Since We're Still Wondering When Something Will Crack, Let's Take a Fresh Look at Social Security

It should be no surprise to read and hear that something will crack. Last time we noted the extreme over-valuation of the stock market, and the gargantuan pile of debt, still growing vigorously, of our federal government and, sadly, many of our fellow citizens, young and old alike. 

While any crack that may manifest will likely not impact social security payments to the old and disabled in the near term, that program has its own problems. And, if you you follow this venerable government program, you are likely aware of the claims that it is destined for financial failure, put more starkly, it is doomed.

An exaggeration? Some say that while the government may reduce future benefits for younger generations, it can never reduce benefits for current recipients. Too many older Americans rely on their monthly checks for the basics of food and shelter. Note that with the current government shutdown, one of the first, most vocal pronouncements was that SS payments would continue as always. Imagine the panic if that were not the case! 

As for the program's future, in the end, they say, the government can simply print more money money to support the system, as it does to support so many other of its programs. Of course, such printing would feed the problems cited last week, referenced above. So you have to wonder how viable this solution might be.

In any case, since nothing's cracked this past week, let's take a look at Social Security, as it still pumps out its payments, and remains a main stay of the survival of so many of us in our old age. We recently read an interesting analysis of the program by Charles Hughes Smith. He's a rather thoughtful analytical gent who's writing is worth the time given to it.

As a prelude to his remarks, remember how the SS program works: The government takes out money from our paychecks (part of the FICA deduction) and funds the current recipient's benefits. At the time of its establishment in the 1930s, there were more working folks contributing vs. folks collecting. In addition, people didn't live as long, so the time collecting was shorter than it is now. So for a while, more money came in than went out. 

Through those years, the government told us they had set up an SSA "Trust Fund" to secure those funds for the future. But now that dynamic has reversed. Why? Folks began having fewer children and so the demographics began to work against the system's design. Even with immigration, more is paid out than comes in. 

Note especially that the idea that you "paid into" the system and deserve to get your money back really isn't the way it works. Nothing is set aside for you, based on what you paid in. The best way to understand this is to compare SS to a real pension plan. In Mr. Hughes's words:  

An authentic pension plan deducts a percentage from workers' earned income and deposits these into a fund that earns income. The fund is in effect a savings account that accumulates the monthly deposits and interest until the worker retires, at which point the fund starts disbursing monthly retirement payments and continues to collect interest on the fund's remaining balance.

In contrast, the SSA "trust fund" is an accounting gimmick that makes everyone feel warm and fuzzy, but it's nothing more than self-serving delusion. The "trust fund" holds "non-marketable securities," a nice way of masking the truth which is when SSA payroll tax revenues don't cover SSA expenditures, the Treasury makes up the difference by selling Treasury bonds--the same way it pays for all other deficit spending.

With that look under the hood, let's consider what might have happened had the system been run like a real pension fund. Mr. Hughes uses his own working life to illustrate:

It is a sobering reflection on the US economy that the purchasing power of my wages as an apprentice carpenter at age 23 were rarely equaled in the five decades since. In terms of what my wages could buy, my earnings have never gone as far as they did in the mid-1970s, which is close to the peak of labor's share of the national income (chart below).

He concludes his analysis with this:

The point of this exercise is to show that if SSA were converted to a true pension plan system, the average wage earner could accumulate a self-funding pension plan just by investing the payroll taxes in Treasury bonds. Yes, I know many would prefer to invest in gold or bitcoin or stocks, but nobody would be stopping anyone from investing their non-SSA savings however they wished.

Well, ideally you already know all this. If not, you know it now. So as the markets continue their dysfunctional climb up the ladder to extreme overvaluation, we can at least get something serious under out belts. After all, all of us are either current beneficiaries of Social Security, or eventual beneficiaries of this venerable government program.

I certainly behooves us to understand it. Doesn't it?