Wednesday, December 9, 2009

The Looming Social Security and Medicare Crisis

We all know that both programs are in trouble, and will have to be modified going forward. Not enough is being collected to cover accumulating liabilities. But we have time, don't we? What about the accumulated asset base? That is not supposed to be used up for many years, right? Think again. Thanks to yet another fraudulent accounting scheme that has largely fooled the public for decades, there effectively is no asset base. Theoretically, both funds hold "non-marketable assets" in the form of Treasury IOU's. However, in order to reclaim the "value" of these assets, the funds must ask the Treasury to redeem them. That's right, the same Treasury that is presently running a $1.4 trillion deficit because it is not collecting enough tax money to pay it's bills is supposed to come up with even more money to shoulder this new burden. Yes, that means you, American taxpayer/US dollar holder/subject of the accumulated and accumulating laws of these here United States. According to "plan," the "trust fund" effectively consisted of the ability of the Treasury to tax and borrow all along, exactly the opposite of what we've been told all these years. Want proof? Here's a smoking gun for you, directly from the Social Security Administration website FAQ:
The government has always repaid Social Security, with interest.
There you have it. This is the nature of Social Security's "assets:" there are none. There never really were any years of surplus when incomes exceeded outflow, because the government simply spent away the balance. All that is left is ever more and more government obligation. The government has borrowed all the money, spent it, and must repay, with interest, out of general funds. Therefore, your ability to collect Social Security is directly dependent on the government's ability to tax and borrow, and the FED's ability to print. There is no pot of gold, or assets, not even a stack of marketable Treasury debt certificates. If there had been such a stack of Treasury debt certificates, it would have been a visible part of the actual national debt, and we would have recognized a long time ago that the situation was hopeless not in some far-off distant future, but in the next few years. Instead, we played pretend until the situation became insoluble. There is no trust fund, just a bunch of meaningless book-keeping entries. The cookie jar is already empty. We simply owe the remaining balance to ourselves. It's as if on our day of retirement, we show up at the bank, open a safe-deposit box, and retrieve an official-looking note that says "The holder of this note owes (insert your name) a large sum of money for his retirement/medical care." If finance were philosophy, the Social security and Medicare funding scheme would be a circular argument. So what exactly is going to happen? What will meltdown look like? As these programs go into the red, and "assets" are "drawn down" to pay for today's benefits, the Treasury will have to redeem the IOU's by issuing more marketable debt certificates. In so doing, the deficits of these two funds will become part of the national deficit and will be rolled into the on budget national debt, the one that just passed $12 trillion. As the Treasury continues to borrow, we can expect interest rates to rise. We can also expect interest payments to eat up an ever increasing fraction of the federal budget. This will eventually become unsustainable, at which point the Great Default begins in one of two ways. The FED can suppress the interest payments by buying the debt itself with freshly printed money, increasing the monetary base in the process. Or these two programs can cut benefits, easing the rate of borrowing and therefore the present economic impact, but stiffing beneficiaries in the process. I would expect at least a little bit of all three scenarios. But it should be quite obvious that the last option will be incredibly politically unpopular. There will be strong pressure to endure the first two, e.g. higher interest rates and monetary expansion, until some breaking point is reached. The Social Security/Medicare funding crisis will morph into a fiscal crisis, which will morph into a monetary and economic crisis. When all is said and done, the great welfare state will be broken and the US will be a very different place. I expect the process to begin in the next few years. I do no think it will take more than five to ten to really start snowballing. Further reading: Gary North on The Great Default, Social Security's phony accounting. Also of interest, why the deflationist argument is wrong.

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