No Way Out.

As I have been thinking about debt and assets and liabilities, it has occurred to me to take a look at one of the largest liabilities the US Federal government has been carrying and the demographic forces that are now bearing down hard on the ultimate payday, our social security system.

As we know, due to an almost laughable absence of leadership, the US government has not seriously addressed, nor even come close to figuring out a way to save its so-called “entitlement programs”, and is now facing a massive shortfall in revenue directed towards those programs, measured in the tens of trillions of dollars. By the way, I object vehemently to politicians’ insistence on referring to these earned benefit programs as “entitlement programs” implying that they are somehow gifts from the government. They were paid for in real cash over many years of employment by every retiree who now draws from the social security well.

This shortfall has occurred because of the same mentality that allowed our national debt to spiral out of control, that is the assumption that the future will always be larger than the past (future debt service will be handled by future borrowing and by the growth of our GDP, and future social security funding will come as the result of future taxes on and abundance of future workers, earning increasingly larger salaries over time). As we have seen with debt, this is a bad assumption.

Prayer will also not work, I am pretty sure.

This assumption creates a dependency upon a growing surplus of current and future workers, and their ever-increasing social security taxes when compared to current and future retirees. So, how’s that working out? In 1940, there were 42 workers per retiree. In 1950, the ratio was 16-to-1. In 2010, there were 2.8 workers per retiree, and within 40 years, it’s projected that there will be just two workers per retiree. At the present rate, as the population ages and life expectancies continue to rise, the system will not be able to sustain itself into the future without major reform. Where is that reform?

And to compound the problem even further, we have begun the great movement known as “the retirement of the baby boomers”. They number around 75 million, and over the next 20 years or so, they will be selling assets and drawing down social security benefits like nobody’s business. Setting aside the issue of who will buy boomer assets, there are insufficient funds in the social security programs to support such a rush on the reservoir. Add to that the fact that young people entering the workforce today are earning exactly what they would have been earning 12 years ago, we have another layer of pressure on the revenue side, and another example of bad assumptions.

Congress cannot keep denying cost of living increases to the social security system in the face of hard evidence to the contrary (see prior post on debt), and those future COLAs, if done properly, will add another 4-5% per year worth of pressure on the system.

So, how are boomers going to retire exactly? Who is going to pay for this impending onslaught of benefits our government is going to have to start forking over? And, how?

Without increasing the payroll tax rate by .5%, or increasing the cap on taxable earnings to 90%, or raising taxes on the actual benefits paid out by 10%, there is no answer. Even if we did all three of these, the impact would only be 72% of the shortfall in the next 10 years. After 10 years, even with these three measures, the impact would fall off to 23%, because the growth in the liability is like a hungry mythical beast, and without RADICAL reform and a BIG tax increase, we can never feed the beast; sort-of like our municipal and state pension obligations.

We have created an enormous burden on future generations of citizen workers, without even a hint of responsible governance or preventive legislation. Congressmen and women who presided over this mess will retire on comfortable and ridiculously generous Federal pensions with fully paid health care benefits, while the average, random Joe and Jane will be stuck holding this bag, with absolutely no hope of any way out. This is beyond shameful. This is criminal.

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About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

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