Thursday, December 12, 2013

Just how bad are America’s Social Security and Medicare programs?

Millions of Americans trust their government. Frankly, they’re nuts. But that said, they trust their government when it claims Social Security and Medicare are solvent until the 2030’s. In this modern age of blatant lies from every corner, party and agency of government, this one is really a much bigger whopper than people know.

Anyone can go to the myriad of government websites and pull numbers like payroll deduction rates, assumed interest growth of the SSI and Medicare Trust Funds, and adjustments for inflation, etc. It’s somewhat complicated, but doesn’t take a trained accountant to see some really obvious and dangerous lies being spread.

In the 1980’s, the programs were ‘reformed’. I say that word cautiously, because government rarely actually reforms anything, but let’s call the changes in the spirit of making the programs sustainable.

Payroll deduction rates were altered to create big surpluses in both programs in the early years. Those surpluses were to be placed in interest-bearing accounts called Trust Funds (remember you can't trust government) so when the Baby Boom generation started to retire, this extra fund would be available to cover the excessive benefit distributions.

That’s where it all goes bad.

The same government that uses the word ‘reform’, then did something so incredible, it’s remarkable that revolution hasn’t already occurred. 

Instead of putting surplus revenues for Social Security into interest-bearing accounts outside the government, they were lent to the Treasury and spent. Well over $2 trillion to date. 

Yes, spent to reduce annual deficits on government completely unrelated to Social Security or Medicare. 

To make matter worse, the Treasury claimed they would pay interest on that borrowing, as you’d expect. But the consequences are quite staggering.

As a result, an American couple, who at age 25 in 1990 started jobs with a combined income of $25,000, under current trends will see their combined income grow to over $200,000 by the time they’re ready to retire in 2030; when they start collecting Social Security and receiving Medicare benefits. But what of their accounts and their contributions versus future estimated benefits?

Looking at a study by the Urban Institute in 2013, it is estimated they will receive in excess of $1.35 million in benefits during the remainder of their lifetimes (2013 dollars). Unfortunately, the study also suggests they will have contributed only about $1 million towards that end (also 2013 dollars). This is not good news. They are already short. But it gets much worse. Why?

It’s the little problem with the government taking their money and spending it immediately on benefits for others, or on reducing the deficit. While our couple lost the ability to invest it themselves and earn a return on the money, because the government took it and spent it, these Ponzi schemes, never really invested any real money to grow the trust fund. In fact, the trust funds are empty and have always been empty. The growth, as well as the principle amount, was all on paper and the government owes 100% of the principle and interest to itself.

So how bad is it. Well, that same couple with an account of about $1 million at age 65, contributed only about half of it themselves. The rest was the assumed compounded interest on the dollars the government never invested in such a way to earn any interest. The couple is credited for the growth because it’s only fair to do it since they could have invested it themselves for retirement. But the government spent it the moment they got it, so it actually didn’t grow a penny.

In fact, while the government guarantees a rate of return on all the money it borrows, it never actually has any money to invest anywhere to see real growth. Everything the Federal Government spends on, is done so with current revenue, borrowing, or now, with the Federal Reserve simply 'inventing' the money they need digitally.

Our couple retiring at 65 will receive $1.35 million in benefits over the remainder of their lives. They contributed about $500,000 (2013 dollars)  over their working lives to cover that benefit. Government spent their contribution without earning a penny on it. So where will the $835,000 of unfunded benefits in today's dollars come from? Well, the same place the $17 trillion deficit and other $100 trillion of unfunded obligations will come from. And yes, the same place that will cover ObamaCare and Medicaid’s explosive costs. 

Yes, your kids, my kids and all their kids will pay for it, one way or the other.

Assuming, of course, they survive the economic collapse we’ve planned for them.

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