Social Security no Longer the Safety Net It Once Was

The most terrifying words in the English language are: I’m from the government and I’m here to help. ~Ronald Reagan

Every paycheck you receive shows a line item in the withholding column: Social Security Employee. Or at least it says something to that effect. This is a constant reminder that you, the employee, will one day apply for Social Security retirement. But will the money be available when that day comes? According to the Center on Budget & Policy Priorities (CBPPP), probably not. At least, not all of it.

Social Security was created in 1935 at a time when the country was in the midst of the Great Depression. Due to the stock market crash many had no money and there were no jobs to speak of. During the depression, unemployment was at an all-time high, reaching as high as 25% in 1933. Because of this, Social Security, at the time called “Federal Old-Age & Survivors Insurance” was created for those unable to care for themselves because of age, loss of a wage earner, or disability.

WASHINGTON, DC – APRIL 23: Health and Human Services Secretary Kathleen Sebelius (R) speaks as U.S. Treasury Secretary Timothy Geithner (C), and Labor Secretary Hilda Solis (L) look on during a briefing to release Social Security and Medicare trustees reports at the Treasury Department April 23, 2012 in Washington, DC. The reports project that, when considered on a combined basis, Social Security’s retirement and disability programs have dedicated funds sufficient to cover benefits for the next 20 years, but in 2033, incoming revenues and trust fund resources will be insufficient to maintain payment of full benefits. (Photo by Win McNamee/Getty Images)

How Critical is the Problem?

According to the trustee’s 2016 report, social security will cease to be solvent in 2022, meaning they will no longer pay out each month less than they bring in. Even more alarming is the same report stating the trust fund will run out of money entirely by 2034. But how? How does a trust fund receiving millions of dollars in deposits each month go broke? In short, beginning in 2033 there will be more people retiring, thus taking from the system, than are paying into it via mandatory payroll deduction.

But There are Other Factors in Play

A little-known law related to the social security trust fund, put there at inception, states the surplus monies must be invested immediately into US government T-Bills. More specifically, the law states:

It shall be the duty of the Managing Trustee to invest such portion of the Trust Funds as is not, in his judgment, required to meet current withdrawals. Such investments may be made only in interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States.

Who’s the Managing Trustee? Has anyone outside the finance world heard of this person? All monies collected via our paychecks goes into a trust fund, which is managed by members of the presidential cabinet, as well as two public trustees.

Isn’t this a little bit like the fox guarding the chicken coop?

Another reason the country’s social security trust fund seems to be in trouble is due to past presidents’ administrations reallocating monies from Social Security Retirement to the disability trust fund to prevent its going broke. The most recent time this happened was in 2015, when the Obama administration voted, as part of their budget, to reallocate $150 million to the Disability Trust to prevent it going bankrupt at the end of 2016. This isn’t the first time this problem has presented itself, so it should come as no surprise monies are being converted to support its sister program, should it? I mean, heck… Everyone else is doing it. Why not?

Is the Social Security System a Ponzi Scheme?

According to Investopedia, it sure is. A brief definition of a Ponzi Scheme is, “…a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors.” Forbes Magazine, a premier investment and money periodical, has a contributor to their pages, John C. Goodman, who explains why Social Security was made this way.

Irony alert: Back in 2009, Bernie Madoff was sent to prison for 150 years for doing exactly this, wasn’t he? And who was it that prosecuted him? The federal government? I’m just gonna leave this here…

NEW YORK – MARCH 12: Financier Bernard Madoff arrives at Manhattan Federal court on March 12, 2009 in New York City. Madoff is scheduled to enter a guilty plea on 11 felony counts which under federal law can result in a sentence of about 150 years. (Photo by Stephen Chernin/Getty Images)

What’s the Solution?

This question was asked of EF Hutton’s Director of Individual Investments, Hugh Rhodes, and his solution was to allow for actual investment of our social security withholding, rather than “investing” in just T-Bills. Other countries do it. It’s called a “Sovereign Wealth Fund” and over 40 countries around the world have one, with remarkable success.

Rhodes also stressed the following, “The Social Security Trust fund is supposed to be a perpetual trust that should be invested for the long term. No competent financial planner or trust officer would willfully invest an entire portfolio into US Treasury Bills based on the goal and time frame of the trust.   While this strategy worked fine for decades as (social security)tax receipts exceeded expenditures, now that the opposite is true the low returns generated by the Treasury only portfolio is no longer enough to grow the Trust fund at a sustainable rate.

“A properly allocated and diversified portfolio would have alleviated this risk over the long term and the value of the Trust would most likely be significantly higher.” (Editor’s note: This link takes you to a chart showing receipts and expenditures of the Trust since 1957)

Diversity is key to a successful trust, and the federal government simply isn’t doing this.

So why doesn’t the United States create a Sovereign Wealth Fund with the Social Security Trust funds? One led by a third party who will do their level best to ensure the fund makes money?

The reality is, our federal government should maintain a hands-off approach with regard to the running or finances of a private corporation. (*Cough*Cough*General Motors*Cough*Cough*) Investing in the stock of a particular company, or ten, could be interpreted as a sign of governmental favoritism or interference. Secondarily, they wouldn’t have the money in either the SSI or Disability trust funds to kick back and forth between the two, “preventing” bankruptcy of either one. It’s been asked more than once, though, “What if they did?

The bottom line is this: Social Security’s reached the end of it’s financial life, or at least it could by 2034, if the Social Security Trustees and their actuaries are correct. Do the math. That’s only 16 years from now. That’s less than two decades. If you’re a high school senior right now, this means by the time you reach the age of 34, the prime of your adult years, social security retirement goes the way of the unicorn and the dodo bird. Gone. Kaput.

But you have time to make up for this with some wise investing now. Whether it’s your company’s 401(k) or a personal IRA or investment account, the younger you are, the easier it is to plan. Those new to the workforce, fresh out of college, with tens of thousands of dollars in student loans, can still set aside retirement funds, even if it’s just $20 every two weeks. You’ll never miss it, but over time that $20 a paycheck can become substantial, according to Motley Fool.

How do you feel about where you stand for retirement? Get in touch with a personal investment professional, one who will help you plan for your future based on your needs and goals. Make your retirement a comfortable one that you control.

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