Tuesday, February 9, 2010

Talks With Pops

I spoke with my father on the phone a few nights ago and we talked a little about retirement.  During the conversation he mentioned that he will have the ability to access social security in just a few years.

If my father is confused on the availability of social security, then I would imagine there are a great deal of other boomers that do not understand what is going on with the fund.

Over the past 70 years, since the social security program was created, it has run a surplus.  This means that workers are taxed a percentage of their income every month and that money is put into the social security fund for their future retirement.

When they reach that magic retirement age they will be paid X amount of dollars every month.

What most do not understand is what has happened to that fund over the past 70 years.

Let's say that the social security fund in a given year takes in $400 billion in taxes.  The program pays out $200 billion in social security payments.  This leaves a $200 billion "surplus" that is put away for future generations.

The problem is that the money is not put away for future generations.  Many people do not realize that our government then "borrows" that $200 billion and spends it.  They replace the money with an I.O.U. called a treasury bond.

It is similar to the movie Dumb and Dumber when Jim Carey hands the bad guys the suitcase full of I.O.U.'s.

The size of the "surplus" suitcase that is full of I.O.U. pieces of paper is now $10 trillion.  That is money promised to the retiring baby boomers that is no longer there.

This year things will begin to get interesting.  For the first time ever, the amount of money that is brought in with taxes is going to be LESS than the amount paid out.

For example, the government still has to pay out the $200 billion in social security benefits, but they only take in $180 billion in taxes for the program. (I am making up these numbers to make it easy to understand)

This gap is going to grow wider and wider every year as we move forward for two reasons:

1.  There is a tsunami of boomers about to retire
2.  Tax receipts are plummeting in the current recession/depression

Costs Higher/Income Lower

This difference in cost between what the program takes in and what they pay out will be added to the regular budget deficit.

For example, last year the budget deficit came in at $1.4 trillion, however that included the government TAKING money from the social security surplus to pay down the debt.

The same scenario exists for medicare except the I.O.U. empty suitcase is $65 trillion.  That is what has been promised, taxed, and then spent.  (This is the running number down at the bottom of the webpage)

The most likely scenario to emerge will include the following:

1.  The retirement age to collect social security will be raised: most likely to 69 or 70
2.  The government will create a "savings" plan where a portion of your income goes to investing in the treasury market to fund the government debt shortfall
3.  There will be rationing in the health care system

This is best case scenario.  Most likely there will be a run on the United States currency far sooner.  This will cease a vast portion of the government spending as they default on the debt.  The default could come in the form of DEVALUATION if the Fed prints money to buy the debt.

This will create the worst case scenario involving hyperinflation, civil unrest, and the loss of most of the freedom we enjoy today.

No comments:

Post a Comment