US Social Security - Is Gramps Rocking Chair Busted?

Not yet.

But according to Martin Hutchinson at breakingviews.com, it may soon be.

Mr. Hutchinson is long on predictions and short on facts. Basically he's saying that if "baby boomers" take early retirement, the Social Security fund will start to show a deficit of net outflows over net inflows in 2010. When its' investment income is added back, the fund will still show a "surplus". The deficit for 2010, he claims, will be $10 billion of net outflows before investment income is added back. Where does this investment income come from? Simple, it''s entirely in Treasury bonds.

Really, this is talking about chump change, when the US federal budget is over one trillion dollars. The simple immediate solution to the problem is that payroll Fica taxes < i.e. Soc Security taxes > will be raised a few tenths of a percent.

But it is still a cause for concern. The funding of Social Security will become much worse after 2010. This will especially be the case if more employees are losing their jobs and not contributing to the Social Security system thorough payroll taxes. Of course, if the stupid Obama administration bothered to use the stimulus money entirely to boost employment, this potential budget drain in Social Security would not be occurring so fast. Also, it doesn't help the fund's total revenue when Bernanke has Treasury interest rates reduced to zero, which virtually eliminates net investment income from the Social Security fund.

This has been one of the best known fiscal problems in the US gov for the past 40 years. Even in the mid seventies "Bubbles" Alan Greenspan chaired a committee on this issue. Nothing came from any of this, except a waste of time and money.

In his book The Price of Loyalty, Paul O'Neal, G.W. Bush's first Treasury Secretary, pleaded with the President that they had to fix the Social Security system along with other government fiscal problems. For his efforts, Bush and Fascist Cheney had O'Neal summarily fired, and then briefly harassed him when O'Neal's book was published. Cheney's dismissive comments about Mr. O'Neal's efforts were - "Reagan proved deficits don't matter." Bush and Cheney then tried to prove this theory,  by running up yearly budget deficits of unimaginable levels in their quest for grandiloquent glory in the Middle East.

Well, like all intentional modern empire builders, they completely flopped. And their grossly negligent mismanagement will cost the country additional trillions in veteran disability benefits, etc..

Sooner or later, the US is going to have to face a decision on government budget priorities. Even with foreigners funding the Fed deficits, there won't be unlimited money to go around. Currently much of the total Federal budget deficit is for funding the military < including those vets >, and in interest payments on previously incurred debt.

If interest rates go up significantly, the strain will be unbearable. The Treasury bond market will collapse, and with it the dollar. Then funding the Federal government budget will not difficult. It will be impossible.

Marc Fabor, a respected investment "guru", has said in a  Bloomberg.com interview, that the next economic crisis in the US will mean the end of the US government. Yes, literally he said that.

Prominent investment fund managers seem to be sanguine about this, and have been buying more US Treasuries. So has everyone else, from sovereign governments to the man on the street.

When everyone piles into one investment, it's almost a sure thing that there will be a crash in price in that investment. When, no one ever knows until it happens.

Soon it's going to be time to short Treasuries again. But not yet.

"But with respect to future debt; would it not be wise and just for that nation to declare in the constitution they are forming, that neither the legislature, nor the nation itself can validly contract more debt, than they may pay within their own age, or within the term of 19 years." - Thomas Jefferson

< This article is for information purposes only. It is neither investment advice or in any other way a recommendation, >