The Takeaway, or 30-second pitch:

If the government can’t guarantee your tiny Social Security payment, shouldn’t you be able to invest that money yourself and make twice as much, ten times as much as Social Security?

The Social Security Trust Fund is empty. Congress started raiding it in the 1950s and has spent all that money. Today’s workers’ Social Security taxes pay today’s retirees’ payments. And the government still can’t guarantee the payments.

The money is earning a terrible rate of return, and the government still can’t guarantee the payments.

If your retirement is just as risky in the government’s hands, shouldn’t you be making a lot more for taking that risk? Let’s privatize Social Security.

♦

Please, follow my logical interpretation of Merrill Matthews in a Forbes blog:

Here’s how President Barack Obama answered CBS’s Scott Pelley’s question about whether he could guarantee that Social Security checks would go out on August 3, the day after the government is supposed to reach its debt limit: “I cannot guarantee that those checks [he included veterans and the disabled, in addition to Social Security] go out on August 3rd if we haven’t resolved this issue.  Because there may simply not be the money in the coffers to do it.”

That, to me, sounds as if Dear Leader has just legitimized privatizing Social Security.

And Treasury Secretary Timothy Geithner echoed the president on CBS’s Face the Nation Sunday implying that if a budget deal isn’t reached by August 2, seniors might not get their Social Security checks.

Merrill then proceeds to remind us that there is supposed to be a trust fund for Social Security, and that said trust fund is suppsedly fully-stocked with available cash, gold, diamonds, bonds, and celebrity teeth.

Well, either Obama and Geithner are lying to us now, or they and all defenders of the Social Security status quo have been lying to us for decades.  It must be one or the other.

Here’s why: Social Security has a trust fund, and that trust fund is supposed to have $2.6 trillion in it, according to the Social Security trustees.   If there are real assets in the trust fund, then Social Security can mail the checks, regardless of what Congress does about the debt limit.

President Obama’s budget director, Jack Lew, explained all this last February in USA Today:

“Social Security benefits are entirely self-financing.  They are paid for with payroll taxes collected from workers and their employers throughout their careers.  These taxes are placed in a trust fund dedicated to paying benefits owed to current and future beneficiaries. … Even though Social Security began collecting less in taxes than it paid in benefits in 2010, the trust fund will continue to accrue interest and grow until 2025, and will have adequate resources to pay full benefits for the next 26 years.”

Notice that Lew said nothing about raising the debt ceiling, which was already looming, and it shouldn’t matter anyway because Social Security is “entirely self-financing” and off budget.   What could be clearer?

Well, that settles that. Right? Grandpa will get his automatic funds transfer (they don’t write many checks any more at the SSA). Right? Charles Krauthammer invested 3.5 seconds of his intellect, knowledge of the habits of legislators and historical knowledge to remind us that the trust fund is “fiction…” it “contains — nothing.”

Merrill continues:

Social Security status-quo defenders have assured us for the past 25 years that Social Security is fully funded—for the next 25 years, or 2036.  So if there are real assets in the Social Security Trust Fund—$2.6 trillion allegedly—then how could failure to reach a debt-ceiling agreement possibly threaten seniors’ Social Security checks?

The answer is that the federal government has borrowed all of that trust fund money and spent it, exactly as Krauthammer asserted.  And the only way the trust fund can get some cash to pay Social Security benefits is if the federal government draws it from general revenues or borrows the money—which, of course, it can’t do because of the debt ceiling.

Thus, the answer to my initial question is that the president is telling the truth now in the sense that he is conceding there’s no money in the trust fund to pay benefits; but he and other Social Security status-quo defenders have been deceiving the public for decades.

What! All the funds Grandpa put in are gone and Congress is living hand-to-mouth? What! When I read this, I reactivated my anger and vitriol over crooked politicians. Anyone who has studied Social Security knows the trust fund is basically full of IOUs. (Treasury Bonds, I believe, whose only value is tied to the “good faith and credit of the United States of America,” whatever that is worth today.) I can’t maintain the furious rage that this legal embezzlement gives rise to in me for more than a few hours, so I have to put it on a back burner until something like this reminds me of it.

In the next second however, an itch struck me: If the government can’t pay what it owes to SS recipients, then the government is no better at securing the later years of citizens than the private markets. Indeed, one of the prime reasons for rejecting privatizing social security has been the “lack” of guaranteed payment in the private markets. The song goes that a private investment might crash, might be stolen, might go bankrupt, or even be poorly invested, and therefor not be paid.

Well, now, in an effort to scare seniors and intimidate the Republicans, Dear Leader has handed us the stick with which to beat not only him, but the entire government-run Social Security apparatus:

Government run Social Security is just as risky a financial investment as a fly-by-night private investment.

PLUS

Government pays almost zero rate of return.

PLUS

Private investment offers significant return (5-10 percent per annum, maybe better, maybe worse).

EQUALS

If one is going to face practically equal risk of not getting paid (Government in default), sensible people opt for the higher rate of return to hedge against that risk.

Cue the rising orchestra. I read on:

And here’s the real irony: Anytime someone has proposed personal Social Security retirement accounts as a way to ensure that people have real assets in their own account without bankrupting the government or future generations, defenders of the status quo would pounce, calling such a reform, in Al Gore’s words, a “risky scheme.”  They have vociferously claimed that those trust fund assets are real and that only by having the government manage and control the accounts would seniors be guaranteed to get their retirement checks.

Well, we have the status quo and seniors may not get their checks.  Had we shifted to a system of pre-funded, personal Social Security retirement accounts years ago, this wouldn’t even be an issue—because retirees would have their own money in their own accounts.

Yes, the accounts likely would have declined when the stock market went down, though not if the reform were structured like three Texas counties did 30 years ago (see here).  But in case you haven’t noticed, Social Security revenues also declined during the economic downturn—because fewer people were working—so that the government is paying out more in benefits than it is taking in, and hence needing additional federal revenues, a fact admitted by Lew.

Ah! Merrill also clued into this. Great minds and all that….

Now, here is the context to offer this to the public. There was once a Social Security Trust Fund. About 50-60 years ago, Congress began stealing this money away from us. They left us IOUs that pay beneath free market interest. Congress took all the money and spent it. Six decades of bridges to nowhere and airports for one congressman, and failed program after failed program. In the real world, we would hang these thieves and confiscate their assets. But what they did is legal, if only because they make the laws that make it legal.

Now, this month’s Social Security is paid by this month’s tax revenues, with nothing going into the “Trust Fund” for current workers to get retirement benefits from SS.

Angry yet? Furiously, ragingly, where’s-my-shotgun angry yet?

But now, when the government is approaching the debt limit, President Obama is not sure if the government has the money to pay next month’s Social Security payments. Payments that are supposed to be guaranteed. Payments that would be there if the trust fund were intact, earning returns.

If one invests about 6.2 percent of his income throughout his work life (let’s say 25 years for the fun of it) and his employer matches that investment, then a person earning a lifetime average of $37,300 a year will be investing about $409 per month for 300 months. Let’s assume they invest this at an annual rate of 8 percent, compounded monthly and do not remove any month from the account for all 25 years. They will have paid in $122,700. They will end up with $388,969. And this is conservative. How many people do you know who earn the same amount every year of their working life?

According to sources (Heritage Rate of return calculator , Cato, Political Calculations rate of return calculator), SS returns from -1+ percent to about +3 percent on the taxes paid in, depending on your age, sex, marital status and the shaving habits of rhesus monkeys at the San Diego Zoo. Let’s play using the 2 percent number. If we compound the interest, it’s only $152,093 after 25 years. Remember, we got nearly $400,000 in the real world with an 8 percent APR.

And the private market is just as likely to pay off as the government.

If the risks are now the same, does one want to get $388,000 or $150,000 for that risk?

$388,000

or

$150,000?

One final note: The above completely ignores what a person could invest OUTSIDE of the Social Security tax deduction. In short, a good investor would probably be investing an additional amount in addition to this, which would also compound and grow. If $409 = 12.4 percent of your monthly income, then an additional $220 would be investing 20 percent of your gross income. For giggles: That comes to nearly $600,000 over 25 years at 8 percent, compounded monthly.

The Takeaway, or 30-second pitch:

If the government can’t guarantee your tiny Social Security payment, shouldn’t you be able to invest that money yourself and make twice as much, ten times as much as Social Security?

The Social Security Trust Fund is empty. Congress started raiding it in the 1950s and has spent all that money. Today’s workers’ Social Security taxes pay today’s retirees’ payments. And the government still can’t guarantee the payments.

The money is earning a terrible rate of return, and the government still can’t guarantee the payments.

If your retirement is just as risky in the government’s hands, shouldn’t you be making a lot more for taking that risk? Let’s privatize Social Security.