What To Do About The Social Security Meltdown

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One of the hallmarks of America is the near-universal belief that our nation is the land of opportunity. Despite the many problems in our country, we've always believed that our children would be better off than we were.

And for the better part of two centuries, that was true. But in the minds of many Americans today, that belief is dying...

You see, more than 56% of Americans believe their children will be worse off financially than they are. Now, that's an improvement from a similar survey in 2014, which found that 76% of parents feared for their children's futures. But that still means that almost 60% of parents don't think their children will achieve any lasting financial success. And that number is sure to grow as the United States edges ever closer to a financial abyss.

This begs the question: Are these parents being overly pessimistic, or do their concerns have merit?

Like many such questions, the truth lies somewhere in the middle. But being proactive against the threats to our kid's futures is a sure-fire way to secure their financial well-being.

Take Social Security for instance.

Social Security was instituted by Franklin Roosevelt in 1935 as a tool to prevent seniors from living in poverty after a lifetime of work. Today, nearly 60 million Americans receive retirement, disability, or survivors benefits from Social Security.

And at $897 billion annually, Social Security is the single largest budget item of the United States. This one program consumes about 25% of all government revenues. But those numbers will accelerate over the next decade.

You see, there were more than 76 million baby boomers born between 1946 and 1964. The oldest baby boomers have already entered their retirement years while the youngest are still in their 50s.

But there're problems facing the country that no amount of spin by either political party can make positive. It showed up in the most recent trustee's report for Social Security but almost nobody noticed. Sadly, none of the major news networks even bothered to report the findings.

What's In The Report?

Let's first look at Social Security revenues and expenses. In 2015, total expenditures were $897 billion. This was against total income of $920 billion. So far, so good.

But a closer examination reveals some scary details. Of the total income, $827 billion came from taxes paid into the plan by current workers (Social Security is a pay-as-you-go system), while interest added another $23 billion. In other words, FICA taxes were NOT sufficient to pay all sums due to Social Security recipients -- and haven't been since 2010.

Why Is This Important?

This is important because the interest income being paid to Social Security isn't coming from any real assets generating real interest. Instead, it's an accounting fiction whereby the government imputes interest on non-marketable U.S. Treasury bonds.

In other words, the Treasury prints enough dollars for Social Security to make its required payments, because the actual bonds generate no actual interest. In simple terms, the government is cooking the books!

But that's not even the scary part...

You see, as the remaining baby boomers enter their retirement years, the government's accounting fiction will no longer be sustainable.

Here's Why...

Economists use a long-term measure called the infinite horizon fiscal gap to project the future Social Security outlays. Here we examine how much is owed against the value of future FICA taxes and the present value of the trust fund. In 2015, the gap was an eye-opening $26 trillion shortfall.

By 2016, that shortfall had climbed to more than $32 trillion! In other words, unfunded liabilities of Social Security grew by $6 trillion in a single year. And that's only the beginning.

The trustees also report the disability trust fund that pays disability income will be exhausted by 2023 -- a mere six years away. And forget any ideas that the disability fund could borrow money from the retirement fund.

That's for two good reasons. First, you can't borrow from what doesn't actually exist. The bonds in the "Social Security trust fund" are essentially IOUs. They have no real value other than as a claim against future government revenues. Secondly, current law forbids the practice anyway.

This means that disability payments will have to be cut immediately by about 15% in 2023.

Combined with annual government budget deficits of more than $1 trillion by 2023, the government will have no money to solve the problem. In fact, our same infinite horizon fiscal gap for the entire government shows a fiscal gap of $199 trillion! That's 10 times greater than the entire GDP of the nation.

What Does This Mean To Today's Young People?

Let's be clear. Social Security can't go bankrupt as some claim. While the government could end Social Security (an unlikely event), the government will continue receiving FICA taxes sufficient to pay about 75% of promised benefits.

But that means we have to do more to prepare our kids for a future where Social Security is a lesser part of their future income. We owe our kids the knowledge to overcome the results of two generations of reckless fiscal and monetary policies.

And it starts with providing them the tools to become great investors -- something we'll be doing with regularity in the coming year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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