It's no secret that we face a major crisis in Social Security due to the enormous shift of Baby Boomers from workers to retirees. Given that politicians have dipped their hands into the Social Security "Trust Fund" for years, the government must rely on the payroll contributions of current workers to keep Social Security solvent. In essence, the government is running a giant Ponzi scheme that will fail miserably. From USA Today, Rash of Retirements Pushes Social Security to Brink
The day or reckoning is coming a lot quicker than government officials ever expected, no doubt due to their incredibly rosy projections of perpetual GDP growth in the face of obvious demographic headwinds. We've collectively been putting our heads in the sand on this issue, incorrectly assuming the Social Security catastrophe would fall on the laps of another generation. From the looks of things, we will come face to face with a huge crisis very soon.
Social Security's annual surplus nearly evaporated in 2009 for the first time in 25 years as the recession led hundreds of thousands of workers to retire or claim disability.
The impact of the recession is likely to hit the giant retirement system even harder this year and next. The Congressional Budget Office had projected it would operate in the red in 2010 and 2011, but a deeper economic slump could make those losses larger than anticipated.
Experts say the trend points to a more basic problem for Social Security: looming retirements by Baby Boomers will create annual losses beginning in 2016 or 2017.
Falling Payrolls and More Retirees- A Recipe for Disaster
It just takes a little common sense and some basic mathematical skills to figure out that we are in a lot of trouble. In 1950, we had 16 workers for every retiree; now we have 3. There are two trends that I feel will negatively effect the relationship between workers and retirees. First of all, there is a clear backlash against immigrant workers right now, and this can plainly be seen by collapsing H-1B (employment based immigration) filings. And second, recent graduates simply aren't receiving the type of education that will make them competitive globally.
Social Security took in only $3 billion more in taxes last year than it paid out in benefits — a $60 billion decline from 2008, according to federal data. The slide in revenue occurred sooner than Social Security actuaries had expected, for three reasons:
• Payroll tax revenue that was growing at a 4.5% average annual clip along with wages flattened out in 2009 because of rising unemployment and pay raises that largely disappeared.
• The number of retired workers who began taking benefits increased by 20%; those taking disability jumped by 10%.
• Monthly benefits were raised 5.8% because of a spike in energy prices the year before.
Social Security was saved from bankruptcy in 1983 by a bipartisan deal that increased payroll taxes, taxed some benefits and gradually raised the retirement age to 67. That was supposed to keep the system solvent at least until 2058, but the projection has slipped to 2037.
The impact of the recession shows that "for all these projections, unexpected things happen," says Maya MacGuineas of the Committee for a Responsible Federal Budget.. "Money has to be found to repay those trust funds."
It saddens me to say this. but recent American graduates with Art History degrees and over $100,000 dollars in debt are being rendered obsolete in the new global economy. Right now, the looming unemployment crisis for younger graduates is being veiled since so many went back to school to get graduate degrees. After all, that's what they've been conditioned and advised to do. I'm stating the obvious when I say there are way too many lawyers in the U.S. The demand just isn't there to soak up the supply of new lawyers, especially in an environment where credit is tight.
Everyone can see the present; not many think about the future. We will have a huge problem years down the line when these graduates with tons of debt find there are still no jobs. Then people will start to understand what a secular contraction in credit entails.
Now is the time to prepare for future crises. Remember, the government must devalue the dollar to keep this con game going. Gold will rise in response.
This post has been republished from Moses Kim's blog, Expected Returns.