August 30, 2001

Since I am planning on retiring in my hometown, I decided to start reading the local newspaper. Here's a recent letter I sent the editorial board of my hometown newspaper.

August 29, 2001

Union-Bulletin
Editorial Board
P.O. Box 1358
Walla Walla, WA 99362

Dear Editorial Board:

The top priority of the Fed and Union-Bulletin should be to inform Americans about the reality of the National Debt (ND) and Social Security (SS).

The ND is $5.7 trillion (T) with $2.2T held by the so-called SS trust fund. I say so-called because the government still has $5.7T in debt, it just owes itself $2.2T of it.

Remembering some of my basic math from Green Park: I take $3.5T (5.7T minus 2.2T) and divide that by the best case scenario for a budget surplus of $150 billion (B) and I get 23. It will take the Fed 23 years to pay off just the ND not including the SS trust fund. (best case scenario surplus of $150B based on the following: in 1999 we had great employment, GDP growth, corporate earnings and stock market gains, and the Fed had a surplus of about $150B)

In 2015 there will be more outlays of SS and Medicare than coming in, and the government will need to dip into the trust fund, but there won't be one. In fact, I already pointed out the government is still going to be trying to pay off the $3.5T of ND. They will still have another 9 years (2015 to 2024) just to pay off that portion of the ND.

Simple math has shown that since the government squandered all the SS surpluses from the mid-thirties to now has left America in dire straights. The sooner the government and the news media admits that and passes the information on, the sooner Americans can accept the facts and save more on their own.

The Republicans are screwed up because they think SS can be saved and still give tax refunds that mostly go to the rich. The Democrats think the Republicans are just scaring the public even though the government has already increased SS taxes from 2% in the Thirties to 15% in the Eighties and increased retirement ages, e.g., someone born after 1960 has a retirement age of 67, and if they retire early at 62, they get a 30% reduction in benefits vs. only a 20% reduction for someone born before 1938. Just go to Social Security Administration to find out your retirement age. Those born in 1960 are still 25 years away from retirement and you would have to be nuts to think they're not going to raise taxes and the retirement age even more.

Note: Here's a quote from a Bloomberg magazine called On Investing. The quote is from an article called, "Do We Have a Surplus" (John B. Shoven, Ph.D., Fall 2001, page 11):

"So, let's consolidate what we know. The government as a whole ran a $236 billion surplus, but part of the government (the trust funds of Social Security, Medicare, etc.) ran a surplus almost as large at $234 billion. That means that the rest of the government ran a relatively tiny surplus of approximately $2 billion. This number is reported in the massive US budget as the 'Federal Funds surplus,' but it receives almost no attention."

Meaning if we are going to assume, as we should, that the Social Security trust fund is real, we should only credit the Federal Government with a surplus of $2 billion for the year 2000. In my example above I used a budget surplus number of $150 billion as my best case scenario. I was actually being very generous since the year 2000 was even better than 1999 as far as tax revenues, and the Federal Government still only managed a Federal Funds surplus of $2 billion.

END

I have known for sometime now that mathematically it is not possible to save Social Security. Yes, It's possible to raise Social Security taxes and reduce benefits and if you want to call that saving Social Security, go for it. But the fact is, the government, left and right, Republican and Democrat, squandered all the Social Security surpluses from the Thirties to now. Any insurance program that does not invest the premiums so as to have money "in the bank" when hard times come, for example, with Social Security the hard times would be when the Boomers started to retire, is bound to go belly up. And there is nothing anybody can do about it after 60 years of wastefulness on the part of the Federal Govenment.

If an individual walks into a financial planner's office and says I'm 60 years old and have not saved a dime, but I want to retire at 65 and the individual has no other retirement plan, the financial planner won't hesitate in telling the person, "it's too late." However, when it comes to the Federal Government, all the politicians and news media refuse to admit the truth: it's too late, you blew the Social Security surpluses for 60 years and the boomers start to retire in only 10 more years, unless you're planning on running over to the US Treasury and putting the crew on overtime in printing more money, it's too late!

Instead of just admitting to the failure, the government and news media continues to tout Social Security has a great plan. Yes, for the past 60 years when the number of individuals on Social Security was far less than those working, of course Social Security is going to seem like a great plan, and it may have been if the Social Security surpluses would have been invested, but they weren't.

It reminds me of a Danny Devito movie called, "Other People's Money." Devito is a corporate raider, one who buys a company's stock that has a market value lower than the company's liquidation value. In it's simplest form, the idea is to buy a company's stock until you have some power and can be heard by other shareholders, you tell the other shareholders that if you get together you can elect a new board of directors and the new board will just sell the company at it's liquidation value, e.g., the current market price per share is $10, but the liquidation value is $15, so just sell the company assets and shareholder's reap a 50% gain.

The reason the stock is selling at a low market price is because the stock market doesn't have a lot of faith in the company as a whole, that is, the company has no synergy, and the stock market is actually placing less value on the company as a whole (market price of $10 a share) than what the company is actually worth when broken up (or liquidation value of $15 a share). Off the subject of Social Security, but a very important concept for a stock investor: the more synergy the company has, the more investor's will pay for the stock, and generally, the company's market price is always higher than its liquidation value. However, when the stock market starts losing faith in a company, that is, the stock market doesn't think the company is clicking on all cylinders, it is possible for the market price to fall below the liquidation value and that's when a corporate raider will become interested.

You may ask why wouldn't the current board just want to liquidate the company and give the shareholders a 50% gain? That's a pretty complicated answer, but in short: the board of directors and the executives of the company will be out of a job, the employees will be out of a job, and the city where the corporation is located will lose tax revenues as well. The board of directors, executives, employees, and city officials may even sincerely believe the company can be saved (like the politicians and media with Social Security). This was the situation that created the corporate raider, a company would basically be dead (like Social Security), but those in control of the company wanted to keep it going as long as possible, and as they kept it going, more and more money is lost and shareholders lose more and more. With a corporate raider coming in before all the assets are completely wiped out and liquidating the assets, shareholders can save some of their investment and may even make some money (making money is the reason why the raider got involved in the first palce).

Anyway, back to Devito. Devito is a corportate raider and he starts to buy a company's stock at $15 a share. He wants to gain power and take over the company because he can get about $25 a share if he gains control and liquidates the company. He's at the company's annual shareholders meeting and he's talking to the shareholders. He says something to the extent, "This company is dead, I didn't kill it, you didn't kill it, but it's dead...Why is it dead? Fibre Optics, new technology [the company was a wire and cable company]." Devito convinces enough of the other shareholders and he gains control of the company. Since this is the movies, there was a miracle, a large new contract for the company was found, a Japanese car manufacturer wanted to have their airbags made at the company (airbags used small strains of wire). Everybody was happy: the executives, the employees, the local community, the shareholders, and Devito.

Unfortunately, I don't think the politicians are going to get a miracle when it comes to Social Security. Nobody knows what's going to happen, but here's what has and is happening when it comes to Social Security.

From its inception Social Security taxes have been raised from 2% to 15% now (you pay half of the 15% and your employer pays the other half). The Social Security surpluses have been rolled over into general revenues and the politicians have spent them all. There has been a cap on Social Security taxes that allowed the most affluent Americans to avoid paying their fair share of Social Security taxes. Some employees have been allowed to not pay Social Security taxes because their employers got exemptions for whatever reasons. For example: Puerto Rico has an exemption from the Internal Revenue Code, but citizens still receive Social Security benefits, and in the US an employee could work where the employer had an exemption and later retire or quit from that job, and then go and work for another employer for only a short period of time, and earn almost as much Social Security benefit as someone who worked for over 45 years and paid Social Security taxes for the full 45 year period.

Right now according to the web site Choose to Save "The average Social Security benefit for the year 2000 is $804 per month." My work retirement plan will pay me $3500 a month at age 65, and I have had disability and life insurance plans that cost me less than $1,000 a year. Compare that to my Social Security benefit that does not pay me until I'm 66 and 2 months old and only pays me $1,100 a month. My Social Security taxes last year alone were $11,000, my third largest expense outside of my primary mortgage and income taxes. I am confindent my work retirement plan will not change, it has not for the past 15 years. I am confident my Social Security plan will change and it will be for the worst, it already has.

It's interesting to point out that where I heard about "Choose to Save" was on a commercial. You see Social Security already knows it's in trouble and they are going to start early in convincing Americans that Social Security was a partial retirement plan and never meant to be a full retirement plan, that is, workers were suppose to subsidize their Social Security with others savings programs. What Social Security won't tell you is that originally, right along with the plan for Social Security only being a partial, Social Security taxes were only 2% and an employee could save more. However, with Social Security taxes of 15% the vast majority of Americans can't save anymore money, no matter how many 401k and IRA plans the government comes up with.

Another issue Social Security is trying to push on Americans is the suggestion that you are going to live longer so therefore you should work longer. The pre-boomer generation average life span for a male was 72 which meant on average they would receive Social Security benefits for only 7 years. The Social Security Administration wants you to think that as the average life span goes up you should work longer vice maybe having a few more years of retirement. Let's face facts, on average, Americans are working 45 years for 7 years of retirement, and Social Security took payments from you for those 45 years and that should be plenty. Any additional life span should go to the retirees.

Another statement from "Choose to Save," states, "Medical advances could keep you alive until age 100." "Can you afford to live that long?" Social Security wants you to think you will be the one that reaches 100 so you had better start saving now (Social Security knows they are in trouble). The truth is most individuals over 80 are in nursing homes. The deal Social Security makes with those in nursing homes is for the retiree to give up all their personal assets upon entering the nursing home and then Medicare will pick up the expenses. Now there is an incentive to live longer and save more. If you end up in a nursing home paid for by Medicare, there are more assets to give up to Social Security.

According to Ralph Nader (choice of the Green Party): America is in 37th place in health care. Here's a question to end on. You and your neighbor were both born in 1955. You exercise, eat well, and take very good care of yourself. On the other hand, your neighbor doesn't exercise, eats fast food, drinks, and smokes. It's now the year 2017 and both you and your neighbor are 62 years old. But guess what? You're still more than able to work (I wonder why?), but your neighbor can hardly move, let alone work. What do you think the Social Security Administration is going to do with you two?

I'll bet you the Social Security Administration tells you that you have work so hard in keeping yourself in shape that you can retire early and tells your neighbor since he didn't work hard and take care of himself, that he must continue to work? That would be fair wouldn't it? That's what America is about, hard work and fairness?