Social Security Crash Explained In 4 Simple Steps


When Social Security was created in 1935, the system was designed to be funded by workers not financed by their children. It wasn't a generational-transfer or a Ponzi scheme.  Since that time, the system's finances have deteriorated virtually every year to the point where the financing gap is nearly the size of our entire GDP. So what the hell happened?

How to destroy the future in four easy steps:

1. Give To Voters

The original law included automatic tax increases which would have increased the cost of Social Security to 6% of wages from its 2% base. Over the 1940s, Congress waived every increase, one of which required a Congressional override of FDR's veto. Funding for Social Security did not reach the originally envisioned 6% until the 1960s. Self-employed workers would not pay 6% until the 1970s.

These tax cuts transformed Social Security from a system paid by workers to a system financed by children.

2. Take From Non-Voters 

Once voters did not have to pay for benefits, Congress raised benefits — every election year in the 1950s. Social Security Act Amendments of 1950, 1952, 1954, 1956, 1958 all increased benefits. These increased the value of existing benefits, created new benefits, or expanded coverage to more Americans. The 1950 Amendment raised benefits by 77%, 1952 (12.5%), 1954 (13%), 1956(added disability), 1958 (7%).

A couple retiring in 1960 expected to collect $8 of benefits for every $1 of contribution. Basically, Congress in the 1950s was selling dollars of benefits to voters for little more than a dime. The difference between the cost and the benefit was largely passed on to future generations who had no vote in 1950.

3. Allow The Federal Reserve to Lower Interest Rates At A Cost Of $1.2 trillion of Projected Interest Income (in 2012 alone)

In 2011, projected interest income over the life of the Trust Fund was 3.6 trillion. In 2012, projected interest income over the life of the Trust Fund was 2.4 trillion.

Thanks, Ben Bernanke.

4. Ignore The Problem

Social Security almost reached insolvency in 1983. At that time, Social Security had more than 40 years of promises embedded in a system that did not have a penny to pay them.  The solution to these problems in 1983? Repeat step 1. Repeat step 2. Prepare for step 3. The solution to these problems in 2013? Repeat step 1. Repeat step 2.

Today, Social Security is not much different than spending quarters to buy dimes.  Congress' solution is for us to get our kids to spend quarters to buy nickels.

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Brenton Smith

Professionally, I manage credit risk in bank deriviatives. Politically I write commentary for www.FixSSNow.Org on the issue of Social Security reform.

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