Social Security - The Most Neglected Crisis
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1.   Trustees Report: Same Song, Umpteenth Verse

2.   Making the Case for a Crisis     

3.   Crisis?  What Crisis?

4.   Politicians: On the Fence (As Usual)

5.   The Fix Won’t Be Easy – or Popular!  


In what has now become an annual rite, the Social Security Trustees issued their annual report last week saying that the prospects for the “trust funds” are worse than they were last year and that Social Security, Disability and Medicare are all in need of repair. The American people answered with a rousing “ho-hum.”  Perhaps the public is getting numb to bad news about Social Security, or maybe it was the result of the mainstream media devoting only 72 seconds of airtime to the Trustees report the day it was issued, according to the Media Research Center.

I have written about the current state of our national entitlement programs on several occasions through the years.  One thing they all have in common is that the latest analysis always seems to be worse than the one before it.  This year is no different and, in fact, could be seen as much, much worse.

In this week’s E-Letter, I’m going to discuss the findings of the Social Security Trustees and also review their warnings about the future if nothing is done to fix our ailing entitlements.  After that, I’m going to briefly outline two schools of thought concerning Social Security’s perceived problems.  Unfortunately, we’re going to find that those who can actually do something about entitlement reform will likely only give lip service to the idea.

This is an E-Letter that you need to read and pass on to your friends and relatives because everyone needs to get busy and contact their Congressmen to make sure they don’t use short-term solutions that will create long-term problems.

Trustees Report – Same Old Song

Each year, Trustees of the entitlement trusts established for Old Age and Survivor Income (OAS), Disability Income (DI), Hospital Insurance (HI) and Supplemental Medical Insurance (SMI) make a report to the public regarding the operations of the trusts over the past year and their outlook for the future.  As I noted above, each year the situation becomes more dire, yet no one seems to want to do anything about it.

Since the combined Social Security Old Age and Disability Income (OASDI) Trust Funds are the most frequently referenced, I’ll limit my comments to those two in this article.  This year’s report shows that the combined Social Security and Disability Income Trust Funds increased a net $68.9 billion to a total of $2.678 trillion as of the end of 2011.   Not bad, eh?  Well, actually it is.  That’s because the $68.9 billion gain includes payments of “interest” of $114.4 billion on the special Treasury bonds held by the Trust Funds.

There are two important factors needed to put this “gain” in perspective.  First, interest payments on the Trust Fund debt are made by issuing more of the special Treasury bonds that they already hold.  So when the Trustees say interest earned, what they mean is that the government is making an accounting entry to issue itself more IOUs.

Second, without this ledger-entry income, benefit payments and expenses outpaced Trust Fund non-interest income in 2011, as they did in 2010. Total revenues from payroll taxes and other sources came to $690.8 billion while benefit payments and expenses were $736.1 billion.  That’s a shortfall of $45.3 billion.  Not a huge amount compared to today’s trillion-dollar budget deficits, but the Trustees warn that this deficit will continue throughout its 75-year projection period.

Here’s a link to a summary of the Trustees report, which includes tables supporting the numbers I have quoted above as well as lots of other charts and graphs:

And the bad news doesn’t stop there.  According to the Trustees, the combined Social Security and Disability Income Trust Funds are going to be depleted by 2033, two years earlier than predicted just last year.  If you don’t combine the two, the DI Trust Fund will be exhausted as soon as 2016.

So what happens on that sunny day in 2033 when the Trust Funds run out of money?  Since, by law, benefit payments are not supposed to come from general revenues, the most obvious result is that benefits will have to be immediately cut to a level that can be supported by ongoing tax revenue.  The Trustees report estimates this haircut to be in the 25% range, such that benefits will fall to 75% of their previous levels.  Of course, this assumes that no remedial action will have taken place by then, which is probably a pretty good assumption.

So here’s the situation in a nutshell:

  • Social Security is spending more than it takes in if you don’t count interest paid in the form of government IOUs, and by 2020, even these bogus interest payments won’t keep it above water.
  • The combined Social Security and DI Trust Funds are expected to run out of money in 2033, and probably sooner than that since each Trustee Report seems to move the date closer and closer to the present.
  • When the Trust Funds begin to be drawn upon, the federal government will have to borrow money from the public (or foreign investors) to redeem these special bonds, adding to the debt that has to be serviced with real money and not just IOUs. (For more information on how this works, see my June 28, 2011 E-Letter.)
  • The Trustees report estimates that the federal government is on the hook for future promised benefits equal to $8.6 trillion over the next 75 years.  This is over and above what the government expects to take in via payroll taxes.  The Trustees call this an “unfunded liability,” but I call it a pipe dream.
  • As has been the case since the beginning of the financial crisis, payroll tax revenues and Trust Fund performance have been worse.  Higher unemployment means fewer people working who are subject to payroll taxes.  Plus, as I wrote last week, many who have exhausted their unemployment compensation are filing for Social Security disability, putting an even greater strain on that program.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Raising the Alarm

In this year’s report, the Trustees again go on record saying that a solution to Social Security’s funding problems needs to be found, even though it may be politically unpopular.  The Trustees put it this way in their 2012 Report:

“Lawmakers should not delay addressing the long-run financial challenges facing Social Security and Medicare. If they take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.”

When I wrote about Social Security back in 2004, I discussed Alan Greenspan’s warning about its future solvency (or lack thereof).  No matter what you think of Greenspan’s legacy, his Social Security Commission in the 1980s led to meaningful reforms, passed by a Congress that actually took some action regarding the program’s future solvency.  Of course, they subsequently spent all the money and replaced it with government IOUs, so let’s not give them too much credit.

As Congress has now seen fit to spend all of the money in the trust funds, Greenspan’s warnings from 2004 still ring true.  Back then, he told Congress that the then-upcoming retirement of Baby Boomers would lead to Social Security experiencing “one of the most difficult fiscal situations” in its history.  “This dramatic demographic change is certain to place enormous demands on our nation’s resources – demands we almost surely will be unable to meet unless action is taken.”

Congress’ response then?  None (What a surprise!).  I do believe that there are members of Congress today who are in favor of reforming Social Security, but the political consequences of trying to do so are very high.  Even debating the issues can be risky from a political standpoint.

Numerous other conservative writers and think tanks have also written about the recent Trustees report but, as I noted above, the mainstream media has largely ignored it.

Crisis?  What Crisis?

While you might assume everyone would be on the same page in relation to the Social Security Crisis, there are those who are adamant that no such crisis exists.  These folks consider the payment of interest in government IOUs to be just as good as gold.  One such organization is the National Committee to Preserve Social Security & Medicare (NCPSSM).

While NCPSSM is certainly not alone in having this opinion, I’m going to use its position as an example in this section as it is representative of many other organizations and politicians who firmly believe that Social Security is in no danger of becoming insolvent.

In a recent USA Today article, NCPSSM CEO, Max Richtman” declared, “There’s no Social Security crisis.”  In a separate article discussing the latest Trustees report, the NCPSSM noted how positive the report was regarding Social Security’s finances saying the program “remains strong” and is “well-funded.”  Did they read the same report that I did?  I don’t think so!

Rather than future solvency, NCPSSM’s biggest concern is the talk about changing the automatic cost of living adjustment (COLA), a benefit that was not even part of Social Security until 1975. (Before that, benefit increases literally took an act of Congress.)

Most interesting, however, is the disconnect when talking about cuts.  NCPSSM and others contend that changing the way automatic COLAs are calculated would represent a serious cut in future benefits for Social Security recipients.  Benefits would still be adjusted upward, just not as much as under the current COLA formula.  So, a decrease in an increase is a cut, in their opinion, even if it helps maintain the long-term solvency of the program.

In the very same article, however, NCPSSM notes that “Social Security remains strong, despite the lingering effects of the recession, and will be able to pay full benefits for decades to come - until 2033. Thereafter, there will still be enough revenue coming into the program to pay 75 percent of all benefits owed.”  It’s almost like it’s no big deal that benefits might drop 25% after 2033, a short 21 years from now.  Other sources maintain that COLA adjustments will have increased benefits to a point that in 2033, the benefit received after a 25% cut will still be more than today’s benefit level, so it’s not really a cut.

Sorry, but that IS a cut and it’s a lot bigger than modifying the COLA formula.  It’s like your employer reducing your salary by 25% today but pointing out that you still make more than you did 21 years ago, so it’s not really a cut.  It’s one of those arguments that you just have to read and say “Huh???”

So what’s the difference?  Isn’t a cut a cut?  Well, not when one comes in 2033 and the other would be more immediate.  In fact, as you continue to read, you’ll find that this distinction between now and later pretty much outlines much of the debate about Social Security reform.

Politicians: On the Fence (As Usual)

So where are our leaders on this issue?  Some can be easily identified as helping to raise the alarm while others are confident that there’s no problem.  Many, however, fit in a category that’s all talk and no action (what else is new?).  They give lip service to wanting to reform Social Security but do little or nothing to bring it about.  Even so, their soothing words are supposed to comfort us as we hurtle toward retirement.

Tim Geithner is one example, who is on record as saying, “The best thing to do is a long-term solution.” Wow, what insight!  That’s kind of obvious, isn’t it Tim? The Obama administration is also on record as supporting changes to Social Security that would improve the program’s solvency, but as a recent Wall Street Journal article pointed out, Obama has yet to propose any concrete steps to greater stability of our entitlement programs.

In fact, the same Journal article said that Social Security is yet to emerge in the political debate in this election year because its financial problems remain decades away. Translation:  It’s a problem for a future Congress.  Plus Gray Americans vote and in large numbers. As Baby Boomers continue to age, the gray generation will just become larger and larger, meaning more and more likely voters.

This brings about a sobering thought: We may have already passed the age demographic where meaningful reforms to Social Security and other entitlement programs are even possible, due to the voting habits of those who would be most affected by any changes.

The Fix Won’t Be Easy – Or Popular

There are a variety of "fixes" for Social Security, some of which I have written about before in past E-Letters.  As I have noted above, however, each proposal would hurt someone by either increasing taxes or decreasing benefits (or both), none of which are politically palatable.

Below I have briefly listed some of the major fixes that have been proposed over the years.  While these are not my ideas, I have provided some comment here and there.  Each of these suggestions could be an E-Letter on its own, so my brief descriptions are not intended to be complete reviews, but rather just an idea of alternatives available to Congress:

  • Increase the normal retirement age, preferably to age 69 or 70.  This option is often met with resistance, but the fact of the matter is that life expectancies are much longer than they were in the past.  While some say that this option would not be tolerated, you have to remember that the Congressional response to the Greenspan Commission recommendations gradually increased the retirement age from 65 to 67.
  • Increase early retirement age to 65 or 67. This might actually be more important than increasing the normal retirement age.  When Congress changed the normal retirement age to 67, it did not adjust the early retirement age.  Increasing the early retirement age might have a beneficial effect on the program’s long-term stability.
  • Increase the employer and/or employee payroll tax rate.  Increasing taxes is one way to cure the problem, but has a major downside both politically and economically.  Increasing taxes during a shaky recovery could lead us back into recession.  Plus, higher employment taxes on employers would reduce the bottom line, thus affecting profitability and possibly employment.  Payroll taxes are also regressive, so an across-the-board tax increase on all employees would likely put pressure on those least able to afford it.  Plus, recall that employees have enjoyed a 2% payroll tax break since January 2011, so even getting back to normal taxation will feel like a tax increase.
    As a practical matter, if taxes were to be raised all it would do is provide Congress with another slush fund to spend on its pet projects.  Any real solution involving surplus revenues must address the issue of how these are invested so that Congress does not have the power to empty the Social Security coffers again.
  • Soak the rich.  In what has become the most popular cause of the day, where we see even the rich saying to soak the rich, there are various ways to cure the regressive nature of payroll taxes on lower-income workers.  One would be to make all wages subject to Social Security taxes.  Currently, taxes for all but Medicare stop at $110,100 of earnings. Removing this cap from income subject to Social Security taxes would, proponents say, go a long way in curing the program’s financial ills. 
    One issue that is usually mentioned when discussing this option is that, under the current system, those making over $110,100 would then have to start getting benefits based on salary in excess of that amount.  Thus, while income would increase, so would future benefit payments.  To make this work, the government would have to unhitch Social Security from the myth of it being a way to set aside money for retirement so that taxes could be levied without any expectation of a higher benefit.
  • Needs test Social Security benefits.  This option is popular because it also only affects the "rich," who have been demonized of late. This option would involve decreasing or even eliminating Social Security payments for those who have significant other assets.  The line of thought goes something like, “Why does Warren Buffett need a monthly Social Security check?” 
    Of course, this again requires that the myth of saving for retirement be uncoupled from payments of payroll taxes, since even many millionaires will complain that they have “paid in” for this benefit.  The government has already made benefits taxable (another form of cutting benefits) for those with higher retirement incomes, so the mechanism exists to scale them back or eliminate them entirely. 
    The problem with any “soak the rich” alternatives is that there are lots of other tax increases aimed at this demographic group.  Means testing would be among the least currently visible changes, but should Obama get his way and impose higher taxes on the rich, the cumulative effect could be significant.  So much so that the wealthy might decide to defer compensation, or take it in a different way that might escape payroll taxes entirely.
  • Modify the cost of living adjustment.  Since 1975, Social Security benefits receive automatic annual COLA adjustments to help keep up with inflation.  Well, that was until 2010 and 2011 when inflation was so low that no adjustment was made.  Even so, there are some, including Alan Greenspan, who feel that the measure of inflation for purposes of increasing benefits should be changed.
    The result would be a consumer price index that is somewhat lower than the one currently used.  As I noted earlier, this would result in decreasing the increases, which some consider to be a benefit cut.  However, even small differences in COLA adjustments could mean huge long-term savings, especially with the Baby Boomers beginning to retire.  This is one solution that would be easy to implement, but is strongly opposed by many politicians and senior organizations.
  • Privatize Social Security.   I’m sure you’ll remember the debate about privatizing Social Security several years ago.  I won’t go into details, but the idea is that you can invest your money better than the government can, so all or part of payroll taxes should be placed in a fund that you can manage.  While some advocates of Social Security reform still support this idea, two bear markets in less than one decade have dampened the thought of sending workers en masse into the stock and bond markets, especially when Social Security is supposed to be a “safety net.”

Again, these are the most common suggestions for reforming Social Security.  There are others such as moving Social Security under the general budget to cover its shortfall, but space doesn’t permit mentioning all of the various alternatives.  Almost certainly, it will take some combination of the above noted reforms if Social Security is to be saved.  The last president to push for Social Security reform was George W.  Bush, and he was roundly dismissed.

Of course, options are just that until someone makes the effort to review, analyze and debate which single or combination of solutions is best.  There’s no alternative that will result in no one paying more taxes or having benefits cut, so none will be universally popular.  However, it’s time for someone to show some leadership.  Someone should take a page from President Ronald Reagan’s playbook when, in 1981, he established a commission led by Alan Greenspan to reform Social Security.

Some two years later, as a result of that commission’s work, amendments to Social Security included a provision for raising payroll taxes AND the full retirement age from age 65 to 67, phased in over time.  At the time, the Congress cited improvements in the health of older people and increases in average life expectancy as primary reasons for increasing the normal retirement age.


There isn’t much to say in conclusion about a problem that is getting worse every year, except that it is unlikely to be fixed before it becomes a true crisis.  My prediction is that I’ll be writing another article about the same subject next year about this time, except that the future prospects will be even worse.

It is for this very reason that my firm often counsels clients, especially those with large nest eggs, to minimize any reliance on Social Security benefits in their retirement planning.  That way, if means testing reduces or eliminates their benefit, it won’t derail the plan.  And if that doesn’t happen, then retirement income is higher than expected, which is always better than being lower.

Hoping for meaningful reform,

Gary D. Halbert


"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 05-01-2012 4:08 PM by Gary D. Halbert