Social Security -- The Devil is in The Details

We've all heard about it.

We're all taxed from our wages to support it.

But, really now, what is this thing we call "Social Security?" And, more importantly, how should you "think" about "it"? Is it time for you to look at alternative sources of cashflow for retirement...?

Let me begin this treatise by pointing out that I will be quoting (excerpts below are in quotes) from Die Broke (see footnote 1) which I recommend for its general take on financial strategies.

Second, you may recognize some common themes in today's national headlines when comparing these to headlines from the 1930s, when the U.S. had a near death experience.

Social Security -- A Pyramid Scheme

"In 1933 around thirteen million Americans -- one quarter of the labor force -- were unemployed. Crowds of unemployed young men have made politicians nervous ever since the French Revolution. With this perceived threat in mind, FDR and the New Dealers came up with the idea of a universal public pension. They called it Social Security. They had two big issues to deal with however: Who should pay for it, and when should people become eligible?

"...the idea was to get those masses of young men off the street and into jobs. That meant the system had to work from day one. Since you can't tax people to pay for their own pensions once they're out of work, the solution was to tax those who got the jobs. In other words, kids would be taxed to pay for their parents' pensions. As long as there were lots more people working than collecting [overnight pensions which were created], workers wouldn't have to pay too much.

"That led back to the eligibility issue. Retirement had to be set at an age where there would be enough people around to actually open up jobs, but not so many that it would bankrupt the system before it got started. The solution: sixty-five [the arbitrary age of retirement]... At that time, the average American died at sixty-three. That meant most people wouldn't live long enough to collect, and those who did wouldn't collect for too long."

There you have it. The scandalous intentions of our benefactors, those sainted politicians who set the retirement age just beyond the reach of most Americans at that time.

Several problems have cropped up since that infamous beginning.

The Pyramid Scheme Begins to Collapse

Present reality:
1) People are living into their eighties and nineties and not obeying FDR's generous Statism plan for them to die at sixty-three. In fact, the Associated Press reported in July 2009 that the world's population of humans living to 100 is projected to reach nearly 6 million by midcentury. When FDR rolled out his plan, there were approximately 300,000 worldwide.

2) There are so many baby boomers about to retire and oh so few workers to tax in the younger generations. The plan was for there to always be more "workers" contributing than "retirees" draining the system. Woops -- the backhand of being anti-family.

3) The variety of benefits being doled out of the trust fund by the politicians to buy votes from special interest groups is staggering. No, really, it is bankrupting. Not only are there variety of benefits, now there are folks drawing billions of dollars from the trust fund who've never ever paid into it. On the bright side, we are the most generous nation on earth. And, Alex, I'll take, "How greedy politicians buy votes" for $300, please.

4) While all this was unfolding, somebody was robbing the Social Security trust funds. From 1950 to 1994, there was unrestrained theft by Congress. Don't waste your time researching which political party was in control during this time -- trust me -- you DON'T want to know.

The Bottom Line for You and Me

"You simply will not be able to receive the same kind of help from Uncle Sam that your parents are getting. When it was launched, each Social Security recipient had forty workers supporting him. Up until 1949, the maximum each of those workers was being asked to contribute was $30 a year [that is not a typo. Compare that to how much you now contribute!]

"In 1993 each Social Security recipient had just three workers supporting him, and those workers were kicking in up to $3,757 a year... And, baby boomers haven't even started to retire yet... The bottom line is that baby boomers will have to get less money, start getting it later, and not get it for as long."

Will there be "retirement" for any generation which comes after the boomers? Don't count on it.

Social Security Insolvency:
Work harder, millions are depending on you.

Circa 1999 the Social Security Adminstration (SSA) began mailing me regular updates (aka "confessionals") about my "retirement account." What was so magical about 1999 which compelled SSA to suddenly start cutting down forests to update us, I know not. But, I still have each of these notices. It is interesting to read how the bad news reflects the plain English assessment provided in Die Broke.

With each passing year, the bad news in my SSA statement reaches a new low amidst greater verbosity (I know, I'm hardly one to cast stones!) Given what we know about politicians, it makes me wonder just how much worse the situation really is than the SSA confessional discloses.

On the subject of trust fund solvency, here's a chronology of my SSA statements (see footnote 2 below). I trust yours read the same...

March 1999: "Some people are concerned that Social Security won't be there in the future. The program has changed in the past to meet the demands of the times, and it must do so again. Today we are working to resolve long-range financing issues."

November 1999: "Some people are concerned that Social Security won't be there when they retire. This concern arises because people are living longer, the number of retirees is growing and there are fewer workers for each retiree." [... not to mention concerns arising from the example of decades of taxpayer funded handouts from the government and the taxpayer funded retirement mentality that plagues current generations of Americans. SSA also forgot to list other factors such as the millions of folks who are now drawing billions of dollars out who never paid in, let alone the theft by Congress until 1994.]

November 2000: "Will Social Security be there when you retire? Of course it will. But changes will be needed to meet the demands of the times. We're living longer, healthier lives; 76 million 'baby boomers' will start retiring in about 2010; and, in about 30 years, there will be nearly twice as many older Americans as there are today.

"Social Security now takes in more taxes than it pays out in benefits. The excess funds are credited to Social Security's trust funds, which are expected to grow over $4 trillion before we need to use them to pay benefits. In 2015, we will begin to pay out more in benefits than we collect in taxes. By 2037, the trust funds will be exhausted and the payroll taxes collected will be enough to pay only about 72 percent of benefits owed."

November 2003: "Social Security is a compact [aka Pyramid Scheme via government coercion] between generations. For more than 60 years, America has kept the promise of security for its workers and their families. But now, the Social Security system is facing serious future [emphasis added] financial problems, and action is needed soon to make sure that the system is sound when today's younger workers are ready for retirement.

"Today there are almost 36 million Americans age 65 or older. Their Social Security retirement benefits [and the billions paid out to folks who never paid in] are funded by today's workers and their employers who jointly pay Social Security taxes -- just as the money they paid into Social Security was used to pay benefits to those who retired before them. Unless action is taken soon to strengthen Social Security, in just 15 years we will begin paying more in benefits than we collect in taxes. Without changes, by 2042 the Social Security Trust Fund will be exhausted. By then, the number of Americans 65 or elder is expected to have doubled. There won't be enough younger people working to pay all of the benefits owed to those who are retiring. At that point, there will be enough money to pay only about 73 cents for each dollar of scheduled benefits. We will need to resolve these issues soon..."

November 2004: This confessional was an exact cut-and-paste job from 2003, with the secretary correctly noting that there were now only "14 years" left in the countdown.

November 2005: Again, this confessional was an exact cut-and-paste job from 2003. However, the gravity of the situation has escalated in that there are now only "12 years" of project solvency remaining [this means we're REALLY in trouble come 2017, and SSA bankruptcy is moved up to 2041]. But, there's good news, because "there will be enough money to pay only about 74 cents for each dollar of schedule benefits." So there's one more penny per dollar in your pocket. And, we still need to "resolve these issues soon."

November 2006: Things are holding steady...another year elapsed so there are now "11 years" of solvency remaining, and still 74 cents on the dollar of benefits. Otherwise, the verbage from 2003 seems to be working like a charm, including "We will need to resolve these issues soon..."

December 2007: Change...at last. In the SSA confessional the "future" is noticeably absent, and the secretary has given up on most of 2003's magical words. SSA now projects 75 cents of benefits for you and me for every dollar owed. "We need to resolve these issues soon..."

November 2008: We're making progress. In spite of looming bankruptcy of the system, we can now expect "78 cents for each dollar of scheduled benefits."

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Imagine if we could be forgiven for the size and scope of tax transgressions, and honest mistakes, on a scale like those of Timothy Geithner (U.S. Treasury Secretary). Imagine telling bureaucrats we'll tend to their concerns "soon" wherein we employ the word the same way the SSA employs it. Not.

Do you ever get the feeling that what the Founding Fathers were trying to protect us from...despotic tyranny which lives by one set of rules while whipping the peasants for more taxes...is coming back upon us?

In July 2009 Vice President Joe Biden warned that the U.S. is teetering on financial bankruptcy (see footnote 3 below). Are Biden's words and SSA confessionals supposed to comfort us? Honestly, you'd have to have your head in the sand if you didn't know this before July.

If you were born after 1960, you can be reasonably certain that you:
1) will be taxed-to-death to pay for the bailout to pay for the bankruptcy, and
2) you should probably stop entertaining the notion of "retirement" unless you already have several pension plans in your corral, guarded by ethical boards of directors who actually know what they're doing.

Of course, you will be taxed-to-death to pay for all sorts of other out-of-control government expansion being implemented and dreamed up right now, but that's another story.

For most Americans, now is the time to invoke JFK's famous words: Ask not what America can do for you.

And, in not asking that question, do an assessment of yourself. What are your interests? What do you like to do? Is there any conceivable way you can parlay who you are and what you like to do into a business of your own?

U.S. tax laws are written to spur economic development. Tax breaks, incentives and deductions (the likes of which individual tax filers will never see) are for businesses because they generate jobs. Employees...well...they just work at jobs. But every nonelected person responsible for assisting in the crafting of tax law knows that employers/businesses take the risks and create the opportunities associated with economic expansion.

When listening to soundbites intended for your consumption, discern the motivation of the person speaking. If the person is a bureaucrat desperately seeking election/reelection, or a union leader, you will hear emotional rhetoric laced with denial, something along the lines of, "greedy business owners," "those evil corporations," and, "the oppressed workers of the world." The distinguishing characteristic of a soundbite crafted with integrity is that employers and businesses will be acknowledged as the engines of entrepreneurial creativity that make America go and go and go.

Research your options and work out a plan. There is no time like the present for you to start a new journey.

Business...it's the way America works. Without businesses, there will be no jobs.

And, you can take that soundbite to the bank.

John

Footnotes:
1) The book, Die Broke, is informative, authoritative and thought provoking. It will change the way you think. Like all books, however, we readers reserve the right to discard erroneous thinking or comments, wherein I presently consider the book's author's opinion about not passing on a financial legacy to one's children as being rather bogus.

2) Source: My original SSA earnings statements. Form SSA-7005-SM-OR for those still in denial.

3) Source: U.S. Vice President Joe Biden, speaking to members of the American Association of Retired People, July 17, 2009.