Social Security's Truth Is Coming Our Way

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With a $14.587 trillion dollar national debt, the U. S. is on track for bankruptcy and catastrophic economic pain. Politicians from OZ will say "pay no attention to that man behind the curtain." But don't be fooled by smoke and mirrors.

The largest part of the federal budget is entitlement spending. Since it serves the elderly and the afflicted it has often been called the "third rail" because it is politically "electrified." Nobody wants to touch entitlements, but basic math now demands that we feel the shock before we all get burned.

Officially known as The Federal Insurance Contribution Act (FICA), Social Security and Medicare were designed based on a corrupt model of purchasing political power not care for the elderly. In the largest scam ever perpetrated upon American taxpayers, politicians have stolen the people's money and cooked the books.

FICA is automatically deducted from your paycheck and sent to the federal government. Supposedly, this money is to be placed in a "trust fund" and invested so it will grow and provide you with retirement income and health care benefits when you need them most.

The Social Security trust funds are not like a private investment fund or pension that an individual owns and where money is saved, invested, and grows for the rainy day of retirement. Only public insurance can call itself a "trust" and not actually give the taxpayer "security."

Social security functions when there are a lot of workers paying and just a few people getting benefits. In the early years of the program, the payroll tax dedicated to Social Security produced more money than the government needed to pay in benefits. Today our senior population is growing faster than our working population meaning there are fewer workers supporting more retirees.

FICA is a pay-as-you-go system, meaning that the taxes paid by today's workers are immediately sent out to pay beneficiaries. By law, if Social Security revenues exceed expenditures, the surplus is credited to the trust funds in the form of U.S. government "special issue" non-marketable bonds. These securities are worthless on the open market because IOU's that can't be sold are only worth the paper they are printed on.

When the bonds mature, they are rolled over into new bonds that include both the original value and any interest due. In short, the government confiscates the public's hard earned money, writes an IOU from one branch of government to another, then - and this is important - pays off worthless IOU's that have interest attached with newer worthless IOU's so as to make it appear as if the trust fund is solvent. It's accounting magic!

The real wealth earned from hard working Americans, exchanged for worthless bonds, goes into the general fund of the Treasury where it is spent as fast as it is confiscated by politicians. Sadly, as everyone knows, you cannot spend and save the same money.

In fact, the Social Security trust fund is actually a white metal file cabinet at the Parkersburg offices of the Treasury Department's Bureau of the Public Debt in Martinsburg, WV. When the federal government takes the cash coming into Social Security, it writes the trust fund a bond on a laser printer located at the bureau. It is then stored in a three-ring binder and locked in the bottom drawer of a fireproof filing cabinet.

The entire retirement future of America is in that drawer. One bond is for $15.1 billion and another is just under $10.7 billion. In all, the agency has about $2.5 trillion in bonds sitting in the binder. Of course some will say they are all backed by the "full faith and credit of the U.S. government." But when political faith is a fraud and our credit is flawed, good luck getting benefits.

The trust fund balances are claims on the Treasury which must finance all redemptions and pay interest payments with real current dollars. In order to repay those IOUs, the government will have to either: raise taxes, borrow the needed funds from private markets, reduce or cut other federal programs, reduce Social Security benefits by increasing the retirement age, link benefits increases to longevity, or lower automatic adjustments to benefits based on inflation.

Today Social Security is collecting more money than it needs to pay benefits. In 2017, Social Security will begin paying out more than it takes in. Thus, the percentage of spending for entitlements in the federal budget will begin to rapidly expand which will force massive cuts in other programs. The trust funds will become fully exhausted by 2041 and overwhelm the budget until the nation is forced to borrow itself into insolvency.

In simple terms the FICA program is a pyramid or Ponzi scheme. In the fraud, people on the top of the pyramid collect as long as they can get others below them to pay in. Now as the baby boom retires, the takers outstrip the payers. And like all Ponzi schemes, this is when the system will collapse like a house of cards and take with it the American economy.

The day of reckoning is here. Not even the all powerful OZ can spend other people's money, write an IOU to himself, and then on some future day expect to use those IOUs to fund the Emerald City. It's time to pull back the curtains and admit "the emperor has no clothes."

The good news is that it's in everyone's self-interest; liberals, conservatives, left, right, Democrat and Republican, to stop in the runaway train and de-energize the third rail before it runs us over. All aboard!

Dean Kalahar recently retired from teaching economics and pyschology.  He has authored three books, including The Best of Thomas Sowell, a user-friendly guide to Sowell's insightful thinking on a wide range of social and political issues. 

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