Social Security to Go Bankrupt in 18 Years and ObamaCare to Follow Soon After

Eighteen years may seem like a long time, but it’s not. In 1995 the follow events took place:

  • A truck bomb devastated Oklahoma City Federal Building that killed 168 people
  • O. J. Simpson was found innocent of killing his wife Nicole and Ronald Goldman
  • Windows 95 was released by Microsoft
  • The DVD, optical disc storage media format, was announced
  • eBay was founded
  • The Republican Congress shut down the government
  • Last “Far Side” by cartoonist Gary Larson was published

The year 2031 will be here before you know it. Trust me.

There’s a lesson in the insolvency of Social Security and ObamaCare, optimistically named the Affordable Care Act that’s already costing more than anyone projected.

The idea of creating a supplemental retirement system called Social security sounded like a good idea when president Franklin Delano Roosevelt signed the Social Security Act into law August 14, 1935. With the Great Depression a recent memory, selling security to the American people was easy. Each month, the federal government would take a small percentage of money from an employee’s paycheck. The employee’s employer would also be required to “contribute” an equal percentage. At retirement, any person who paid into the system would get a monthly check from the Social Security Administration.

Payments of monthly benefits began in January 1940, just five years after the program was implemented. On January 31, 1940, the first monthly check was issued to a retired legal secretary, Ida May Fuller, of Ludlow, Vermont. She received a check for $22.54. Fuller continued to receive benefits until she died in January 1975 at the age of 100. During her 35 years as a beneficiary, she received more than $22,000. For Fuller, Social Security turned out to be a great investment since her total “contribution” to the program was only $22.00.

Miss Fuller’s windfall is Social Security’s inherent problem. In 1935, the highest amount an employee had to pay was one percent of $3,000. The employer’s portion was also one percent of the first $3000 of wages for a total of $60 per year. Today, an employee and employer each pay 6.2 percent for a total of 12.4 percent of Social Security taxes up to around $110,000. That’s more than $12,000 per year.

Even with the increase in rates and the elevation of the top rate, Social Security keeps having fiscal problems. The problem was given a quick fix in the early 1980s. In order to raise revenue for future recipients, Congress revised the law and brought more people into the system.

Prior to 1983, many state and federal workers were exempt from Social Security. This was also true of non-profit organizations and churches. In fact, prior to 1984 Congress had exempted itself from the program and developed its own private retirement system.

With the new legislation, new state and federal employees and all non-profit groups (excluding ministers who could opt-out) were mandated to enter the program. This immediately added billions of dollars of new revenue to the program to pay present and future recipients. Of course, the infusion of money was only temporary. Since more people were added to the program to meet immediate cash needs, one day those added payers will become added payees. Who will pay them?

In 1935, there were 45 people paying into SS for every one person receiving benefits. Today, that ratio is about three to one. By 2030, it will be two to one. Is it any wonder the Social Security has been described as the “world biggest chain letter”? Dr. Gary North writes:

“Social Security works like a chain letter. Some people have described SS as a ‘Ponzi scheme,’ named after Charles Ponzi, a con artist who bilked people of a lot of money. How did he do it? He would tell people that he would pay them a huge return on their investment within a few months. Then he would take their money and pay off the previous investors. It worked great for the first ones to (unknowingly) get in on the scheme. Ponzi then used his early “investors” as testimonials to attract new “investors.” After a time, the number of investors ran out, and so did Ponzi with their money. Ponzi had worked the “pyramid scheme”: the people at the top (those who get in early) receive the benefits that are being paid in from those at the bottom (those getting in late).

“The following appeared in Parade Magazine (March 28, 1976): ‘Social Security is a wonderful plan. People say it’s going bankrupt. Don’t believe them. It works. I know. My uncle reached 65 and he sent in the appropriate forms. In a week he received a wonderful letter: “Dear Mr. Gold. Welcome to the Social Security System. Attached is a list of ten names. Just send $100 to each name on the list and retype up a new list with your name at the bottom. But remember, don’t break the chain!”’”

The Fiscal Cliff we just went over is nothing compared to what is coming down the pike.