The Insecurity Of Social Security


According to the June 2017 snapshot from the Social Security Administration, nearly 61.5 million people were receiving a monthly benefit check, of which 68.2% were retired workers. Of these 41.9 million retirees, more than 60% count on their Social Security to be a primary source of income.

Of course, that dependency ratio is directly tied to financial insolvency of the vast majority of Americans.  According to a Legg Mason Investment Survey, US baby boomers have on average $263,000  saved in defined contribution plans. But that figure is less than half of the $658,000 they say they will need to retire. As noted by GoBankingRates, more than half of Americans will retire broke.

This is a huge problem that will not only impact boomers in retirement, but also the economy and the financial markets. It also demonstrates just how important Social Security is for current and future generations of seniors.

Of course, the problem is that according to the latest Social Security Board of Trustees report issued last month, those benefits could be slashed for current and future retirees by up to 23% in 2034 should Congress fail to act. Unfortunately, given the current partisan divide in Congress, who have been at war with each other since the financial crisis, there is seemingly little ability to reach any agreement on how to put Social Security on sound footing. This puts those “baby boomers,” 78 million Americans born between 1946 and 1964 who started retiring last year, at potential risk in their retirement years. 

While the Trustees report predicts that asset reserves could touch $3 trillion by 2022, implying the program is expected to remain cash flow positive through 2021, beginning in 2022, and each year thereafter through 2091, Social Security will be paying out more in benefits than it’s generating in revenue, resulting in a $12.5 trillion cash shortfall between 2034 and 2091. That is a problem that can’t be fixed without internal reforms to the pension fund due specifically to two factors: demographics and structural unemployment.

With respect to the demographic problem, it is a “one-two knock out punch” that will hit not only Social Security but also the country’s municipal and Federal pension systems. As I noted previously:

“One of the primary problems continues to be the decline in the ratio of workers per retiree as retirees are living longer (increasing the relative number of retirees), and lower birth rates (decreasing the relative number of workers.) However, this ‘support ratio’ is not only declining in the U.S. but also in much of the developed world. This is due to two demographic factors: increased life expectancy coupled with a fixed retirement age, and a decrease in the fertility rate.”

The structural shift in employment, due to the impact of technology and automation, is an overarching problem that few give little attention to.

While the mainstream media’s focuses their attention on the daily distribution of economic data points, there is a hidden economic depression running along the underbelly of the country. While reported unemployment is hitting historically low levels, there is a swelling mass of uncounted individuals that have either given up looking for work or are working multiple part time jobs. This can be clearly seen in the chart below which is the working age population of those between the ages of 16 and 54 as a percentage of that same age group. This strips out the argument of retiring baby boomers, who ironically, aren’t retiring not because they don’t want to, but because they can’t afford to.

These higher levels of under and unemployment have kept pressures on wages even as work hours have lengthened. The declines in real income are evident as the burgeoning “real” labor pool, and demand for higher wage work, is actually suppressing wages as companies opt for increasing productivity, continued outsourcing, and streamlining employment to protect corporate profit margins. However, as the cost of living is affected by the rising food, energy and health care prices without a compensatory increase in incomes – more families are forced to turn to assistance in order to survive.

Without government largesse, many individuals would literally be living on the street. The chart above shows all the government “welfare” programs and current levels to date. The black line represents the sum of the underlying sub-components.  While unemployment insurance has tapered off after its sharp rise post the financial crisis, social security, Medicaid, Veterans’ benefits and other social benefits have continued to rise.

Importantly, for the average person, these social benefits are critical to their survival as they make up more than 22% of real disposable personal incomes. With 1/5 of incomes dependent on government transfers, it is not surprising that the economy continues to struggle as recycled tax dollars used for consumption purposes have virtually no impact on the overall economy.

As millions of “baby boomers” approach retirement, more strain is put on the fabric of the welfare system. The exact timing of this crunch is less important than its inevitability.

There are two critical factors driving this inevitability. The first is that the number of “real” employees, while growing, is in lower income producing and temporary jobs, and the rate of job growth is substantially lower than the growth of the population. Since social security contributions are calculated as a percentage of income – lower income levels produce lower contributions.

The second factor, as shown above, is the ever larger share of personal incomes being made up of government benefits reduces social security contributions.

As stated above, the biggest problem for Social Security, and the U.S. in general, comes when Social Security begins paying out more in benefits than it receives in taxes. 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 tax revenues alone. 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 the “welfare state.” It is highly unlikely the latter will happen.

As millions of baby boomers begin to retire another problem emerges as well. Demographic trends are fairly easy to forecast and predict. Each year from now 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.

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-workers per retiree, and by 2025, it will reach–and remain at–about two workers per retiree. In other words, 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. Back in 1966, each employee shouldered $555 dollars of social benefits. Today, each employee has to support roughly $18,000 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 where no amount of wishful thinking will change that outcome. 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.


CheapBastard Joe Davola Fri, 08/11/2017 - 10:58 Permalink

SS should not be touched. People who actually worked and contributed deserve it back. Instead, cut free shit handed out now to people who NEVER worked, esp illegals who come here and get free tuition, meical care, etc and they never put a dime into the system.NO ONE should be able to get benefits unless they have worked and contributed a minimum of perhaps 5 years into the system.

In reply to by Joe Davola

Creepy_Azz_Crackaah (not verified) CheapBastard Fri, 08/11/2017 - 11:08 Permalink

The sad thing is that many won't be "earning" enough from their SS to pay the gubmint their rent (property taxes) on their lifelong homes. In displays of compassion, local gubmints will throw them out on the street, sell their homes, then pay the gubmint retiree pensions with the loot.

"Well, we made promises of HUGE retirement incomes to our gubmint slug employees. We can't go back on our promises. Good luck living on the street."

Yeah, it's their fault that they didn't save but property taxes should NOT be $1000/month either.

In reply to by CheapBastard

MalteseFalcon Creepy_Azz_Crackaah (not verified) Fri, 08/11/2017 - 11:29 Permalink

This article is tired and transparent BS.Of course, Legg-Mason wants you to believe that SS is going broke, and you need to save more and give it to Legg-Mason to manage.SS isn't going broke, and as long as interest rates are zero and the stock market is a bubble, the Legg-Mason's of this world are not going to get any more savings to manage.A more relevant question is:  what will become the Legg-Masons of the world when this market crashes?

In reply to by Creepy_Azz_Crackaah (not verified)

AGuy MalteseFalcon Fri, 08/11/2017 - 11:42 Permalink

"SS isn't going broke"

It uses current revenue to pay for retirees but even with the current and pending cap hikes, its still going be underwater in a few years. What is likely to happen is that the payroll taxes will increase so that current workers are forced to pay more. Also Medicare & Medicaid is been running deficients for over a decade usually running deficits in the 100's of billion per year. This is going to get worse as more people sign up.

In reply to by MalteseFalcon

MalteseFalcon AGuy Fri, 08/11/2017 - 12:43 Permalink

Under the current setup SS will pay full benefits for the next decade.Will the tax rate or the wage cap raised?If needed, yes, just like a dozen times before.So, like a dozen times before, problem solved.This article is not about Medicaid or Medicare.In the next two years this is far more likely to occur:.A CEO from a bankrupt money management firm standing on a street corner holding a sign that says, "Will suck dick for invest-able savings."

In reply to by AGuy

AGuy MalteseFalcon Fri, 08/11/2017 - 21:11 Permalink

"Will the tax rate or the wage cap raised?"

I think Both. The cap has been increase just about every year for the past 2.5 decades. But At this point its diminishing returns since fewer and fewer people make above the cap Now at 127,200, up from 118,500 last year). I think they will need to raise the rate on everyone to cover the gap.

"Under the current setup SS will pay full benefits for the next decade."

I am not sure that is true. Especially if the US falls into a recession. For the past 8 years, the SS crisis has been postponed because boomers are working well past their retirement years. But I think the boomers in the early to mid seventies are going to start retiring soon, simply because because of health issues, or their jobs have got outsourced or automated.

My guess is that within the next two years the SS rate increases up from 12.6% to 14% or 15% (perhaps staged over a couple of years).

But as taxes go up, coupled with rising healthcare costs, Companies are likely to replace workers with more automation and outsourcing. Plus states and towns are raising taxes to deal with the Pension crisis. I think there is a limit to squeezing blood from a stone, and at some point taxation increases is going to cause revenue distruction as companies outsource, automate or go out of business.

In reply to by MalteseFalcon

Creepy_Azz_Crackaah (not verified) FreeMoney Fri, 08/11/2017 - 13:26 Permalink

For many, years ago, it was. Some municipalities with pension plans were allowed to opt out of SS. Any fed gubmint employee who started working for the gubmint before 1984 didn't/doesn't pay into SS (or collect) but gets a YUGE gubmint pension instead.

In reply to by FreeMoney

FreeMoney Creepy_Azz_Crackaah (not verified) Fri, 08/11/2017 - 14:30 Permalink

No argument there.  However with Social Security your ( and my ) money is gone.  There is no "Account", there is no "Trust" and there is no enduring "Fund".  We have been taxed 15.3% and our expected return is less than what we paid.  It is a ponzi by its very definition.  I would never had joined if this was voluntary.  Just imagine if all the other "charity" government programs were voluntary.  Would you donate to the UN?  Would you donate to SNAP?  How about Section 8 housing?  How about student loans guarantees?  These are the tyrannys of our time.

In reply to by Creepy_Azz_Crackaah (not verified)

junction Bigly Fri, 08/11/2017 - 11:01 Permalink

$3 trillion in Social Security reserves, less than what the United States spent waging wars in Iraq and Afganiistan over the past 15 years. Senator Feinstein's family controlled construction firm made billions on the military construction contracts she okayed as chair of the MilCon Senate subcommittee, allowing her to buy her $25 million Washington, D.C. mansion.  The Bush Crime Cartel made even more, from narcotics sales and from the sale of stuff like depleted uranium rounds.  Let's not forget all thoses damaged soldiers who went onto SSI after serving tours in war zones to protect the NWO's poppy fields, the ghoulish organ harvesrters and the Saudi jihadist imans. Everything is connected, mostly to George H.W. Bush, the point man and killer for the NWO.

In reply to by Bigly

Iskiab junction Fri, 08/11/2017 - 13:57 Permalink

I like George Bush Sr., I think since WW2 the US has only had 3 good Preaidents; him, Kennedy and Roosevelt. While he was the head of the CIA (an institution that's probably done more harm then good) while President he made excellent decisions. Raising taxes when needed to control the deficit (despite that being his downfall), not Invading Iraq after Kuwait (the effects of not going in without a plan is playing out to this day) and he especially provided stability.

He was panned for being boring, and pissed off his base by raising taxes and not being a warmonger but they were the right choices. More importantly, he knew they'd be unpopular and went ahead anyways because they were the right thing to do. We need more politicians like him.

In reply to by junction

Philo Beddoe Fri, 08/11/2017 - 10:45 Permalink

Show of hands...who is counting on SS?Anybody under the age of 50 who has their hand up please step outside and pray and ask your God for wisdom and a kick in the ass.There, get that little nugget out of your head. If you acutally get a dime of this shit consider it found money.

eclectic syncretist Philo Beddoe Fri, 08/11/2017 - 10:59 Permalink

Elvis said it best!Senior serviceJunior dissatisfactionIt's a breath you took too lateIt's a death that's worse than fateSenior serviceJunior dissatisfactionThough it may be second handIt's by no means second rateI want your neckI want the seat that you sit atI want your checkBecause they told me I would get oneI want to chop off your head and watch it roll into the basketIf you should drop dead tonight then they won't have to ask me twiceThey took me in the office and they told me very carefullyThe way that I could benefit from death and disabilityI want your company carI want your girlfriend and loveI want your place at the barBecause there's always another manTo chop off your head and watch it roll into the basketIf you should drop dead tonight then they won't have to ask me twiceSenior serviceJunior dissatisfactionIt's a breath you took too lateIt's a death that's worse than fateSenior serviceJunior dissatisfactionThough it may be second handIt's by no means second rate

In reply to by Philo Beddoe

Cloud9.5 Philo Beddoe Fri, 08/11/2017 - 12:23 Permalink

The only way social security goes under is if the government collapses the currency.  The walker brigade which I am part of vote.  To shut down social security would be political suicide.  You are dealing with a political class that is accustomed to talking a thing into reality by writing a law.  The charade goes on until the currency collapses or the electricity goes off.

In reply to by Philo Beddoe

Nostradumbass Fri, 08/11/2017 - 10:45 Permalink

Unwise to retire dependent upon SS or even private/public pensions these days... must have other source of income to sustain the golden years if not going to keep working.I worked with a fellow who thought of his pension, which was going to be quite substantial, as a bonus - not a necessity. That was smart planning.

shizzledizzle Fri, 08/11/2017 - 10:46 Permalink

Lot of folks with the "disability" of not wanting to work in the in the remaining %31.8 that aren't retirees. Wonder how much of that number can be accounted for in the lack of workforce participation rates?

Nostradumbass shizzledizzle Fri, 08/11/2017 - 10:53 Permalink

I despise these fake disability retirees. They have pushed the sure to fail system over the cliff much earlier than it should have been. In particular, public safety parasites - fire, police etc. have done this in droves. I think a snitch system should be created whereby anyone caught not being 'disabled' forfeits their pension and the ones who catch them get a reward.

In reply to by shizzledizzle

Dr. Richard Head shizzledizzle Fri, 08/11/2017 - 11:12 Permalink

And never mind COLA increases based on "official" hedonically and seasonally adjusted CPI numbers or for energy or housing to all of the sudden disappear from the "CPI" calculation.  Theft everywhere through the calculations of the official government numbers, money printing, debt issuance. fractional reserve lending, and taxes.Ron Paul was correct when he said something to the effect of...if the federal government had to actually tax the US population directly for all of the welfare (corporate and social) and warfare then all of it would end immediately.  Since the government can inflate the currency away then the true costs for all of these programs can be delayed.  

In reply to by shizzledizzle