Guest Post: Social Security Has A Real Problem

Tyler Durden's picture

Submitted by Lance Roberts of Street Talk Live,

The Social Security Administration made an alarming announcement recently that they will exhaust their funding capability by 2033 which was several years earlier than originally projected.   According to a recent article from Reuters"Unless Washington politicians, who have been at war with each other over government spending priorities and federal budget deficits, can decide how to put Social Security on a sound footing, retirees' pension checks would start running out in 2033, according to an annual report. 


The baby boomers - those 78 million Americans born between 1946 and 1964 - started retiring last year. With 10,000 of them expected to retire every day for the next 19 years, according to the Pew Research Center, they will increasingly strain Social Security." 

As millions of baby boomers approach retirement more strain is put on the fabric of the Social Security system.  The exact timing of this crunch is less important than its inevitability.  The problem that Social Security has is "real" employment.  I say "real" employment simply to sidestep the ongoing arguments about the validity of government employment survey's from the Bureau of Labor Statistics.  The question we want to know is if we are creating jobs and what types of jobs are we creating?  The answer to those questions tells us much about the strength of the underlying economy.

The Federal Government receives income from the Social Security "contribution" from employee's paychecks.  The chart above shows the annual levels of employment as reported by the BLS versus the receipts of social security contributions.  As you can see while there has been a negligible increase in the number of non-farm employees - social security "contributions" have decreased sharply by almost $70 billion from its peak.

This is due to two factors.  The first is that the number of "real" employees, while growing, is in lower income producing and temporary jobs. Since social security contributions are calculated as a percentage of income - lower income levels produce lower contributions.  We have written about this previously on the "real" employment situation.  However, in a recent interview Richard Yaramone spoke specifically to this issue stating "I'm fortunate enough to travel and speak to chambers of commerce with 300 to 500 people in the audience. They all tell me, 'Hey, listen, I am letting go of workers. I'm hiring them back at a fraction of what I used to pay them.  You hear from the other side, 'Hey, I finally got a job after two years of being unemployed. I used to make $100,000 (each year), now I'm making $45,000 or now I'm working part time.' Or (you hear), 'I used to make $500,000 and now I'm making $200,000 or making $125,000.'...."

Here is the key statement and something that we address often in regard to the NFIB survey's:  "So you are actually seeing this collapse, contracting on a real basis, of real disposable personal incomes. If you don't have the money, you can't facilitate expenditures. So that's the core of the problem. That's what's really going on in the US economy.  You don't listen to what all of these bigger numbers coming across the screen tell you. You talk to the people who are running the country. 99.7% of all employer firms in this country are small businesses. So when they speak, you have to listen."

The second factor is that a larger share of personal incomes is made up of government benefits which does not affect social security contributions. The chart tells the tale in this regard.  Since the financial collapse government support of personal incomes spiked from just over 25% of incomes to almost 35%.  This also does not include the 45 million plus Americans also collecting nutritional assistance, or "food stamps", from the government.  

The dependency upon government for financial support is a long term economic problem because it reduces economic prosperity.  However, the problem that Social Security faces is that the program's annual cash surplus continues to shrink due to lower receipts from working American's.  The problem for Social Security, and the U.S. in general, comes long before 2033.  In 2017 or 2018, just 5 to 7 short years from now, Social Security will begin paying out more in benefits than it receives in taxes.  It could come even sooner.   As the cash surplus is depleted, which is primarily government I.O.U.'s, Social Security will not be able to pay full benefits from its payroll and other tax revenues. It will then need to consume ever-growing amounts of general revenue dollars to meet its obligations--money that now pays for everything from environmental programs to highway construction to defense.  Eventually, either benefits will have to be slashed or the rest of the government will have to shrink to accommodate Social Security.

As millions of baby boomers begin to retire another problem emerges as well.  Demographic trends are fairly easy to forecast and predict.  (My friend Doug Short has done some excellent work in this area)  Each year from 2008, when those born in 1946 reach Social Security's early retirement age of 62, until 2025 we will see successive rounds of boomers reach the 62 year-old threshold.  There is a twofold problem caused by these successive crops of boomers heading into retirement.  The first is that each boomer has not produced enough children to replace themselves which leads to a decline in the number of taxpaying workers.  It takes about 25 years to grow a new taxpayer.  We can estimate, with surprising accuracy, how many people born in a particular year will live to reach retirement. The retirees of 2070 were all born in 2003, and we can see and count them today.

The second problem is the employment problem.  The decline in economic prosperity, that we have discussed extensively, caused by excessive debt, reduction in savings, declining income growth due to productivity increases and the shift from a manufacturing to service based society will continue to lead to lower levels of taxable incomes in the future.  Furthermore, with unemployment in the U.S. remaining stubbornly high, the longer that all-important 25-35 year old person remains unemployed the related loss in relevant job skills leads them to becoming unemployable.

This employment conundrum is critical.  Back in 1950, as the baby boom was just beginning to start, each retiree's benefit was divided among 16 workers. Taxes could be kept low. Today, that number has dropped to 3.3 workers per retiree, and by 2025, it will reach--and remain at--about two workers per retiree. Each married couple will have to pay, along with their own family's expenses, Social Security retirement benefits for one retiree. In order to pay promised benefits, either taxes of some kind must rise or other government services must be cut.  The chart shows this relationship between social benefits paid out in total (including social security, Medicaid, Medicare, etc.,) and the burden upon each non-farm employee.   Back in 1966 each employee shoulders $555 dollars of social benefits.  Today, each employee has to support $17,387 of benefits.  The trend is obviously unsustainable unless wages or employment begins to increase dramatically and based on current trends that seems highly unlikely.

The entire social support framework faces an inevitable conclusion and no amount of wishful thinking will change that.  The question is whether our elected leaders will start making the changes necessary sooner, while they can be done by choice, or later when they are forced upon us.

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fonzannoon's picture

I love how the baby boomers started retring last year. I know tons that are 63 and retired at 53.

Tippoo Sultan's picture

Means testing will be a foregone conclusion, within one decade's time; of this you may be certain.

Paul451's picture

But by the time congress gets around to implementing it, there wont be anyone left who could be excluded.

We'll all be destitute.

Bicycle Repairman's picture

"The Social Security Administration made an alarming announcement recently that they will exhaust their funding capability by 2033"

WRONG.  FAIL.  DOUCHE BAG.

Backspin's picture

Down arrows?  Bicycle Repairman is correct.  They will not exhaust their funding capability by 2033, simply because they exhausted it long ago.

There is no social security trust fund.  There is no "lock box".  It was all spent long ago.  Now, there is only debt.

sessinpo's picture

Tippoo Sultan                           2378449

Means testing will be a foregone conclusion, within one decade's time; of this you may be certain.

 

Comment:

Take a step further. I agree with you testing will happen. At this point the foregone conclusion should be SS insolvency.

Harlequin001's picture

I suspect that once the bond markets collapse the elderly and retired will be living with their children.

Bicycle Repairman's picture

Go ahead and means test people who have saved nothing and have no pension.  They will be collecting $12K-$20K a year and that will be their entire income.  You want to tax them?  Well, what do you think the tax will be on your $50K to $100K wage?

Bicycle Repairman's picture

To the people who downgraded me:  I'm sorry you didn't think it through.  It's a real bitch.

Harlequin001's picture

Where will they get the $12-20K a year from?

The govt won't have any money...

greyghost's picture

the u.s. goverment has all the money it wants. as sec. of the treasury i have this day ordered treasury employees to direct deposit all soc. sec. payments direct into all retires' checking accounts. these payments are created out of thin air, at a computor keyboard just like the federal reserve creates money out of thin air and at no cost. these payments will be considered a no cost solution to the generational ponzi scheme called soc. sec. payments into and by current workers to fund soc. sec. will continue ,however those reciepts will be used to pay down the debt of the united states. these actions are by executive order by the president of the united states and require no approval by congress.

Buck Johnson's picture

Bingo, they will mean test like crazy and make it a crime to hide assets while doing this for SS.  And heaven help the people getting disability via the SS, they may send you to federal prison aka "camps" for defrauding them if something doesn't fit.  Maybe this will explain why 450 million hollow point bullets where bought by the DHS (dept of homeland security). 

They may be getting ready for the inevitable cuts in benefits and such.

i-dog's picture

... but ... but ... it was an "investment"! Those who put in will want it all back, plus interest. Those who didn't put [much] in will still want a full benefit (and will probably pass the "means" test, too)!

Cabreado's picture

The 53-year-olds could either a) afford it  b) thought they could afford it, or c) owe their future to the govt/public unions.

(b) and (c) are in for a surprise.

samlowrey's picture

I love it when an ill conceived government ponzi scheme clashes with its own faulty labor statistics.  It's like two morons meeting in the middle of a busy highway and getting run over!  Darwin at its finest!

A Lunatic's picture

Just raise the age of eligibility to 87 1/2. See, all better..........

Born-Again Bankster's picture

No, no no.  You gotta think outside the box.  DECREASE the age to 50, but require anyone accepting benefits prior to 87.5 sign a life insurance policy payable to the US Gov in order to receive benefits.  They should be able to bundle those up, derivitive the shit out of them and get us at least another 10 years of prosperity before we have an "accidental" water poisoning at state-run nursing homes nationwide.   

bobert's picture

Gee I like the way you think!

Bicycle Repairman's picture

There are plenty of boomers whose "nut" is so large they can never retire.  They will continue to work, and contribute, until they drop.  Just like you.  Happy now?

Dre4dwolf's picture

Just raise the age of eligibility to 90, and instill a mandatory age limit of 89....... problem solved.

At the age of 89, all men and women will be forced to fight to the death in the jungle on national television.

Conman's picture

Thats ok, they will just start deducting social security from social security payments.

lemonobrien's picture

they already do, when you pay income tax.

Conman's picture

True in some cases it is taxable but that just goes to bailing out banks, food stamps, and keeping the postal service running. They need a direct way to keep ss running, They should just create a SIV for social security and have the fed buy it or give banks money to buy it.

bobert's picture

I'm voting for you and Born Again Bankster for congress.

 

UP Forester's picture

There's a problem with Social Security?

What, someone stole the 3-ring binder of IOUs from the filing cabinet?

Bicycle Repairman's picture

No, the political class doesn't want to be blamed for the coming debacle, so they are looking for a "divide and conquer" issue.  They want old fighting young.

WonderDawg's picture

Doing it with race, as well, as can be seen by the Trayvon Martin charade.

TBT or not TBT's picture

That would be mostly the race hustling party, the party of the Old South, of Jim Crow, of segregation, of the KKK, of violent resistance against civil rights movement.  

They converted over to the new racism a little while after losing the civil rights fight(their yes votes were embarrassingly low in both chambers of Congress), and converted the party of positive discrimination, race hustling, but changing anything on this note: 

they are now and have been since FDR's first race pandering in the FDR Depression, the party of identity politics.    

The NOT E Pluribus Unum party.

The In GOVERNMENT we trust party.

 

TBT or not TBT's picture

Actually FDR predicted this outcome back when they were doing the calculations as to its viability, that someday, as soon as 1980 back when they did the math, the system would become a giant burden to the young.  

It already has been, as people on this site will understand, it has sucked out something like 13% of their potential wages throughout their careers, for most of them, and will not, cannot be paid back.  

It has gone to current expenditure all along.   Poof.    Worse than the spoof about Wall Street investing.

bingo was his name's picture

I remeber a few year back watching some 60 minutes special (I think) on SS and they actually do keep all the bonds/ IOU's on paper in binders - none of it was electronic - fire in nondescript office building and trust fund goes bye bye

Bicycle Repairman's picture

Dude, everybody gets a report on their future benefits from the SSA every year.  I keep mine in a 3 ring binder in a fire proof vault.

TBT or not TBT's picture

Those are...computer printouts...dude holy crap, did you think they hand typed that report?

buzzsaw99's picture

Since the financial collapse government support of personal incomes spiked from just over 25% of incomes to almost 35%.  This also does not include the 45 million plus Americans also collecting nutritional assistance, or "food stamps", from the government...

 

Now we know where the iphone money is coming from.

Dr Benway's picture

Everyone, including the author of this post, assumes that there is some kind of "solution", some way to avoid the decline.

 

But perhaps all this is inevitable

vast-dom's picture

It's paging Dr. Benway with his rusty scalpel to fix the SS patient.

No One's picture

"The entire social support framework faces an inevitable conclusion and no amount of wishful thinking will change that. "

 

but printing is more powerul than wishful thinking!!!

 

lemonobrien's picture

i just want my money back; i want a lump sum pay out now. assholes.

Leraconteur's picture

1) It's not 'my/your money', it never was.

2) You never 'paid in'.

3) You do not have 'an account'.

4) There is no money to get back to you in a lump sum

You were lied to.
It's a tax, there is no contract, you are entitled to nothing.

The money was spent within 2 weeks of your paycheck being cut. It went into the General Fund and paid for all of the government expenditures over your lifetime.

tajitj's picture

Congrats baby boomers. Thanks for about 20% serving, but the other 80% have destroyed my future.

knightowl77's picture

I think it is closer to 5% having served......

Bicycle Repairman's picture

We've all served in the Social Security system.  Service of any other kind is completely irrelevant for the purposes of this discussion.

WonderDawg's picture

Here's an idea for you: take responsibility for your own future rather than pre-emptively blaming someone else for your failure.

tarsubil's picture

Very true. Dad was visiting last weekend, just retired this year, and he was helping with fixing up the house. Little stuff, nothing major. He kept telling me really basic stuff until I finally said I'm a fucking doctor not a retard. He said he was sorry, he just wasn't around when I was younger to teach me any of this stuff (he abandoned the family before I can remember). I said it's okay, life isn't all parades and birthday parties. It was very touching almost like a Hallmark ad.

Just one of the many little ways I get to tell the powers that be to fuck off. You better believe they hate any type of reconciliation between generations.

Everybodys All American's picture

Unbelievable that the author of this article does not discuss the payroll tax cut which funds the friggin system. Less money going in to the system. Gee, guess what happens? The insolvency date gets closer.

Beam Me Up Scotty's picture

It will go insolvent anyway. At least we can keep that 2% today. The people here know what to do with it. So don't look a gift horse in the mouth.

Rainman's picture

Factor # 3 : Odrama dropped the payroll tax rate 2%, a taxpayer savings that transferred immediately to the oil cartel.