My island vacation retreat, six miles off the coast of Maine, presents a vision of our Social Security system that helps me consider all those citizens, from sea to shining sea, that benefit from this jewel of a government program.
What troubles me from my Adirondack chair are the rumblings of the system's incipient insolvency. I long for the help of the late Gerald Ford who was considered to be one of the few professional politicians who ever really understood government spending.
The system to date has loaned its $2.3 trillion surplus to the U.S. government --- all thanks to the increase in payroll tax rates some 20 years ago at the suggestion of Alan Greenspan during the Reagan administration.
In 2018, the payouts will equal the incoming payroll tax revenue. The surplus itself by then may be as much as $5 trillion. It will take awhile to exhaust, (estimated to be 2042) and then again it might last forever. The annual interest alone on $5 trillion would be about $250 billion at a 5 percent interest rate, and this will forestall the eating into principal.
Back in March of 2008, Allen Sloan, a senior editor of Fortune, wrote a column that effectively said the U.S. would just default on any money it has borrowed from the Social Security trust fund. The chance that politicians 10 years from now would increase taxes, borrow more money, or cut government spending to pay back those loans was not an option that today's "twenty-or-thirty-somethings" would consider when the time comes. Warren Buffett also registered a concern about future "social upheaval" in a recent annual letter to Berkshire stockholders.
Three years ago, when the system was under the threat of being "privatized," I specifically asked Rep. Ellen Tauscher, one of the Bay Area's congresswomen, if the Treasury bonds owned by the trust were the same as those owned by, say, the Chinese or the Japanese. She, as a former investment banker who should recognize any difference, assured me that they were.
So these privatizers who say the system is broken are basically saying that we will honor some U.S. bonds, but not others, and they assume that this won't shake the confidence in our financial system.
One difference, I have learned, is that the bonds earn interest that is just effectively reinvested in more bonds.
Basically, the government has no interest "cost" that they have to use tax revenue to pay, because the Social Security system, already running a surplus, would just turn around and invest that cash back into more bonds anyway.
The Japanese-owned bonds, by comparison, collect interest provided by our tax dollars that they can spend someplace other than in new U.S. Treasury bills if they prefer.
As best I can determine, the interest cost on the Social Security trust bonds is not factored into our general fund "deficit" which this year is calculated at $490 billion. Counting five percent interest on $2.3 trillion would have added another $115 billion dollars â€” something that Gerald Ford would have been quick to point out.
Many government programs investing in U.S. bonds are operated independently of the so-called general fund. Beyond Social Security, the highway fund is a good example, not to mention state and local governments. One of Allen Sloan's problems is that he conveniently forgets that there is interest accumulating on these bonds held by the Social Security trust.
His short-term memory loss also ignores that this same surplus made it possible to retire most of the other government debt just eight years ago which set the stage for subsequent tax cuts and run-away spending.
Nobody back then was declaring that we "don't owe nothin' to nobody." Not one think tank proclaimed that "this nation is now debt-free!"
With responsible leadership â€” namely, politicians telling us what we don't want to hear â€” we can get back to some semblance of normalcy. Higher taxes are a given. If so, the most practical antidote from an investment standpoint will be to stuff as much money now into tax-sheltered retirement accounts.
Consider spending down any after-tax savings or use home equity if that's what it takes to afford maximum contributions into your IRA's and 401(k)'s. In other words, batten down the hatches and be prepared for some heavy lifting.