Social Security has long been called the third rail of American politics because of the political danger it poses to politicians attempting to change or reform it.  But change it must because Social Security will not deliver as promised to the majority of Americans living today.  Social Security’s problems date back to its inception and the general public has been ‘misinformed’ on the matter by every congress since 1935.  But let’s start at the beginning.

According to last year’s trustee report, over its history Social Security has collected roughly $20.9 trillion in taxes and interest, while it has paid roughly $18 trillion in benefits, leaving $2.9 trillion in “trust fund reserves.”  But a problem arises because those reserves aren’t really reserves at all.  Americans pay into Social Security via the Federal Insurance Contributions Act, (FICA) with ‘insurance’ being the operative word.  But Social Security isn’t insurance in the way most Americans think of it.  I’ll use an overly simplified primer-type example to illustrate.

Insurance companies take their customers’ premiums and invest them to create real wealth.  Later, the earnings from that wealth can be used to pay annuities when they become due.  For example, an insurance company may use its customers’ premiums to build an apartment complex and then use the rental income to pay benefits to those who have dutifully paid their premiums over the years.  But Social Security doesn’t function that way.  The bifurcated deception the government continues to promote is A) that Social Security is a form of insurance and B) that a “trust fund” (in the manner your local bank would define one) actually exists.

Unlike the wealth created when insurance companies invest their premiums, Social Security taxes create nothing tangible.  Just like other taxes, our FICA contributions are spent as soon as they get to Washington.  Paper transactions on the government’s books give the illusion of a ‘trust fund,’ but $2.9 trillion in government IOUs aren’t the same as tangible assets.  And therein lies the problem with Social Security; no real wealth has ever been created—there are no apartment buildings or shopping centers or factories to generate the money to pay the people who’ve been paying into the system all of their lives.

The FICA taxes Americans have been paying for years haven’t been invested in anything.  Those monies are being used to pay today’s retirees.  But who’s going to pay for tomorrow’s retirees?  And that’s the problem.  The current pay-as-you-go system worked great when the baby boomers were paying into the system and their FICA taxes were being used to pay benefits to a much smaller generation that was retired.  But something has to give as the huge baby boomer generation continues to retire and begins collecting their Social Security benefits.

The fact is there are simply not enough people working to pay all the benefits that were promised unless Social Security taxes are raised, the eligibility age increased or most likely, both.  Perhaps no single sentence illustrates the issue more clearly than the following. Insurance companies pay the benefits they owe their customers by creating wealth; the federal government pays the benefits it owes its citizens by borrowing from Peter to pay Paul.

At the top of this commentary I opined that the misinformation on the part of congress is the real cause of Social Security’s problems.  This should not come as a surprise to anyone because the underpinning principle of Social Security is practically identical to the predicates of illegal pyramid schemes run by con men like Bernie Madoff.

The first people to put their money in are repaid liberally from the money received from others who join later; that’s what attracts new ‘investors’ and enables the con men to keep the scam going.  And as long as the bottom of the pyramid keeps expanding, things are great; but eventually the pyramid stops expanding, which is the case with Social Security today.

But the day of reckoning has arrived.  In 2020 more money will leave the Social Security system than it will take in, and the people who ‘joined late,’ i.e., those born after 1955 will in all likelihood, not receive what the government promised.   So perhaps this might be a good topic for the next presidential debate.

Quote of the day: “Social Security isn’t in trouble because of some demographic fluke; it was a demographic fluke that kept it from collapsing before now.”—Thomas Sowell