Saturday, June 26, 2010


Do you ever wonder how your Social Security account is performing?

Each week, the Federal government takes 7.5% of your salary and another 7.5% from your employer as a contribution towards your retirement plan.

When you contribute to a 401K, your money is put into an account, and the fund manager has a fiduciary responsiblity to manage that fund for you, keeping it separate from other funds.

Where is the money you’ve paid into Social Security? According to FDR, it was going to be set aside for you. How is the Federal government managing its fiduciary responsibility to you?

Roosevelt envisioned a plan through which workers would contribute and provide for their own future economic security, and he specifically disdained the idea of reliance upon welfare.

The original SSA embraced the idea of Social Security being an insurance program under which a group of individuals were insured against identifiable risks: disability and old age.

It was also meant as a supplement, never to take the place of individual savings efforts.

Some describe Social Security as a transfer payment--transferring income from the generation of workers to the generation of retirees--with the promise that when current workers retiree, there will be another generation of workers behind them who will be the source of their Social Security retirement payments.

Or you could say that Social Security is a pyramid scheme (the man in the photo is Charles Ponzi, by the way).

If the demographics of the population were stable, then the current system might have worked.

However, since the 1950’s, population demographics have fallen, and through modern science people are living longer, which has thrown a bit of a monkey wrench into the Ponzi scheme.

No problem-we’re investing the excess contributions, right?

During periods when more new participants are entering the system than are receiving benefits there tends to be a surplus in funding (as in the early years of Social Security).

Social Security is a pay-as-you-go system, which means that the taxes that come in each year are used to pay benefits for retirees that year. There is no mechanism for investing any excess funds that are left over.

Surpluses, which in theory should fund benefits for future retirees, are instead raided by Congress and squandered on unrelated spending programs.

Here's how the raid works: The surplus payroll tax dollars go into the Social Security Trust Fund, which in turn uses them to buy special issue bonds from the U.S. Treasury.
Then Congress can use those dollars, in the Treasury, to spend on anything it wants.

All that Social Security has are the bonds. The bonds pay interest, but Congress raids the interest, too, by simply placing more bonds in the trust fund.

The trust fund itself is a filing cabinet in West Virginia — it doesn't have any real funds in it and you probably shouldn't trust it.

President Bush explained this pretty well in a speech in 2005: "You pay your payroll tax, we pay out to current retirees, and then we spend your money on other government programs."

This should make Americans mad. Really mad. But it seems as if everyone is confident that the money to pay them is going to be there when they need it.

I hate to sound all doomy and gloomy, but how can it possible be there? The system is already insolvent (more liabilities to people like you and me than it has money to pay) and in a few years it's going to have a cash flow problem.

During periods when beneficiaries are growing faster than new entrants (as will happen when the baby boomers retire), there tends to be a deficit. This vulnerability to demographic ups and downs is one of the problems with pay-as-you-go financing.

Unfortunately, a majority of people anticipate that Social Security will form a significant part of their retirement income. And the demographic winter we’re on the brink of is the problem with that assumption.

When Social Security was implemented, there were 16 workers for every Social Security recipient; today there are 3.3 workers for every recipient, and it is estimated that by 2030 there will be only two workers for every recipient.

Not a very sustainable model, huh? Where is the money going to come from to pay out benefits to the baby boomers?

Well, how does a government “earn” money?

It can tax us, it can borrow it, or it can print it.

Most people would agree that higher taxation is a bad idea, yet it is actually the preferable of the three options. Government borrowing and the Federal Reserve’s ability to print money will be the topic of future posts, but they are ways to hide the wealth redistribution agenda. At leats with a new or increased tax, it’s out in the open.

I know that most of this is not new to people, yet I hear alarming statistics about the number of Americans who are relying on Social Security to fund their golden years.

If you want some gold in those golden years, you may want to invest in real gold now while it’s affordable.


  1. Excellent post.

    First of all I want to commend you on the layout. I like the separation into sentences--I think I heightens the impact by allowing the reader to think about what you're saying. Good Approach.. And the length is very comfortable.

    I am one of those poor planners who is relying on SS to get me through old age. I have no other programs, funds, accounts, or investments. It's mostly due to bad job choices as far as offering retirement funds.

    In reality, can we rely on any of it. I keep hearing stories of people losing their nest eggs. Let's face it anything can happen. I'm not planning anything. So we'll see how this poor planning thingy goes for me as opposed to those who thought they had everything all set up for themselves.

    We are living uncertain times.

    Tossing It Out

  2. Lee-

    You're right-none of it is very stable. If I am right, people who did save are going to be subject to some pretty stiff taxes (yep-the rules on taxability of IRA's and 401K's can change).

    Uncertain times, indeed.


  3. --> I hear alarming statistics about the number of Americans who are relying on Social Security to fund their golden years.

    "Don't let me hear you say life's taking you nowhere, angel
    Come get up my baby
    Run for the shadows, run for the shadows
    Run for the shadows in these golden years"

    It's either run for the shadows or be imprisoned in a F.E.M.A. camp.

    --> The trust fund itself is a filing cabinet in West Virginia — it doesn't have any real funds in it and you probably shouldn't trust it.

    Oh, come on, man! Don't peddle THAT!
    The next thing we know, you'll be telling us that the Federal Reserve isn't really federal and that it hasn't any reserves. :o)

    ~ "Lonesome Dogg" McD-Fens

  4. Stephen-

    Funny you should mention the Fed. They'll be the subject of a blog entry before long.

    Anyone who can't wait for that may want to check out Ron Paul's latest book, "End The Fed."