it on to his heirs -- that's not even a ponzi scheme, it's shuffling the deck of wealth for absolutely no reason, with government stealing some cards along the way.

If you collected Social Security and died with dollars in your bank account, then obviously you didn't need all of the Social Security you collected.  That money was (forcibly) donated by a younger generation solely for the purpose of supporting you (and your spouse) in case you couldn't support yourself. (and for paying your funeral expenses) It was never meant to enlarge your estate.  And it was never meant to be a windfall for your children.  Don't worry, they'll get their share if and when they actually need it.

No one is willing to make the hard choices when it comes to Social Security, so nothing gets done, and the problem lingers and multiplies for the next generation.  That's shameful, lazy, and greedy.  Someone, someday, is going to have to make an unpopular suggestion, because reality can't be ignored forever.

And don't get me wrong... I'm no fan of estate taxes.  This is just a special case where, really, the deceased shouldn't have had the money in the first place.  The problem, however, is that the Social Security system has been so twisted, abused, mischaracterized, and exploited by politicians over the years, that now most Americans see it as something like an investment.  "I paid for it for thirty years, it's my money, I'm damn well entitled to collect it!"  Ummm... with all due respect and regret... No.  Your money was spent the moment it was collected.  And any Social Security you collect, in your old age, comes from working Americans.  But it's the "I'm entitled to it!" attitude that will forever prevent any politician from actually saving Social Security before it completely collapses into a superdense black hole of lost money.

Sorry for the rant.  I've thought about this for a while.

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#8) On April 14, 2009 at 11:08 AM, whereaminow (< 20) wrote:


I have. It's called the United States of America from 1776-1913 and it produced the greatest increase in the standard of living FOR THE MASSES in human history.

David in Qatar

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#9) On April 14, 2009 at 7:40 PM, DemonDoug (31.01) wrote:

Can I hack into the system and add a +1 rec to comment number 8? Seriously we need to get a +/- rating system on comments, that is one of the best I've ever seen.

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#10) On April 14, 2009 at 9:11 PM, Entrepreneur58 (37.92) wrote:

This is not rocket science, folks.  If you have money, you retire.  If you don't you keep working until you drop.  If they cut your social security benefits it mean you have to keep working and paying taxes into the system, thus keeping the system going.  Social security isn't going to go broke, but your benefits are going to get cut to some extent.  People who think they won't get a dime from social security are just plain nuts.

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