Several years ago, President Bush signed an executive order creating a Social Security commission consisting of former Senator Daniel Patrick Moynihan and Richard Parson, chief operating officer of AOL, Time Warner directing it to come up with a plan that must include individually controlled, voluntary personal retirement accounts, which should augment the Social Security safety net. A draft of the commission's report (12/21/2001) is available at government reports.

The Depression era Social Security has served the nation well, vastly reducing destitution among the elderly. But its foundations have been eroded by modern trends in life expectancy, living standards and retirement habits.

Social Security doesn't invest in stocks and bonds. The unfunded pay-as-you system worked well with 42 workers supporting each retiree, the case when payouts started in 1940. Buy by 1960 there were 5 workers per retiree, and now there are barely three. When the babyboom generation starts to retire there will be two workers per retiree. This brute fact carries unavoidable financial implications.

Social Security is so threatened that it can't be fixed painlessly. There is no way to keep the income and outgo in balance.

Financing the system on an unfunded basis would require a 26% cut in benefits or a 37% increase in the payroll tax for a taxpayer making $50,000 a year. Or government budget cuts equivalent to eliminating the departments of Education, Interior and Commerce and the Environmental Protection Agency. Or borrowing enough to plunge the goverment into debt deeper than that required for World War II.

If the Depression-era formulas remains unchanged, future growth can not solve the problem. Faster growth is a two edged sword. Yes, it increases the system's revenues. But since intitial benefits are indexed to wages, growth also increases obligations.

To understand the problem fully one must understand the twin diversions: "trust fund" and "lockbox". While the system will start running deficits in 2016, the accounting fiction is that until "2038"it will be merely drawing on its "trust fund". But in fact, redeeming the government bonds in the fund will require the same tax increases, budget cuts and so on as outlined above. Social Security's shortfall will run into 6 trillion of dollars. To rescue Social Security will take raising taxes, cutting benefits, cutting government programs, piling up national debt or increasing the rate of return earned by the system or its beneficiaries.

The "lockbox" is a rhetorical device designed to advance the notion that the government can put money on the shelf today and use it to pay Social Security after 2016. But again the "trust fund" is merely paper the government has issued to itself. Under the "Lockbox" program, Social Security surpluses are simply used to pay down the national government debt. This presumeably will make it easier for the government to borrow money later to pay benefits in out years. Yet, the current national debt is trivial compared to the borrowing that would be necessary to fund the deficits impending under Drepression-era formulas.

There are those who say the above view is a flawed and fundamentally biased view meant to frighten the Ameican public, sheer mean-spirited nonsense and a complete lie. How is it they ask, that government bonds are good assets in a private pension fund but not in the Social Security trust fund?

This then is the crux of the matter!

The answer often given is that when an individual buys a government bond, he or she establishes a financial claim against the government. When the government issues a security to one of its own accounts, it hasn't purchased anything or established a claim against some other person or entity. The key point it's said is Trust Funds do not hold financial resources to pay benefits - rather they provide authority for the Treasury Department to use whatever money is on hand to pay them.

Alternately, you could say that for political reasons, it's important that Social Security have its own separate account. We should count government bonds in the trust fund as real assets, just as we would if Social Security were a private pension fund. Yet again if we put the the Social Security Trust Fund in private banks which then buy goverment bonds, wouldn't that make the assets "real".

Finally, money is needed in "2016" with or without the "trust fund", the steps required to obtain that money will remain the same: raise taxes, cut benefits or other government spending, or add to the national debt!

Can Social Security Be Saved? Different Points of View

Pro: AARP The latest 75-year forcast reveals that the gap between Social Security's revenues and expenses will be less than 2 percent of payroll. In other words a 2 percent increase in contributions now (half from the employees and half from the employers) would be enough to keep the system solvent throughout the tradional 75-year estimate period. Whatever its merits, such an increase lacks support for enactment now. So the questions is whether other steps could be taken that would do the job? Four other steps might do the job: improve the accuracy of Social Security's cost-of-living adjustment; make the program universal, by covering new state and government employees; increase the maximum annual earnings subject to Social Security tax(and credited for benefits); and tax the benefits to the extent they exceed what the worker paid in. These changes would cut the long-term deficit from 1.87 percent of payroll to 0.61 percent. That's well within the trustees definition of "close actuarial balance," a reasonable goal for a 75-year estimate. Adelphia Communications Corp. John Regas Timothy Regas (Father & Son) Arrested: July 25, 2002 Securities & Mail Fraud Self-Dealing Convicted: May 24, 2007 Sentence: 12 Years Sentence: 20 years RECENT Insurance-Mortgage-Investment COLLAPSED ENTITIES FANNIE MAE (Bailed out by US Government) $15 B BAD $45 B LOANS ? $19 B ? FREDDIE MAC (Bailed out by US Government) ? $45 B ? AMERICAN INTERNATIONAL GROUP Insurance Company (Taken over by FHA) RESCUE: $200 B MERRILL LYNCH Brokerage Firm (Bought by Bank of America) COUNTRY WIDE FINANCIAL (Bought by Bank of America) BEAR STERNS (Bought by JPMorgan Chase) LEHMAN BROTHERS (Bankruptcy) WACHOVIA (Bought out by Wells Fargo) INVESTMENT SECURITIES BERNARD L.MADOFF "MAY-doff" or "made off with the money") $65 BILLION (Bankruptcy) GABRIEL CAPITAL GROUP J. EZRA MERKIN Ascot Partners (? BANKRUPTCY ?) R. ALLEN SANFORD SANFORD GROUP $8 B PONZ1 (? BANKRUPTCY ?) MUNICIPAL BOND MARKET PAY-to-PLAY BID RIGGING -- TAX EVASION TRADING FIRMS E*TRADE CAPITAL MARKETS GOLDMAN SACHS EXCUTION & CLEARING KNIGHT FINANCIAL PRODUCTS TD OPTIONS + 10 OTHERS "FRONT-RUNNING" SEC's PENALTY: $65 M STATE PENSION FUNDS SCANDAL PAY-to-LAY US RETAIL BANKRUPTCIES Boscov's Sharper Image Mervyns Linens 'n Things Whitehall Jewelers Steve and Barrys Circuit City LIFE INSURANCE COMPANIES BAILOUT Harford Financial Services Group Prudential Financial Lincoln National Allstate Ameriprise Principal Financial Group FOREIGN BANKRUPTCIES SATYAM COMPUTER SERVICES B. RAMALINGA DAJU FOREIGN OUTSOURCING (INDIA) NORTEL NETWORKS CORPORATION TELECOMUNICATIONS CANADA BANKRUPTCY TALF (THE SECOND ATTEMPT: A) TERM ASSET-BACKED SECURITIES LOAN FACILITY Con: AARP Modest steps won't solve a $25 trillion problem! According to the Social Security Administration that's what Social Security owes in benefits over what it gets in taxes over the next 75 years. Raising taxes or cutting benefits just hurts workers and retirees. Raising social security taxes by 2 percent of income at first provides more money than Scoial Security can use, and then, not enough. Thus it will only delay the deficit for six years. It will not end it. Making higher income workers pay Social Security taxes on their entire income instead of the first $84,900 only delays the Social Serurity's annual deficits by about six years. More money comes in at first, but then the program has to pay benefits on those higher incomes. Thus raising taxes or cutting benefits just hurts workers and retirees. Certainily personal retirement accounts are worthy of investigation in search for a solution to the Social Security dilemma. (Web master notes that questions on the applicability of personal retirement accounts to the problems of Social Security can find ready answers at Arthur Anderson (Andrew Fastow: Jail: 5 years), Enron Corp (Ken Lay - verdict vacated (DEATH), Jeffrey Skilling: 24 years), KPMG: Fraudulent Tax Shelters: Robert Pfaff, John Larsen and Raymond J. Ruble XEROX accounting irregularities, ImCLONE (Sam Waksal: 7 years 3 months - Living Omnimedia. (Martha Stewart: jail 5 months), WorldCOM (Bernie Ebbers: 25 years - Scott Sullivan - David Myers), Dynegy, Global Communications Ltd. (Gary Winnik), Qwest Comunications International Joseph Naccio: Nineteen counts of insider trading: : 6 years. ??? Robert S. Woodruff, Robin S. Szeliga, Alshin Mohebi, Greory M Casey, Roger B Hoaglund, William L. Eveleth, James J. Kozlowski and Franh J. Noyes ???), Tyco (Dennis Kozlowski: 25 years - Mark Swartz: 25 years), Vivendi Universal (Jean-Marie Messier), Bertelsman (Thomas Middlehoff), Disney (Michael Eisner), Refco (Tone N. Grant: 10 years - Philip R. Bennett: 16 years), National Century Financial Enterprises (Roger S. Faulkenberry: 5 years - James E. Dierker: 5 years - Randolph H. Speer: 12 years - Donald Ayers: 12 years - Lance K. Paulsen: 15 years), Bayou Group (Samuel Israel III: 30 years - Daniel E. Marino: 20 years - James G. Marquez: 4 years 3 months) and various banks (see below) and my mother's house on weekends only.) BANK FAILURES 2008–2009 ..... 32 2000–2007 ..... 32 1990–1999 .....925 1980-1989 ...2036 1970-1979 ......79 1960-1969 ......44 1950–1959 ......28 1940–1949 ......99 1934–1939 .....312 BAILOUT IN BILLIONS TROUBLED ASSETS RELIEF PROGRAM TARP (THE FIRST ATTEMPT) $800 B $670 B DISTRIBUTED B BANKS & OTHER ENTITIES $130 B: UNDISTRIBUTED Bank of America TARP $45 B TARP FDIC BONDS $44 B IndyMac Bank (Taken over by FDIC) Washington Mutual (Sold to JPMorgan Chase) Goldman Sachs (Bank Holding Company) TARP $10 B TARP FDIC BONDS $21.1 B Morgan Stanley (Bank Holding Company) TARP $10 B FDIC BONDS $23.8 B Citygroup Financial Supermarket Vikram S. Pandit TARP $50 B TARP FDIC BONDS $27.6 B Spin Smith Barney Brokerage Off STATE STREET BANK TARP $2 B TARP FDIC BONNDS $3.9 B PNC FINANCIAL SERVICES TARP $8 B TARP FDIC BONNDS $3.9 B STIMULUS PROGRAM IN BILIONS (THE SECOND ATTEMPT) $787 B ? DISTRIBUTION: ? AUTO INDUSTRY GENERAL MOTORS $17.4 B(+ $16.6 - $22 B requested) CHRYSLER $4 B (+ $8 B requested) NOW IN BANKRUPTSY FORD $0 requested GENERAL ELECTRIC FDIC BONDS $37.7 B WELLS FARGO TARP $25 B TARP FDIC BONDS $9.5 B AMERICAN EXPRESS TARP $3 B TARP FDIC BONDS $5.6 B HOME MORTGAGES DIRECT DROWNED DIRECT $75 B DROWNING $ ? B AID TO SMALL BUSINESS $15 B FDIC FDIC is the agency that guarantees checking and savings deposits. It did so in the past (since 1980) by promising repayment on deposit accounts up to $100,000 when banks collapse. Nine lenders, most of them small, have failed so far this year. FDIC has recently raised the number of banks on its list of problem lenders to 117, the most since mid-2003. (FDIC does not release the names of banks currently in trouble.) This year (2008) FDIC's insurance fund declined from $53 billion to $45.2 billion. The already failed banks, the increase in troubled banks and the decrese in available funds has led to growing questions about the adequacy of FDIC's position vis-a-vis deposited funds. Congress(2008) has recently (and temporarilly) increased the amount covered from $100,000 to $250,000. (Insured or not, the FDIC has only enough cash on hand to cover about 2% of nationwide deposits. Pretty scary stuff is it not?) To date: the FDIC has requested an assessment (infusion) of $27 billion claiming that without that amount the deposit insurance fund will become insolvent this year: 2009. PUBLIC-PRIVATE INVESTMENT PROGRAM PPIP (THE SECOND ATTEMPT: B) The latest word, out of Washington, is that the US treasury is going to provide as much as 2 trillion dollars that private investors can use to buy up toxic assets from US banks. At the direction of Geitner and with the cooperation of the FDIC chairwoman (Sheila Blair) but without the approval of Congress, the FDIC is going to insure 85% of the monies provided by the treasury ($1 trillion in new obligations) thereby adding more not less risk to the system. Thus, the FDIC, originally set up 76 years ago with the simple but important job of insuring bank deposits, is now elbowing its way into the middle of the financial mess as an enabler of enormous leverage. The loans to private investors will be “nonrecourse” which means if any investor looses money in buying toxic assets, that investor owes the taxpayers nothing. The arrangement is the closest thing to risk-free investing. The terms are hard to beat! Where does the risk go, ultimately? To the FDIC and finally to the taxpayers, of course. How does FDIC get to do this? BY PLAYING GAMES WITH ITS OWN RULES A provision in the FDIC charter allows it to take extraordinary steps at the direction of the Secretary of the Treasury in order to mitigate “systemic risk.” HOWEVER, A CURRENT FDIC PROVISION, LIMITS FDIC’s ABILITY TO BORROW, GUARANTEE OR TAKE ON OBLIGATIONS UP TO BUT NOT MORE THAN $30 BILLION. (SEE: nytimes.com/dealbook) How did FDIC get involved beyond its authorization? How does it justify its actions now? By deciding to consider the loans not as “total obligations” but as “contingent liabilities” (what it could possibly loose). The agency projects no losses. In so doing it stays under the borrowing cap of 30 billion. The FDIC believes it can lend an unlimited amount to anyone as long as it believes, at least for the moment, that it won’t loose any money. If it does FDIC says it will assess the banks or financial institutions a fee to pay the FDIC back (perhaps bankrupting the institutions involved in the process). To the rescue? Good old Barney Frank and Chris Dodd! Barney Frank has introduced a bill to increase FDIC’s borrowing limit by $100 billion; Chris Dodd by $500 billion. Both ready with tax payers’ money at the drop of a hat! Nice going guys! Source: MICHAEL J. DALY

What Do You Think? Submit your solution to the Social Security dilemma and MCRA will publish it here.

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