The Daily Reckoning Weekend Edition ------------------------------------------------------- (Quick aside: That is one ugly revision. There’s nothing wrong with changing your mind, but someone at the CBO had quite an awakening in 2010.) Essentially, Greenspan’s fix for Social Security was to take in more money and pay less of it out at a later date. And with the help of a booming American economy through most of the ’80s and ’90s, it worked... until it didn’t. As noted above, we’re just about back to square one. As it stands today, there’s just not enough money to fund the Social Security program as we know it. With $2.5 trillion left in the SS warchest, there is no immediate threat to the status quo. But as the SS Board of Trustees forecast in August, “Over [a] 75-year period, the Trust Funds would require additional revenue equivalent to $5.4 trillion in present value dollars to pay all scheduled benefits.” That gap will be filled by borrowing from abroad, taxing at home or slashing the benefits of those yet to retire. Either way, it’s hard to picture a happy ending for Social Security. It’s in your best interest to build a substantial retirement fund of your own and – probably more importantly – one for your children. Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future Have You Heard of the OTHER Government Backed "Pension Program?"
Saturday, September 18, 2010
Buenos Aires, Argentina – Baltimore, Maryland
Joel Bowman, reporting from Buenos Aires, Argentina...
In Thursday’s edition of The Daily Reckoning, we promised you a few essays on the impending catastrophe that is the government’s Social Security scheme...ahem, program. If you haven’t yet heard the news, this “lock box” retirement fund will begin to officially shrink a couple of weeks from now, although it has likely been in the red for quite a while longer.
So pressing is the issue for millions of Americans that Ian Mathias, who recently joined forces with income specialist, Jim Nelson, over at The Lifetime Income Report desk, has dedicated himself to penning a short series on the topic for your consideration.
In the first installment, below, Ian offers his thoughts on insurmountable demographics, bumbling bureaucrats and the infamous Greenspan touch. Please enjoy and send us your thoughts at the address below...
The End of Social Security as We Know It
By Ian Mathias
Baltimore, Maryland
On September 30, America will quietly begin a generational shift. This will be the final day of the government’s fiscal year 2010, and consequentially, a very notable day for Social Security. September 30 will be the last day – maybe for a long time – that Social Security could possibly be operating at a surplus.
Back in March, the Congressional Budget Office (CBO) admitted that most Social Security funding projections were way off, and that sometime in 2010 the program would begin paying out more than it’s taking in. In August, the Social Security Board of Trustees said much of the same, that they too were drastically revising previous solvency projections. Just a year ago, both agencies forecast that the Social Security Trust Fund would stay out of the red until 2016. This year, they said 2010... As in, it’s probably already happened.
According to this year’s FICA/SECA tax receipts and benefit payouts, there’s reason to believe the SS fund dipped into deficit as early as February 2010. But since there’s no “official” government mandated date for when Social Security officially entered the red (we wonder if either agency actually knows) the end of the fiscal year will have to do, for now.
Though there will be some debate over when SS started losing money in 2010, there will be no such discussion in 2011, or the year after, or the year after that...or maybe ever again. Despite 2009 projections completely to the contrary, the CBO and Social Security Trustees now expect the fund to suffer deficits indefinitely. There may be two or three years of surplus if the US economy can avoid a double dip recession, but over the long term, in the words of the SS Board of Trustees, “program costs will permanently exceed revenues.”
In summary of the CBO’s findings, the credit crunch and subsequent “Great Correction” moved a future Social Security crisis into the present tense. In fact, the whole issue is now worse. Stock market crashes and unemployment plights like those we’ve suffered lately have long term, arguably irreversible effects on wages, income inequalities, retirement plans and tax revenues...all of which will pile on top of Social Security at a time when it’s already bearing a heavy load.
But as you might remember, we’ve been here before. A not-so-dissimilar bout of high unemployment and lousy economic growth in the ’70s brought the Social Security fund to a sudden crisis in the early ’80s. By 1982, the powers that be weren’t just fretting over the program entering deficit...they had every reason to believe the Social Security would be out of money in as little as a year.
The Regan Administration’s solution was a bi-partisan study group called The National Commission on Social Security Reform (NCSSR). To lead the commission, Washington hired a man who has since proven to be one of the most unsuccessful monetary and fiscal planners in American history: Alan Greenspan.
Long story short, the Greenspan Commission marked “the end of Social Security as we know it”... or at least as we knew it in 1983. That year the Commission released its findings and recommendations, most of which were gradually implemented over the next decade. Here are some of the basic elements of their reform:
(The real irony here is that there’s reason to believe there was nothing long-term about Greenspan’s solution in the first place. The Greenspan commission was formed by President Regan’s chief of staff Jim Baker, and it’s an open secret Baker’s key objective was only to make Social Security a non-issue for the 1984 election. As with most administrations, the real crisis was left for the next guy to deal with.)
The current generation of leadership is now “that guy.” Worse yet, this Social Security crisis is larger than the one we faced in 1982, which was a combination of a cyclical economic downturn and SS rules and mechanisms in need of reform. Today we face a structural crisis...they’re called baby boomers.
76 million Americans were born between 1946-1964, the so-called baby boomers. On January 1, 2011, the oldest member of this demographic – the largest America has ever known – will turn 65. At present they make up about a third of the entire US workforce. Taking their place will be Generation X, about 46 million people strong. Forgive us for the back-of-the-envelope math, but that sounds like 30 million fewer contributors to the Social Security fund and tens of millions of new beneficiaries. Hmmm...
When the whole idea of Social Security was first brought to the table, way back in post-Depression FDR days, there were 16 Social Security contributors for every 1 Social Security beneficiary. Today, that ratio is closer to 4:1. By 2030, when America will be bearing the full brunt of retired baby boomers, that ratio will be 2:1. To accommodate that ratio, either recipients will have to get less, or workers will have to pay more. The current method of funding the program is simply no longer applicable.
And there’s a whole other “problem” with current or soon-to-be Social Security beneficiaries: They’ll likely live much longer (and expensive) lives than their parents. In 1935 the average life expectancy was 65, making the minimum age to collect SS almost a cruelly ironic death sentence. Today, the average American will live to around 77... yet the minimum age to collect full benefits has only risen by 2 years. And if you believe tech-savvy people like my colleague Patrick Cox, we are on the verge of generational medical breakthroughs that could expand our life expectancies into the triple digits.
So what happens when the largest demographic America has ever known taps into a fund already in deficit? And what will we do if they...well...won’t die on time?
You can whine about “paying into Social Security every month for the last 40 years and I deserve every penny” till the cows come home... But this is simple, cold math. If you’ve been in the working world that long, you must understand by now the difference between what’s fair and what’s reality. The reality of the moment is this: You must...
Good luck,
Ian Mathias
for The Daily Reckoning
P.S. If you want some help building a private retirement fund, you should meet Jim Nelson. His sole mission is to study stable, high-yielding dividend stocks and recommend the cream of the crop to his Lifetime Income Report readers. He recently released a presentation on his favorite income opportunity...check it out here. It might be a great addition to your post-Social Security portfolio.
-------------------------------------------------------ALSO THIS WEEK in The Daily Reckoning...
Home on the Range
By Alan Knuckman
Chicago, Illinois
“Home on the Range” is regarded as the unofficial anthem of the American west. It’s also a slogan available on vanity license plates in Kansas – where few Buffalo now roam. The wide-open spaces are now rangeland for the final installment of commodity critters: chicken, hogs and cattle. As I’ve said before, it’s important to know the market relationship between livestock and the grain market. The price of livestock plays an important role in the grain market and vice versa. That’s exactly why this chart caught my eye...
Drink Up
By Jim Nelson
Baltimore, Maryland
“Too much work, and no vacation, deserves at least a small libation. So hail! my friends, and raise your glasses, work’s the curse of the drinking classes.” – Oscar Wilde
“Sinvesting” is a theme that we monitor constantly at The Lifetime Income Report. We have previously explained why tobacco in emerging economies is a steal. Today, we’re raising a glass of hooch to the next-best sin play.
America Still Makes Stuff
By Chris Mayer
Gaithersburg, Maryland
It’s a common lament to say that US manufacturing is in decline. It’s received wisdom that the US doesn’t make anything anymore. In fact, I myself have repeated it.
I am here to correct the error of my ways and to dispel this common myth. And I’m going to tell you about a company with four of the five lowest-cost plants in the world in its industry. These plants are not in China or India. They are in the US. In truth, there is a lot of stuff made in the US, which is still a mighty giant in manufacturing.
Oil’s Out...Clean Energy Is In
By Marin Katusa
Vancouver, British Columbia
The International Energy Association (IEA) has spoken. What the world needs now is a clean energy technology revolution. June saw the 2010 launch of IEA’s biannual report, Energy Technology Perspectives. Speaking at the launch was Nobuo Tanaka, executive director for IEA. The Gulf oil spill, he said, could prove to be a tipping point in the world’s energy consumption habits. He added that the disaster serves as a tragic reminder that our current path is not sustainable.
--- Hidden Gov’t Documents Let You Predict Stock Moves ---
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Roger Barnes of Colorado used one of these hidden documents to bank $237,000 in just 6 days... It’s all perfectly legal and you can do this too!
Click here to watch the new presentation now.
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The Weekly Endnote: As we continue to cover the Social Insecurity conundrum in the coming days and weeks leading up to the September 30 deadline, we invite you to share your own thoughts on the matter.
As always, don’t be afraid to voice your honest opinion...and don’t be surprised to find it gets reprinted in an upcoming issue of The Daily Reckoning.
We look forward to your thoughts.
Until next time...
Cheers,
Joel Bowman
Managing Editor
The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com The Daily Reckoning - Special Reports:
Saturday, 18 September 2010
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