Saturday, August 15, 2009

Next Great Bailout

This article by Fortune's Allan Sloan get's into the nitty gritty of Social Security and demonstrates the gigantic problem we'll have on our hands in about 10 years. Most people don't know that there is actually no money in the Social Security Trust. The U.S. Government has been spending that money for many years and has been issuing IOU's to the Trust to take the place of the cash collected from our taxes. The system is totally broken because when it comes time to pay the money owed to the current generation, the Treasury Department will have to make good on those IOU's by selling more debt to investors like China or Japan. This assumes that foreigners will be willing to fund us into perpetuity, a common assumption made by the government in its bailouts of the Financial, Auto, Insurance industries along with the existing national debt. This is not a prudent assumption and will hurt us badly someday when foreigners stop buying.

Here is my favorite quote. This is an important article in my opinion.

"The cash that Social Security has collected from my wife and me and our employers isn't sitting at Social Security. It's gone. Some went to pay benefits, some to fund the rest of the government. Since 1983, when it suffered a cash crisis, Social Security has been collecting more in taxes each year than it has paid out in benefits. It has used the excess to buy the Treasury securities that go into the trust fund, reducing the Treasury's need to raise money from investors. What happens if Social Security takes in less cash than it needs to pay benefits? Watch.
Let's say that late next year Social Security realizes that it's short the $3,486 it needs to pay my wife and me our Jan. 1, 2011, benefit. It gets that money by having the Treasury redeem $3,486 of trust fund Treasury securities. The Treasury would get the necessary cash by selling $3,486 of new Treasury securities to investors. That means that $3,486 has been moved from the national debt that the government owes itself, which almost no one cares about, to the national debt it owes investors, which almost everyone -- and certainly the bond market -- takes very seriously."