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Social Security Needs a Bailout   February 4th, 2010
It was going to happen, but it happened sooner than anticipated       

 
QUICK OBSERVATIONS

More observations...
 

For years the Social Security surplus has been pumping its extra money into the federal government's treasury. Since Americans have been paying more in Social Security taxes than Social Security has been paying in benefits, the Social Security Administration has "invested" that extra money in U.S. Government bonds. This extra Social Security money, in large part, is what caused the illusion of a surplus during the Clinton years.

Unfortunately, that's no longer the case. Social Security is no longer taking in more than it's paying out. That's a double-whammy for the federal budget: Not only will Social Security no longer be providing "surplus money" for the government to spend on other things, the federal government will now have to pay Social Security out of the general fund to keep it solvent.


From an article this week called "Next in line for a bailout: Social Security":

Don't look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.

A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.

nstead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing -- in other words, a taxpayer bailout.


Now consider what I wrote almost three years ago:

The underlying problem of Social Security is that it isn't a trust fund. The money you pay into Social Security over your working life is not saved in your name. Instead, the Social Security Administration uses your money to pay current Social Security recipients and, if there's any money left over, "invests" your money "conservatively" in United States Bonds...

This has been great for the Federal Government because it has had all that extra money it could spend without having to take the unpopular step of raising taxes. At the same time, Social Security hasn't been impacted because, for the time being, it's still collecting more money from you and me than it's paying to recipients.

However, as the number of recipients continues to increase as the baby-boomers retire, we're going to see the number of recipients almost double between 2000 and 2030, growing by 34 million to approximately 70 million, while the number of workers contributing to Social Security will only grow by 24 million. By 2017, it is expected that Social Security will be spending more money than it's receiving from you and me.


Unfortunately this didn't happen in 2017 as originally predicted. It's happening this year. Social Security is no longer able to pay all current benefits with the money it is receiving from taxpayers. That means it's going to have to start cashing the bonds it holds with the U.S. Government. That means the U.S. Government is going to have to pay Social Security from the general fund.

This wouldn't be a problem if the Federal Government had saved the surplus funds it received from Social Security. But it didn't. The money the federal government received from Social Security over the decades was treated as income and spent.

To be fair, Social Security doesn't need a bailout. The Social Security Administration has been "saving" its surplus money for decades. Unfortunately, it's been saving that money (as required by law) by "depositing" it with the Federal Government... which, as a very poor steward, went out and spent it on whatever it wanted the next day. Social Security now needs that money back. So we can't really say that Social Security needs a bailout. It simply needs the Federal Government to pay back the money Social Security loaned it.

But the Federal Government doesn't have the money.

So just as a liberal administration is cranking up federal deficit spending to astronomical levels, the federal government is also now in the position that it's going to have to spend money from the general funds on Social Security.

The article goes on to say:

It would have been a lot simpler to fix the system years ago, when we could have used Social Security's cash surpluses to buy non-Treasury securities, such as government-backed mortgage bonds or high-grade corporates that would have helped cover future cash shortfalls. Now it's too late.


In other words, we could have invested Social Security surpluses in private investments. This is essentially what President Bush proposed (and was thoroughly criticized for) back in 2005. And it's what I also wrote about three years ago:

I believe the best solution is to completely privatize social security. The government could mandate a minimum level of contribution to private retirement plans instead of running the social security scam. The government could even collect the social security contributions, but they should be immediately forwarded to a private financial institution rather than being spent by the Federal Government.


Indeed, the solution was some sort of privatization of Social Security. But that was not possible due to liberal rhetoric.

Indeed, this is not dissimilar to the political rhetoric leading up to the housing crisis. Back in 2004 the Bush Administration's regulators and Congressional Republicans were out in public trying to increase regulation on Freddie Mac and Fannie Mae while Democrats were resisting that regulation and claiming there wasn't a problem. Four years later both Freddie Mac and Fannie Mae went bankrupt and were taken over by the government.

Now we have a situation where conservatives have been saying for years that we needed to in some way privatize Social Security--or at the very least prohibit the Federal Government from spending the surplus money. Instead, liberals have been ignoring the problem or diminishing its importance. President Obama has even said that Social Security is one of the smaller problems: "There are some problems that are really hard to solve... This is one we actually can solve."

Sure, we can "solve" it. Increase the retirement age. Decrease benefits. Increase taxes. None of those are solutions. They're just different ways of trying to extend the life of the Ponzi Scheme of Social Security.

Yet in his first year in office Obama has done nothing to address this "small problem" that's now in the process of unfolding rather than being a theoretical future event.

It gets very frustrating to see, time after time, conservatives' warnings are completely ignored until the train actually crashes. We see the "bridge is out" years or decades ahead, but no-one is willing to pay attention and slam on the brakes or take corrective action until its too late.

And this is the same government that many people look to to solve our problems? The reality is that the government is creating more problems than it is solving.

As an aside, as this situation unfolds and becomes better understood, I anticipate that my article on the Myth of the Clinton Surplus will become even more popular than it already is... and will, over time, gain increasing credibility even among those that have resisted believing it. The Social Security surpluses have allowed politicians to "hide" the federal government's true fiscal situation for a long time. But with Social Security going into deficit the problem is going to be next to impossible to hide and people will be looking for an explanation. The Myth of the Clinton Surplus is the explanation.


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