International Man: The Social Security Administration recently announced an 8.7% cost of living adjustment for next year. That’s the largest increase in over 40 years.
It represents an additional about $100 billion in annual spending for Social Security. Moreover, cost of living adjustments could increase even more in the future.
However, it seems the government will pay for this $100 billion by printing even more currency, which will make prices rise, even more, necessitating further cost of living increases.
What do you make of this?
Doug Casey: From its very inception Social Security was an unsustainable Ponzi scheme. They anticipated that money from new contributors would pay off early recipients. For decades they had demographics on their side; the average American was young and had a large family, and the economy was growing.
Worse, Social Security corrupted Americans, making them think they didn’t have to save for their own future—that the government would provide for them. Meanwhile, the extra tax burden made it harder for them to do so, supporting a dysfunctional bureaucracy of over 60,000 employees.
But they’ve reached a tipping point. The average American is 39, about the age when someone might become a grandparent. The economy is headed downward. And the average family is way below the replacement level of 2.2 children. Social Security currently pays about 50 million retired people every month, about one out of six people in the US. As late as 1960, there were five workers for every Social Security recipient. By 2010 it became three to one. By 2030 each beneficiary will be supported by two workers. Demographics are destiny—especially for Ponzi schemes.
Don’t count on millions of low-skilled migrants to solve the problem. For one thing, there aren’t going to be many young Chicano males in California anxious to pay 20% of their incomes to support old Anglo women in Massachusetts.
In addition, and perhaps even more serious, is that Social Security pays over eight million disabled people. What kind of hard-hearted ogre, you might be thinking, could object to a pittance for the disabled? The answer is anyone with a clue about how insurance is supposed to work. In the past, the Social Security definition of disability was extremely stringent and tight; disability benefits were only payable if you were literally on death’s door. Today, however, almost anybody with a real or imagined bad back, chronic headaches, or psychological disorder—and a compliant doctor—can collect Social Security disability benefits. Disability is a huge moral hazard compounding the system’s unsound actuarial base.
The taxes for Social Security retirement benefits started out at 2% in 1937; now they’re 12.4% up to about $145,000. Medicare and Medicaid are now integrated into the system and tag all taxpayers an additional 2.9% per year with no limit. Since the system is underfunded by many trillions, the taxpayer “contribution” can only go up. The money that you paid into Social Security was never tax deductible, but the benefits were at least tax-free. That changed in 1983 when benefits became taxable.
Despite the fact that it’s a horrible deal in terms of what a person pays relative to what he gets, Americans have been taught to love and respect Social Security. In fact, they now need it. The government reports that most older Americans rely on it for most of their income, and a quarter of SS recipients rely on it for 90% of their income.
If the government was going to enforce people to save for their retirement or a rainy day, they might have done it like the Chilean government under Pinochet. Chileans’ money went into what amounted to an IRA account invested in the stock market. I’m not sure what the number is now, but at least until recently, the average Chilean citizen—not so long ago a backward Third World mining province—had a higher net worth than the average American. Further, the Chilean owns his account as a personal asset.
But it may be a bit late to talk about reforming the US Social Security system, which is totally bankrupt.
Another $100 billion added to the annual budget deficit can only be financed by more money printing. The US government can no longer borrow the funds, as it once did. They used to say, “Don’t worry; we owe it to ourselves.” That became impossible with a lack of domestic savings. Then we borrowed from the Chinese and the Japanese, who are now trying to get rid of their hot potato dollars. They don’t want to hold the unsecured liabilities of a manifestly bankrupt government. They recognize that they could find themselves in the same position as the Russians.
In any event, increases in SS benefits must now be financed by the Federal Reserve printing up money. Another hundred billion dollars to finance the Ponzi is comical. Some readers may remember a US Senator named Everett Dirksen who once quipped, “A billion here, a billion there… pretty soon it adds up to real money”. Well, a trillion is the new billion.
International Man: The CPI is a significant factor in calculating the Social Security cost of living adjustments.
However, the CPI is a rigged statistic because the government gets to cherry-pick the inputs and other factors to get the desired results. As a result, it’s apparent to any independent observer that the CPI understates the situation.
What is your take on using the CPI to calculate the cost of living adjustments?
Doug Casey: The retail price rises that we’re seeing in the US are just a start. The 8.7% number is fictitious; it’s financial imagineering. Inflation, you must remember, is an increase in the money supply. Retail price rises are the result of inflation, not its cause. But the US budgets, deficits, and money supply are so far out of control that the numbers are academic. Inflation is going much higher—unless, of course, the Fed causes a deflationary credit collapse. The entire system is bankrupt. SS, Medicare, and Medicaid add up to well over 50% of Federal spending. They’re mandatory and growing rapidly as the population ages. They’re major reasons for the looming US national bankruptcy.
Some years ago, a poll asked Millennials whether they thought that they were ever going to collect Social Security. Most of them felt that the chances of an alien invasion were greater than those of collecting Social Security. And they’re actually quite correct. It’s a Ponzi scheme that’s coming to an end.
US government accounting is totally out of control. Hundreds of billions, even trillions of dollars, get lost, misplaced, or miscounted. But as best we can tell, about one-third of all government spending is on Social Security. Another 27% of government spending is on Medicare and “health,” and about 16% goes to the military. So 75%, more or less, of the US government budget goes just towards those three things. There’s not much “discretionary” room. And absolutely nothing is going to improve with Jacobins in DC for at least another two years trying to impose a Great Cultural Revolution on the country.
They used to have the concept of a “lock box,” wherein the money raised for Social Security went into a segregated fund, buying a special class of government bonds to fund the system. It sounded good, but the concept was a ridiculous grift. The special bonds set aside for retirees would have to be redeemed with future taxes. But bonds don’t represent a real asset, something tangible and productive; they just represent more debt. This concept has long since gone out the window. SS income and expenses are part of the general revenues of the US government.
In recent years we’ve had the lowest interest rates in all of history. Interest on the official $31 trillion+/-national debt is something like $300 billion per year, and that’s roughly 7% of the US government spending. But with interest rates going to, let’s say, 6%, soon half the budget will just be to pay interest. I think rates are going much, much higher. I think they’re going necessarily back to the levels that they were in the early 1980s. Which, I know, seems impossible.
There’s no wiggle room here at all to, for instance, bail out the FDIC—which is grossly underfunded—when banks start failing. Or bail out major corporations and insurance companies, which will happen as they suffer gigantic losses due to interest rates going up.
We’re in the final acts of this play. The inevitable has become the imminent.
International Man: What do you say to young people who the government coerces into funding Social Security?
Doug Casey: There’s really not much that they can do because it’s a tax.
If you don’t pay your Social Security, an agent from the IRS—and there are 87,000 new agents that are being hired—will knock on your door, seize your assets, and garnish your income. It’s a criminal swindle because the 12.4% for FICA plus 2.9% more for Medicare that young people have to pay makes saving nearly impossible for many. That’s money which, if it was invested, would build individuals’ assets and provide the capital to build and grow the economy.
But it won’t be there. It’s been frittered away with corrupting welfare payments funded by a Ponzi scheme. Millennials will have to retire on a bag of worthless promises and phony digital dollars. What do I suggest they do? Redouble their efforts to work harder, and consume less—as much as that may sadden the local avocado toast and vanilla latte emporium. Use your savings to buy gold and silver coins as a first step.
Social Security is perhaps the greatest criminal swindle in history. It should be abolished, and what assets it has should be divided among people over 55 who may not have time to repair the damage it’s done and may need Social Security. But it should be gotten rid of in its entirety, ASAP.
International Man: What will happen to Social Security in the next 5, 10, and 15 years?
What are the social, political, and investment implications?
Doug Casey: Let me share an objection to what I’ve said. Namely, SS can’t be abolished because it’s become part of the US social fabric.
I have an ex-associate, not a prudent guy, but he always had a high income throughout his life. Now he’s in his 70s and basically penniless, living on Social Security. And it’s rather odd because when he was living high on the hog, he made a big political statement, quite correctly, about how Social Security should be abolished. But now, ironically, he’s living on it. There are a lot of people in that position now and will be many more in this decade.
We often hear that half of Americans can’t even lay their hands on $500 cash; not only don’t they have any money, but they have lots of debt. So it’s not going to be pretty for people relying on Social Security because it’s bankrupt too.
So what are the implications of this?
Social Security is now and has always been a gigantic time bomb. Nobody talks about its bankruptcy, but they should. They say it can be repaired. That’s a lie. We’re looking at not just the collapse of the financial markets and the economy but serious social disturbances and perhaps some radical (near revolutionary) political changes. When people find that their Social Security check can’t cut it, the natives are going to get very restless.
Reprinted with permission from International Man.