Saturday, October 24, 2015

Another 10,000 coming everyday and why entitlement spending will destroy the United States

The title to this blog post is a take off on the lyrics of the Blue Oyster Cult song "Don't Fear the Reaper":

40,000 men and women everyday, Like Romeo and Juliet
40,000 men and women everyday, Redefine happiness
Another 40,000 coming everyday, We can be like they are
 Come on baby, don't fear the reaper

In this case we are not talking about death but entitlement spending and Social Security in particular. I believe that SS and Medicare spending will be the eventual downfall of the US dollar and potentially the United States as a political entity in its current form. That sounds like a provocative statement but lets look at the facts.

In 2008 the first of 78 million Baby Boomers turned 62 and became eligible to draw down benefits.When I say another 10,000 coming everyday this is what I am talking about. Everyday for the next 25-30 years 10,000 Americans will begin to draw benefits from Social Security and Medicare. Mandatory spending on entitlements, such as SS and Medicare, is already consuming two thirds of federal spending.

One of the big problems with SS is that it is a pay as you go system. Money comes into the system and is paid out to current recipients. This worked well when the program was in its in infancy i.e. in 1940 there were 159 workers supporting each retiree. However, in 2013 there were only 2.8 workers supporting each worker and this ratio only gets worse as time goes on. Back in 1999 when we still had some real journalists the problem was outlined in the Washington Post.

In 1935, after bank failures and a stock market crash had wiped out the savings of millions of Americans, the country turned to Washington to guarantee the nation's elderly a decent income.
The solution was Social Security. 

More than six decades later, with the gigantic Baby Boom generation approaching retirement age, Social Security faces a funding crisis. By about 2012 more money will be going out to Social Security recipients than will be coming in from workers' payroll taxes. The system's trust fund can cover the difference for a while, but by about 2032 the trust fund will be empty and the program will no longer be able to meet all its obligations. 

 Many politicians assert and most people believe that there is a "social security trust fund" that will not run out until the 2030's. This is a huge fiction which will cost many people in the future. There is no trust fund, lock box, or individual accounts for each taxpayer. Remember these two jerkoffs talking about SS and Medicare lock boxes fifteen years ago:

The fact is that incoming SS and Medicare taxes go into the general fund of the federal government and have been spent by politicians. Here is an older article by Dr. Bill Wattenburg that outlines the problem. He writes:

The Congressional Research Service says bluntly: There is no social security trust fund with real money or assets in it. Most people, and most of the media, don t realize that social security taxes taken from people s paychecks are not paid into a social security bank account. They are paid directly into the federal government s general account. The politicians in Washington have stolen and spent over a trillion dollars of excess social security taxes that were not paid out in benefits to retirees. 

For instance, in this year 2000 the government will take in social security taxes of 479 billion dollars taken directly from the paychecks of 95% of the working public. Benefits paid out to retirees will be 409 billion dollars. The Treasury Department will give the Social Security Administration paper IOUs for the 70 billion of excess social security taxes that were supposed to be saved for future retirement benefits. Worse yet, the Treasury will not subtract this 70 billion debt from the federal income surplus that is claimed. Because your social security money was stolen, there was no real federal surplus the last two years. 

To cover this smoke and mirrors fraud and keep you unsuspecting suckers quiet, the politicians in Washington even designed the paper IOUs (by law) so that they can never be sold to anyone (banks) for real money. They are not negotiable. This means that the Social Security Trustees can never use the IOUs to pay future social security benefits. These IOUs are not real treasury bills that have value. They are not assets. They are totally worthless that is unless you pay double taxes in the future to pay them off. 

 So the bottom line is that entitlement spending, which is already consuming two thirds of the federal budget, is set to grow massively over the next thirty years (100 trillion dollars). One might be thinking well the politicians will come up with something to bail us out. No they won't and people that believe that deserve what they will get. The two and four year election cycle does not allow for the solving of perceived problems in the future. The problem of too many retirees and not enough money coupled with the short term thinking of politicians is the problem. These older people, unlike the younger cohorts, actually turn out to vote in high proportion to their numbers. That is why SS is called the "third rail" of American politics. If you touch it you are dead politically.

In addition most of these people feel entitled to this money because "they paid into it for so many years" even though there is a Supreme Court ruling that says they are not entitled to it. Remember the Supreme Court case Fleming v. Nestor? Of course not as it is not in anyone in politics or the media's interest to discuss it if they even knew about it. Here is what the ruling said:

“To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever changing conditions which it demands. "The Court went on to say, “It is apparent that the non-contractual interest of an employee covered by the [Social Security] Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments.” 

 In other words, Social Security is not an insurance program at all. It is simply a payroll tax on one side and a welfare program on the other. Your Social Security benefits are always subject to the whim of 535 politicians in Washington. Congress has cut Social Security benefits in the past and is likely to do so in the future. In fact, given Social Security’s financial crisis, benefit cuts are almost inevitable. 

So basically SS payroll contributions are taxes and the program is welfare. Try that one out on your grandparents at Thanksgiving Day dinner. So what is the solution if there is no political palatable one? There isn't one so expect the following:

  • Benefit cuts including no COLA increases (been there done that
  • Means testing
  • Higher taxes
  • More debt (We are nearing $20 trillion already)
  • Combination of all of the above
I anticipate all of the above and that will still not be enough. Unfortunately government will revert to what all bankrupt governments have reverted to throughout history, currency debasement. They will just print the money and hand it out. This will result in the eventual destruction of the dollar and the demise of the United States in its current political form. Hopefully it will not be too messy but with hundreds of millions of guns and an undercurrent of racial and class division in the US I don't see a happy ending. Take heart though, all the western welfare states and Japan are in the same boat. In fact Japan is furthest down the line towards a currency collapse.

Will this happen next week or even in ten years, probably not? Because things are certain does not mean they are imminent. Countries seem to go bankrupt slowly and no one pays attention until a tipping point is reached and then events happen all at once. This gives people the time to plan and to make sure they are not a victim. This is why I like a certain holding of gold bullion as a store of wealth and as insurance against politicians and government stupidity. Quite a few advisers suggest 5-10% of ones wealth be stored in gold as a wealth preservation tool. I would say that due to all the issues that the US faces it would be prudent to go as high as 20%. I am not alone in saying this as even famous hedge fund managers like Kyle Bass and Ray Dalio agree.

"If you don't understand and own gold you don't know history" pretty much sums it up.

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