A Solution to the Fears of Old Age

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In 1935, the Social Security Act was signed into law by President Franklin D. Roosevelt. Back then, 65 was considered old age.

Today, “65 is the new 45”—at least that’s what many baby boomers would like to believe. In America, people fear growing old and losing their independence more than they fear dying, according to studies as old as the 1990’s and as recent as this year.

With advances in medicine and technology, the new old for your child may be 90 or even 120. In other words, growing old is a new and escalating opportunity…and problem.

In 2012, the U.S. government finally admitted that the Social Security fund will be bankrupt by 2033. How old will your child be in 2033? Most baby boomers will just be entering their 80s.

The question is: How will governments afford to keep an aging population housed, fed, and given proper medical care?

In 2012, the Social Security Administration reported that 10.8 million Americans were now receiving disability benefits. That is a 53% increase over the past decade. More than 5 million people have applied for disability benefits since the economic crisis began in 2007.

When unemployment rises, more people collect disability. What will happen if the economy remains flat for the next 20 years, as many predict?

Today, many governments are going bust, unable to fund the retirement pension plans of their public workers. The state of California’s pension system is a disaster. How will governments afford tomorrow’s old people? This problem will be your child’s problem.

Social Security and the U.S. deficit

Over the last few decades, U.S. politicians have been sounding the alarm on Social Security and calling it the “driver of the federal budget deficit.”

Earlier this year, U.S. Senate Majority Leader Mitch McConnell, blamed “entitlements” as the key cause of rising deficits, and blamed Democrats for refusing to cut spending by Medicare, Medicaid and Social Security.

In July, the budget deficit grew to $779 billion in fiscal 2018—the highest in six years. The U.S. Department of Treasury attributed the increase to the bill passed by Trump last December.

By law, Social Security cannot contribute to the deficit, because it is required to pay benefits only from its trust funds. Those trust funds are funded by employers and employees through a payroll tax of 12.4%. These trust funds have seen a growing surplus and finished fiscal 2018 with a surplus of $2.89 trillion.

The surplus funds must be invested in special-issue U.S. treasury notes, which have the same guarantee as any other federal bond.

It’s not surprising that such entitlements are on the chopping block during midterm elections, but is the blame for the deficit accurately placed on Social Security?

The Long-Range Outlook

The trust fund surplus will be drawn down as boomers claim benefits and fewer people are paying into social security.

In fiscal 2018, expenses exceeded revenue for the first time since 1982 by almost $80 billion. The difference came from repayment of interest on those Treasury notes. Some say that this is evidence that Social Security is a cause of deficits since the payment came from general revenue.

“We can call that $79 billion an interest payment on past borrowing – fine,” said Brian Riedl, senior fellow at the Manhattan Institute. “Social Security in the past ran annual surpluses and lent that surplus money to the Treasury. In those years, the existence of Social Security reduced the federal budget deficit. Today, it is relying on a cash infusion from the Treasury to pay full benefits.”

As I stated earlier, these trust funds are projected to be exhausted in 2033; at that point, incoming revenue would only cover about 75% of promised benefits.

This could be cured by increasing payroll taxes and raising the cap on covered income. Or reduce benefits by increasing the retirement age.

The “Hope” of Social Security

Perhaps the scariest thing about thinking of Social Security as a means to freedom is that it is the ultimate gamble on hope.

You have to hope that it’ll actually be there upon retirement.

Scott Burns in Dallas News writes: “In our economy, the most important asset isn’t actually an asset. It’s not something you own. It’s a variety of promises that our government calls an entitlement. Some call it: virtual wealth. But most of us call it Social Security. It’s the biggest asset most Americans have.”

Of course, Social Security has been around for a long time now and they only have $2.89 trillion on hand. How they would ever catch up, especially given that (including other obligations) the US has trillions in unfunded liabilities. Why? Because it is the big elephant in the financial room.

In short, US unfunded liabilities are larger than the “future” payroll collection income for Social Security.

Add to that the fact that the Federal Reserve lists housing and mutual funds as assets Americans rely on, (despite that they’re not true assets, meaning they are not things that put money in your pocket) and that Americans rely solely on capital gains…

Well, you can see how much trouble we’re in.

Take Control of Your Financial Future

In the end, relying on a government program like Social Security as your “biggest asset” is the ultimate gamble…one you will lose big on.

Rather than passively rely on capital gains and the government to make you financially secure, you need to take control of your own financial future. That starts with increasing your greatest asset: financial intelligence.

And the key to financial intelligence is how to use both cash flow and capital gains to grow wealthy. Not one or the other, but there are tons of ways to invest in both for every investment you make. Dividend-producing stocks, DRIPs, options contracts, real estate… just to name a few.

So many people are not successful because they’re generally focusing on only one of the two. The majority is focusing on capital gains.

In my opinion, one of the primary reasons people invest in tomorrow, rather than today, is because they think they cannot find or afford an investment that pays them today.

As a result, they often become believers in tomorrow. These are the people who often fall prey to financial predators selling dreams of the future.

As my rich dad said, “An investment needs to make money today and tomorrow.”

Today, start putting the power of true assets and cash flow to work for you.

Regards,

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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