Weekly Market Update by Retirement Lifestyle Advocates

          Yup, I’m going to do it.

          Going to quote Bernie Sanders in this week’s “Portfolio Watch”.  While I have little in common with Mr. Sanders when it comes to opinion on public policy, Senator Sanders did bring to light an important study regarding the financial health of retirees in America.

          Mr. Sanders released a report outlining the current state of retirement in the United States.  The report, titled “A Secure Retirement for All” (Source:  https://www.commondreams.org/news/retirement-crisis), found that half of all Americans age 65 and older are living on less than $30,000 per year.

          The report also stated that nearly half of all Americans are at risk of a financially insecure retirement, up from about one-third of all Americans 40 years ago.

          The report offered up solutions that I could have predicted without reading the report.  Mr. Sanders refers to these proposed changes as ‘strengthening the Social Security program.’  Change one proposed by Sanders:  put more money into Social Security, which Sanders calls “the most successful program in our nation’s history,” and change two: forcing workers to save for retirement via payroll deduction and then offering those workers a guaranteed monthly income at retirement.

          Since Social Security began, changes to ‘strengthen’ the program have been made, always with the outcome of making the program weaker.

          I'm not sure if Senator Sanders made this connection, but describing Social Security as the most successful program in our nation’s history is almost delusional.

          With a current underfunding level of more than $60 trillion+, the reality is that the Social Security program has been thoroughly mismanaged by the collective group of Washington politicians over the years.

          That’s not how one would define a successful program.

          Interestingly, Mr. Sanders is suggesting forced savings through payroll deductions and a guaranteed lifetime income later in life.

          That’s how Social Security was defined at the program’s inception nearly 90 years ago.  What he undoubtedly means is more forced savings (higher taxes) and (maybe) more income at retirement.

          It seems Mr. Sanders and others want to attempt to remedy retirement poverty by doing more of what got us here.

          Albert Einstein is widely credited with stating that the definition of insanity is doing the same thing over and over again while somehow expecting to get a different result.  (Note:  there are those who say that saying can be attributed to Edison, too.  Regardless, it’s an appropriate quote for the discussion.)

          The harsh reality is that there is no money to ‘strengthen’ the Social Security program.  More on this momentarily.

          For some Social Security perspective, let’s review what President Franklin Roosevelt had to say about Social Security at the inception of the program:

“Young people have come to wonder what would be their lot when they came to old age.  The man with a job has wondered how long the job would last.

This Social Security measure gives at least some protection to thirty million of our citizens who will reap direct benefits through unemployment compensation, through old-age pensions and through increased services for the protection of children and the prevention of ill health.

We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty ridden old age. 

This law, too, represents a cornerstone in a structure which is being built but is by no means complete.  It is a structure intended to lessen the force of possible future depressions.  It will act as a protection to future administrations against the necessity of going deeply into debt to furnish relief to the needy.  The law will flatten out the peaks and valleys of deflation and inflation.  It is, in short, a law that will take care of human needs and at the same time provide the United States an economic structure of vastly greater soundness.”

          When Social Security was initiated, it was the perfect political scheme.  To receive full retirement benefits from Social Security, one had to reach age 65.

          Yet, the average life expectancy of an American at the time was 61 years.  (Source:  https//www.ssa.gov/planners/retire/background.html)

          It was a perfect political victory and tax revenue victory in the beginning.

          Over time, there were changes made to the Social Security program that were not unlike the changes that Senator Sanders is now proposing.  Each change brought higher taxes.

          Initially, beginning in 1937, workers and employers each paid 1% of the worker’s annual wages into Social Security, up to a maximum of $3,000 in earnings.  Laughably, one of the first publications released by the government declared that the 1% tax rate was “the most you will ever pay.”

          By 1950, the Social Security tax rate increased to 1.5%.  Then, in 1956, disability benefits were added to the Social Security program, probably described then as strengthening the program.

          In 1975, in the wake of massive inflation, an automatic cost of living adjustment was added to the program.  As many readers are aware, Social Security benefits paid to beneficiaries are linked to the ‘officially’ reported inflation rate and increase each year based on this rate of inflation.

          Social Security taxes were increased to reflect these increased costs, rising to more than 5% on the first $25,000+ in wages by 1980.  Today, Social Security taxes are 6.2% for the employee and 6.2% for the employer on the first $168,600 in wages.

          Longer American life expectancies have also driven costs higher.

          While Social Security is purported to have a ‘trust fund’ which does exist on paper, it doesn’t exist in reality.  Here is an excerpt about the trust fund taken directly from the Social Security Administration’s website (Source:  https://www.ssa.gov/OACT/ProgData/fundFAQ.html)

By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are "special issues" of the United States Treasury. Such securities are available only to the trust funds.

In the past, the trust funds have held marketable Treasury securities, which are available to the general public. Unlike marketable securities, special issues can be redeemed at any time at face value. Marketable securities are subject to the forces of the open market and may suffer a loss, or enjoy a gain, if sold before maturity. Investment in special issues gives the trust funds the same flexibility as holding cash.

          The Social Security trust funds contain government debt as assets.  What about Social Security taxes that the Treasury collects?  That cash is pulled from the Social Security trust fund and replaced with ‘special issue’ securities.  The cash goes to the Treasury general account and is used for any purpose.  This excerpt again from the Social Security Administration’s website:

Tax income is deposited on a daily basis and is invested in "special-issue" securities. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund.

          Despite nice-sounding political rhetoric, ‘strengthening’ the Social Security program would inevitably result in more government debt. 

          How can I be so sure?

          The Social Security program has been around for 89 years this year.  Every time changes have been made to the program to enhance it, taxes have increased and so have the unfunded liabilities of the program.

          Treasury Secretary Janet Yellen just released a report in which the Treasury Secretary stated that both Social Security and Medicare were underfunded by more than $173 trillion!  (Source:  https://scnr.com/article/analyst-warns-social-security-medicare-underfunded-by-175-3-trillion_df4004a7dbcc11ee9c930242ac1c0002)

          That is simply a monster number.

          Yellen stated current policies “are not sustainable and must ultimately change.”

          She’s right.

          The brutal truth is there is no money to ‘strengthen’ the program again.

 

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          This week’s radio program features a ‘best-of’ interview with Michael Pento, founder of Pento Portfolio Strategies and host of the popular podcast “The Mid-Week Reality Check.”

          Mr. Pento provides his forecast for stocks, bonds, and gold moving ahead and weighs in on the inflation followed by the deflation debate.

          If you haven't yet had the chance, be sure to check out the interview now posted by clicking on the "Podcast" tab at the top of this page.

 

“If you want to be wrong, then follow the masses.”

                                              -Socrates