Chief Investment Strategist, The Freeport Society
I love Star Trek. It’s one of my geeky little vices.
And one of my favorite episodes of Star Trek: The Next Generation, “Half a Life,” has an interesting take on how to mitigate the effects of an aging population.
On the planet Kaelon II, when a person reaches the age of 60, they undertake “the Resolution.” In a gathering of family and closest friends, they attend their own funeral… and then commit ritual suicide so as to avoid becoming a burden to younger generations.
I got to thinking about that ST:TNG episode recently while considering the loss of some great men this week. Charlie Munger passed away at age 99 years and 332 days. Henry Kissinger died at age 100. And a week earlier, we lost a great woman: Rosalynn Carter. She was 96 years old. Her surviving husband, President Jimmy Carter, is 99.
While reaching centenarian status is still uncommon, people are certainly living longer than before, generally speaking.
That begs the question: What does this mean for Social Security?
Well, I’ve got some bad news.
But I’ve got some good news, too.
And that’s what we’re going to discuss today.
It all starts with our government…
Modern-Day Geronticide?
The current national debt is just over $33 trillion. Of that, $6.8 trillion is “intragovernmental” debt. That’s debt the government owes itself.
Why does the government owe itself money?
Because it’s been borrowing hand over fist from… you guessed it… the Social Security trust fund.
But here’s a dirty little secret about the Social Security trust fund: There is no trust fund… and there never was.
In the years when Social Security ran surpluses, bringing in more in tax revenues than it paid out in benefits, that extra green wasn’t left sitting in a bank account somewhere. It was invested in government bonds.
So, the money ostensibly set aside for Social Security got spent elsewhere by Congress and was replaced with IOUs.
Social Security “surpluses” masked deficits elsewhere, but it at least made the accounting look good. OK, not “good,” but at least slightly less terrible.
Of course, this accounting fantasy is untenable now that the retirement of the baby boomers has put Social Security into deficit. The trust fund that never was a trust fund is estimated to be fully depleted by 2034. That’s just 11 years from now.
What seems more likely to you: That 80 million Baby Boomers accept a Social Security check that’s 20% lower each month to match current inflows… or that they demand their congressman makes up the shortfall by pulling spending from elsewhere?
We all know how this ends. Congress will play with tax rates, lifting the cap on earnings subject to Social Security FICA taxes. They’ll make benefits fully taxable. They may even reduce the benefits paid to higher-income retirees who “don’t need it,” effectively turning Social Security into welfare.
In fact, that’s exactly what former New Jersey governor Chris Christie said in the November 8 Republican debates: “The fact is Social Security was established to make sure that no one would grow old in this country in poverty, and that is what we have to get back to. Rich people should not be collecting Social Security.”
Color me cynical, but I imagine anyone with two nickels to rub together will be considered “rich.” Yet the government can’t cast that net too widely because that’d bring a legion of angry voters to metaphorically (or literally!) storm the Capitol.
This all smacks of a modern-day version of geronticide… or maybe even ageism or wealth-ism: “You’ve reached your allotted wealth limit. Over the cliff for you!”
Surviving the Social Security Crisis
The easiest way to make the Social Security problem go away is for the government to play with inflation adjustments. Sure, your guaranteed payout won’t be lowered, but it will buy a little less with each passing year.
Conveniently, inflation is also a great way to make the national debt problem go away. Paying debts in devalued money is a trick as old as debt… and as money itself.
That means, despite all the talk about fighting inflation, our government has a strong vested interest in keeping inflation alive and well… while making sure your Social Security payments lag behind.
At least that’s the plan until we are forced to take on Kaelon II’s Resolution custom.
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To life, liberty, and the pursuit of wealth…