(Social Security Administration)
(2019 Annual Report to Congress)
(Signatories to the 2019 report)
1. More On Pension Plans/Funding
CLICK HERE, for #1: CPPIB invests $2B in Mumbai, India.
CLICK HERE, for #2: CPP underfunded, money leaving Canada.
CLICK HERE, for #3: where is all money actually going?
CLICK HERE, for #4: CPPIB embraces UN PRI agenda for investing.
2. Important Links
On the American situation:
CLICK HERE, for the 2019 Annual Report to Congress.
CLICK HERE, for an interesting powerpoint on liability calculation.
CLICK HERE, for a 2018 paper: UNFUNDED OBLIGATION AND TRANSITION COSTS FOR THE OASDI PROGRAM
CLICK HERE, for the Brookings Institute & privatization.
3. Side Note On Signatories
Although unrelated to the long term problems with the Social Security program, it is worth pointing out — as a side note — some scandals with 2 people involved. Steve Mnuchin, is long suspected or corruption, and Alex Acosta was the Prosecutor who previously let Jeffrey Epstein off on child sex charges.
4. Open-Group v.s. Closed Group Valuation
From this presentation. The author makes the assumption that “open-group valuation” should be used for public pensions such as Social Security, while private pensions should rely on “closed-group valuation” methods of accounting.
The difference is this:
Open-group valuation principles mean that a pension is solvent and in good shape as long as it’s current assets and payouts are able to keep up with the demands of retirees at the moment. It doesn’t require that the pension plan be fully funded. The reasoning is there is a “social contract”, and that the Government can raise more money (tax more) to cover the shortfalls.
Closed-group valuation principles require that “all” liabilities be taken into account. The is a far more accurate method, as payments from all workers are considered, if those who won’t retire for decades. The rationale is that private companies could go bankrupt at any time, and need to take the actual amounts into account.
For obvious reasons, the closed-group valuation method is a far more accurate approach in calculating the health of pension plans. It forces “all” assets and liabilities to be disclosed.
To be fair, it is a valid point that private pension funds cannot exactly just “take more money” to cover their shortfalls. Still, the open-group approach is very misleading.
5. The Approach Explained in 2018 Paper
(See this source.) This paper explains that the open-group valuation method is appropriate because people will always be paying into it. While this is a valid point, it doesn’t take away from the growing amount of unfunded liabilities.
In fact, it helps to conceal just how much the program owes and still is obligated to pay out. The only way this works is with an infinitely growing population, and ever growing contributions.
Basically, a giant Ponzi scheme, where participation is mandatory, under threat of arrest and detention.
6. Quotes From 2019 Report
This information is from the overview (Page 2). it states that on paper, the revenue generated (both from employee deductions and from interest/dividends generated was slightly higher than the payments it distributed.
On paper, this seems fine. However, getting to the “long-range results” it tells a different story. However, it still relies on the “open-group valuation” method.
(Those quotes from page 4) Using the “open-group” method, the unfunded liabilities over 75 years is $13.9 trillion, or adding the equivalent of $185 billion/year. The authors also state a few blunt facts in the conclusion
A few points to take away here
(A) Old Age Survivors Insurance (OASI) will become depleted in 2034, and only able to pay 77% of its obligations.
(B) Disability Insurance (DI) will be depleted in 2052, and only able to pay 91% of obligations by then.
(C) Raising deductions taken from employees is necessary.
But this is using open-group valuation methods of accounting. So how much
7. Getting An Answer On Unfunded Liabilities
It has been difficult getting an accurate answer on the true size of the Social Security deficit. Estimates range from $10 trillion to over $100 trillion.
The government cited $13.7 trillion in liabilities using the less accurate “open-group” valuation. Still, that is an awful lot of money, even if it is the full amount.
8. Why Not Reform Or Privatize?
The Brookings Institute explains in this article why efforts to privatize or reform Social Security have so far gone no where. Media scare is not the only reason for this.
The article is blunt about the situation.
The system DEPENDS ON a constant inflow of new money from younger workers in order to stay solvent. If current workers were to start pulling their money from Social Security (and saving or investing elsewhere), the program would be immediately strapped for cash. This means benefits cuts to those receiving it, and higher premiums for those paying into it.
Of course, as workers who remain have to pay higher premiums, they, quite reasonably, will look for other options. This could easily create a snowball effect where more and more people pull their contributions. This will cause the collapse of Social Security.
So it’s not really the “privatization” boogeyman here. It is that the system needs an ever growing pool of new money to pay off retirees.
Yes, it’s a government run Ponzi scheme.
9. Government Pensions Are Ponzi Schemes
As was demonstrated in previous articles, the Canadian Pension Plan has almost a trillion dollars in unfunded liabilities. While claiming to have almost $400 billion in assets, the truth is that the full size of liabilities put it well in the hole.
The U.S. Social Security system faces the same issues, although the scope is worse. Even the open-group accounting method lists $13 trillion in liabilities.
There are efforts to “reform” which include: (a) raising premiums; (b) cutting benefits; and (c) raising the age of retirement. However, this may just be like shuffling the deck chairs on the Titanic. Futile. As long as a fund depends on paying off retirees with the contributions of workers, it is set up for failure.
Letting workers invest in private funds will hasten the demise, as it would deplete the funds needed to pay off existing retirees.
One has to shake their head. Bernie Madoff ran a Ponzi scheme and was sent to prison. As would any private citizen. But when the government does it, it’s called a social safety net.
Same conclusion as before: Americans are pretty screwed.