Social Insecurity: Coming Up Empty At Retirement

For the first time ever, Social Security is running a cash flow deficit, doling out more money to retirees than it confiscates in payroll taxes from the nation's 160 million workers.  As the ratio between workers and retirees shrinks, the financial chasm becomes wider over the next two decades until the program plummets into insolvency.

That dire forecast is written on page nine of the 2011 annual report of the Board of Trustees of the Federal Old Age and Survivors Insurance Trust Funds.  The trustees estimated that the fund will be exhausted by 2036.  By law, retiree benefits will have to be pared by approximately 24 percent.

Despite the gloomy outlook, Congress and President Obama are content to twiddle their thumbs.  In fact, the two branches of government have conspired to exacerbate the crisis.  They recently hammered out a deal to extend a two percentage point reduction in Social Security payroll taxes.

The agreement, coupled with an extension of unemployment benefits, will add $100 billion to the federal deficit and will deepen the financial sink hole within the Society Security trust fund.  That portends a financial train wreck of epic proportions that will extinguish the retirement hopes of future generations.

Despite repeated government assurances to the contrary, the Social Security trust fund has no cash.  It consists only of government bonds that will have to be repaid by taxpayers. Congress has annually raided the fund, depleting its surplus to pay for other government obligations.

As more people file for benefits, unfunded liabilities are mushrooming.  Benefits to be paid to current retirees are underfunded to the tune of $21 trillion.  These future payments have already been earned by the nation's 51 million Social Security pensioners, yet there are no real economic assets in the fund that can be used to pay these benefits.

Many Americans still cling to the notion that the payroll taxes they send into the program during their working years guarantees retirement income.  The unfortunate truth is that the government is under no obligation to pay any benefits.  The entire system rests on the continued benevolence of politicians, who can change Social Security eligibility rules and benefits at their whim.

That cannot be comforting news for today's workers.

Even worse, the choices are limited for salvaging Social Security. Either taxes have to be raised by double-digits or benefits must be significantly reduced or the government has to borrow massive amounts of money to cover the ballooning liability.  There are no magic bullets.

However, there is an alternative solution to provide retirement income for today's workers.  Let them invest their own money in a personal retirement account.

A worker who had invested in S&P 500  stocks over the past 40 years would have earned an average yearly return of 6.85 percent.  Corporate bonds would have generated a 3.46 percent yield over the same period.  Even safe, low-earning government bonds would have delivered a 2.44 percent yearly gain.

Social Security's rate-of-return for the same period is a paltry 2.2 percent.  There would be zero return had it not been for cost-of-living increases over the years.

Those figures are contained in a policy analysis published by the Cato Institute on February 13.  The numbers probably come as a surprise given the volatility of the stock market over the past several years.  Conventional wisdom declares that stocks are too risky for a retirement nest egg.

In spite of the evidence, individual retirement accounts have no chance to see the light of day under President Obama and the Democrat controlled Senate.  Former House Speaker Nancy Pelosi once bellowed that if seniors' had owned personal retirement accounts they would have been wiped out by the recent market plunge.

The evidence doesn't support her chicken-little squawk.  But since when does Congress or the president put any stock in facts or data?

Both branches of government continue to bury their collective heads in the sand, hoping the Social Security crisis magically goes poof.  Neither have the political will to make the difficult decisions, especially in an election year.

Meanwhile, the clock is ticking toward a financial Armageddon that will leave today's workers empty-handed at retirement. If politicians ignore the pleas of workers and pensioners to fix Social Security, no one in Washington can pretend ignornace.

Unless, of course, they want to plead to being both politically deaf and dumb.