Social Security in 2010 is going cash flow negative, that means it will pay out more benefits than received in contributions. It wasn’t supposed to happen for another 5-10 years. Due to the economic crash it is happening NOW! This is a financial disaster few are talking about. It is yet another Ponzi scheme that is collapsing. Watch this carefully as it unfolds. The economic consequences are dire and far reaching.
Surprise! Swamped by a 23 percent increase in benefit applications fueled by a surge in early retirements (age 62-65), higher disability payment requests and declining payroll withholdings resulting from generationally high unemployment and underemployment, Social Security Administration officials for the first time in the OASDI program’s history now expect to pay out more in benefits the next two fiscal years than are received in contributions.
Since all previous annual Social Security surpluses have been lent to the federal government to partially fund national budget deficits, including $142 billion in FY2009 (which for a generation have masked the true extent of our profligate deficit spending), OASDI (Old Age, Survivors and Disability Insurance) has about $2.5 trillion of government bonds in which those surpluses have been “invested” and from which it can fund the $10 billion shortfalls it now projects for the next two fiscal years, and any other deficit years, by redeeming those bonds from the federal government.
The implications of Social Security no longer generating a borrowable surplus and redeeming government bond “investments” to fund current retirement and disability benefits, however, even for two years, are huge and far-reaching. Right off the bat it will require the federal government to borrow – from other sources, including a growing reliance on international governemnts – another $120 billion in FY2010 over and above the already projected $1.5 trillion in borrowing necessary to plug next year’s budget chasm, and a like amount in FY2011.
We have known with certainty the day was coming when Social Security outflows exceeded inflows, but since it was not projected until 2017 or 2018 in typical fashion we ignored the issue. Now come the days of reckoning as the worst recession of the post-WWI-era unfortunately coincides with the coming-of-retirement-age of a Baby Boomer generation ill-prepared for job losses or retirement.
Baby Boomers were born between 1945 and 1964, so the forward elements of this 77-million-plus cohort have been eligible for age-62 reduced Social Security benefits since 2007. The recession likely is driving more early retirement decisions as job losses or reduced hours force Boomers to tap what in many cases is their only source of income based on estimates 70 percent of that generation have no retirement savings whatsoever and many are deeply indebted with mortgages, home equity credit lines and credit card obligations amassed from a decade of overconsumption.
According to an Associated Press story posted at Yahoo! Finance Sunday, “Social Security officials had expected applications to increase from the growing number of baby boomers reaching retirement, but they didn’t expect the increase to be so large. What happened? The recession hit and many older workers suddenly found themselves laid off with no place to turn but Social Security. Job losses are forcing more retirements even though an increasing number of older people want to keep working. Many can’t afford to retire, especially after the financial collapse demolished their nest eggs.”
A new “austerity chic” among retirement-savings-deficient Baby Boomers, who now are spending and consuming less and saving and repaying debt more, in addition to the increased borrowing burdens on the federal government, will conspire to dampen any consumption-led economic recovery in the coming years, perhaps, in a worst-case scenario, setting up a Japan-style lost decade(s) as more and more Americans reduce spending and turn to the federal government for various income supplements, whether unemployment compensation, health care or retirement benefits.
Recent budget projections by the Congressional Budget Office and the White House Office of Management and Budget forecast cumulative deficits of $9 trillion over the next decade, and that’s a “best-case” scenario. If we miss the extremely optimistic annual GDP growth projections, even by only a little, we could be looking at more than $12 trillion of cumulative deficits, assuming we are able to find willing lenders in the face of such substantial numbers at a time when, in 2019, our total government debt could exceed 140 percent of GDP, a level at which it would exceed even the post-WWI high of 120 percent .
In any event, hold on to your wallets in preparation for a series of significant tax hikes at all levels of American government, which would assure an economic lost decade or two. Either that or some intentional devaluation of the U.S. dollar to generate a massive inflationary surge, after which, if destroying the U.S. dollar to save the country as in 1933 with a 60 percent devaluation against gold is deemed “reasonable” policy, $4.00/gallon gasoline in 2008 will seem quaint in comparison to the price levels to which motor fuel would spike as an “unintended consequence” of such a hyper-inflationary monetary policy.