A recent headline in my local newspaper came as an unwelcomed, but not unexpected revelation: “Social Security, Medicare run low.”  The article, based upon a May 12, 2009, report by the trustees who monitor the programs, described how both will face insolvency earlier than previously anticipated.   Treasury Secretary Timothy F. Geithner, as spokesman, indicated Medicare to be at greater risk of imminent financial collapse as it already pays out more than it receives, and will be addressed first, putting Social Security on the back burner.  However, he hastily added: “The president explicitly rejects the notion that Social Security is untouchable politically,” adding “[the administration intends to] work to build a bipartisan consensus to ensure the long-term solvency of Social Security.”

For those of you who plan to rely upon the president’s assurance of long-term solvency of Social Security, you must delve a little more closely into the trustees’ report.  They state social security tax revenue will become inadequate to fund benefits by 2016, with the trust fund depleted by 2037.  They further project annual surpluses will “fall sharply this year,” to remain at reduced levels for the foreseeable future.  With nationwide unemployment now at 8.9% and possibly on the rise, there are fewer workers contributing into the system.  This puts a stark new reality on the fallout of the current recession and intensifies the political debate over how quickly President Obama should tackle Social Security reform.

Government officials, speaking anonymously, report this impending gap requires Congress act at once to increase FICA payroll tax and reduce benefits.  Acknowledging that the resources which ostensibly secure the two trust funds “exist only in paper form, not by any actual assets,” it becomes clear each Social Security recipient is protected only by an expectation of full faith and credit.  If the system cannot be promptly revamped so to prevent its anticipated cash drain, it faces a bleak future.

Does long-term solvency as the president describes it imply future social security recipients will enjoy the sort of benefits current recipients receive?  I’ll risk the president’s displeasure and offer a somewhat different prediction on Social Security’s future.  Let’s fast-forward a few years as 77 million retiring baby boomers begin to swell the system’s ranks.  With anticipated payments to exceed collections by 2016 and general insolvency forecast for 2037, will the government actually allow the system to generate an outpouring of red ink which would bankrupt the nation?  It’s my belief no administration will permit economic destruction of the nation merely to maintain an economically unfeasible illusion.

I’ve revealed what will not happen to social security; you’re now entitled to know what will happen.  Regardless of philosophic inclination or party affiliation of persons elected to executive and legislative office, there’s really not much choice.  An economically unsustainable agenda cannot continue indefinitely.  At some point it must either become viable or self-destruct.  And that is what it will become—viable.  As the money runs out, contributions will rise and benefits will shrink.  There is, of course, a practical limit beyond which FICA tax may not extend.  As with all taxes, the limit is one of “collectability,” usually reflecting the point when political considerations overrule the attempt to extract further revenue.  The matter of shrinking benefits is easier to envision.  Expected changes will include full rather than just partial taxability for those above an income threshold.  Following will be systematic reductions of those limits until social security benefits become fully taxable to all recipients.  The next modifications will be a further increase in the retirement age as a prerequisite for eligibility as well as a reduction in the size of retirement payments to wealthy Americans.  This is merely the start. 

The major changes will begin when the situation becomes more aggravated.  Within a generation means testing, and eventually assets limitation, will convert it into a system to which all will continue to pay, but only those who qualify as needy will receive benefits.  The real pity, of course, is today’s young and middle-age, middle-class, middle-income citizens are being bled to death to sustain a fiction from which they will receive, at best, a pittance.  Perhaps the saddest part of all is that for the mass of you paying the bill to maintain this sinkhole, there is nothing you can do about it.  You will continue to sustain this labyrinth until its eventual transition into the welfare system it will become.

As disheartening as the prospects seem, there is at least a sliver of good news for a small but select group of persons with the ability to opt out of the system, either partially or wholly.  These are generally the self-employed, with a certain amount of investment or other non-earnings income.  There is no space here to provide details, but you’re invited to visit my website, www.onthemoneytrail.com, where I’ve outlined a strategy for what might be termed “selective privatization.”  Simply click onto my Newsletter Archives where you will find a bonus article, Opting Out of Social Security: The Well-Kept Secret.  It’s also a subject to which I devote attention in my book, Nobody’s Fool: A Skeptic’s Guide to Prosperity.