On the Money Trail
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Social Security: A System in Turmoil
by Al Jacobs, author of Nobody's Fool
October 2007

On Labor Day, September 4, 2007, New York Senator Hillary Clinton, frontrunner for the Democratic presidential nomination, addressed the legislative conference of the American Association of Retired Persons (AARP).  As an organization that claims more than 38 million members age 50 and over, AARP is a lobbying powerhouse for Social Security recipients.  As an experienced advocate for popular causes, Senator Clinton left no doubt as to what her policy would be as the nation’s chief executive.  “Social Security is the most successful domestic program in the history of the United States,” she said, adding that “When I’m president, privatization is off the table because it’s not the answer to anything.”  She made it equally clear that if elected, she would neither cut benefits nor raise the retirement age.  Understandably, she received sustained applause from the seniors in the audience.

There can be no doubt that AARP is influential.  They played a major role in passing the Medicare Prescription Drug, Improvement and Modernization Act of 2003, that imposed a $40 billion annual pharmaceutical cost onto an already depleted program.  They were equally instrumental in the defeat of President Bush’s 2005 Social Security reform effort that would have permitted workers to divert a portion of their FICA taxes into personal investment accounts.  It’s only an unsophisticated office seeker that could fail to recognize the political clout of this vote-generating behemoth, and Hillary Clinton is not unsophisticated.

 With that said, let’s fast-forward a few years as 77 million retiring baby boomers begin to swell the ranks of social security recipients.  With anticipated payments to exceed collections by 2015, and general insolvency forecast for 2037, what actions will a responsible president take during this most crucial coming decade?  As it appears increasingly likely that Hillary Clinton will, in fact, become the next president of the United States, will she adhere to her Labor Day assurance of no changes?  Would she actually permit the system to generate an outpouring of red ink that would bankrupt the nation?

Now that I’ve asked the question, I’ll hazard a reply.  It’s my belief that no prudent chief of state, particularly Mrs. Clinton, would permit economic destruction of the nation merely to honor a pledge made in the heat of political battle.  Such promises are commonly disavowed by the makers following election to office, as reality replaces enthusiasm of the moment.  No finer example exists of the attitude among seasoned politicians to retroactively renounce campaign pledges, than the humorous comment attributed to President John Kennedy in 1961.  As he undertook the Apollo program that on July 20, 1969, resulted in the lunar landing of Neil Armstrong, he claimed that he aspired to go down in history as “the first candidate to promise the moon . . . and deliver.”

Now that I’ve revealed what will not happen to social security, you’re 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 “collectibility,” 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 that will be systematic reductions of those limits until social security benefits become fully taxable to all recipients.  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 that 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 that 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.

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Al Jacobs has been an entrepreneur for forty years. His business experience ranges from property management and securities investment to appraisal, civil engineering, and the operation of a private trust company. In his book, Nobody's Fool - A Skeptic's Guide to Prosperity, Al presents his Ten Ground Rules for Success for achieving wealth and a prosperous life by outlining a philosophy for spending, borrowing, making sound investments, and how to avoid being victimized by America's many intimidating institutions.