Happy Birthday Social Security?

Neeraj Chaudhary
Euro Pacific Capital, Inc.
Posted Aug 20, 2010

In his weekly radio address this past Saturday, President Obama happily commemorated the 75th anniversary of Social Security. From my perspective, the milestone is nothing to celebrate. For although the president spoke earnestly about the "obligation to keep the promise" of Social Security, in reality, the program will wreck the government's finances within 10 years.

The numbers are simply astounding. Social Security is the largest social program in the world, making up over 40% of all federal spending. Over 58 million Americans - 1 in 5 citizens - receive a monthly check from Social Security. Although these numbers are already daunting, demographic realities will soon cause the program to expand much more rapidly.

According to the Government Accountability Office (GAO), entitlement programs and net interest costs may be expected to consume fully 93% of federal revenue by 2020. Think about that: in less than 10 years, the Social Security program (which includes Medicare and Medicaid) will have gotten so big that only 7 cents of every dollar of federal revenue may be left for everything else.

What exactly does "everything else" include? Try the entire military, FBI, freeways, disaster relief, NASA, housing agencies, and the postal service - to name a few. If new revenue is not found, and if current Social Security obligations are not changed, the remainder of federal programs would have to be cut by 88% by 2020. Simply put, the "third rail" of American politics is about to electrocute us all.

Enacted in 1935, Social Security turns 75 this year (its sibling, Medicare, is a mere pup at age 45). By comparison, our great republic is over 200 years old. In other words, for most of our nation's history, Americans have not relied on a Social Security check or Medicare insurance in their old age.

These programs have grown rapidly during the historically brief period since their inception. Even after adjusting for inflation, Social Security taxes have risen fourteen-fold since 1935, and Medicare taxes have risen at least four-fold since 1965. And yet, despite massive tax increases for both programs, their balance sheets have only deteriorated. But it's important not to confuse size with permanence.

Instead of tackling the issue head-on by cutting spending, leaders in both parties continue to exacerbate the problem. Medicare Part D -- signed into law by former President George W. Bush just seven years ago -- increases our nation's unfunded liabilities by nearly $16 trillion! And while the fiscal impact of President Obama's health care reform law is still being debated, one thing is for certain: total expenditures will rise, not fall. Those Americans who criticize Europeans for spending so much money on social programs should take a good look in the mirror.

If an American politician were to take a courageous stand to reform this failing system, how would the nation react? One can already picture elderly Social Security recipients being trotted out by the mainstream media in a heartbreaking plea for sympathy. Any intimation that our seniors might suffer would surely stop the debate cold. No matter that a bankrupt program would offer far fewer benefits than one that has been reformed.

The original mission of Social Security was to provide a basic subsistence income to the elderly during the Great Depression. But while the initial intention may have been laudable (no one wants to throw Grandma and Grandpa out on the street), the program has predictably spiraled out of control. In 1935, each person receiving funds from Social Security was supported by 17 workers. By 2020, a Social Security recipient will rely on just about 2 workers paying in. Since neither Republicans nor Democrats have demonstrated a willingness to cut those monthly checks, get ready for higher taxes (and higher inflation).

Alarmingly, there is growing evidence that the current tax bite, and the prospect of higher taxes in the future, is already destroying jobs in the American economy. In a recent op-ed in the Wall Street Journal, small businessman Michael Fleischer vividly described his reluctance to hire more employees due to the current burdens of health insurance, Social Security payments, unemployment insurance, and other government-mandated costs, as well as the potential for added burdens in the near future. No doubt this sad drama is playing itself out in company after company all across the country.

We are saddled with a large and growing tax burden that will eliminate jobs, an exploding but untouchable government program that is set to consume nearly every dollar of federal revenue, and virtually nothing left for essential programs such as national defense. Happy birthday, Social Security?

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Aug 19, 2010
Neeraj Chaudhary
Investment Consultant
Euro Pacific Capital, Inc.
website: www.europac.net
email: nchaudhary@europac.net

Neeraj Chaudhary is an Investment Consultant with Euro Pacific Capital. Opinions expressed are those of the writer and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

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