Did you hear that loud thud echoing across America last week?
That was the head of US Treasury Secretary Jacob J. Lew hitting his desk when he was asked to sign the Social Security Administration’s (SSA) latest annual report.
A Great Concept…
Social security is a great idea in theory.
Everybody contributes to a collective fund. Prudent and responsible government agents conservatively invest the funds in cash producing assets building a substantial national piggy bank over time.
Those same prudent public servants then distribute interest from the fund to provide income security to retirees, the disabled, and widows with children.
It sounds like a great idea, and for many decades social security has been a keystone of our stable and prosperous society.
…Gone Horribly Wrong
Unfortunately, the ideal presented above hardly represents how social security has actually been managed over time.
For decades any excess annual tax revenues paid into the social security and Medicare trust funds were, by law, invested in US government bonds.
What that really means is that Congress used your social security and Medicare tax dollars as a government slush fund and filled the social security and Medicare trust funds with government IOUs.
This little scheme worked for decades and the SSA hasn’t missed a payment.
But there’s a problem.
The Day of Reckoning is Upon Us
Starting in 2020, the SSA will have to begin selling bonds from the trust funds in order to continue making full payments to beneficiaries.
This drastic measure will only be able to fund social security payouts for 14 additional years.
That’s right. The $2.8 trillion social security trust funds will be completely depleted by 2034.
After that the SSA estimates that ongoing tax revenues will allow them to continue paying roughly 79% of promised benefits to beneficiaries.
But never fear, the SSA’s report also reassures us that lawmakers have “a broad continuum of policy options that would close or reduce the long-term financing shortfall.”
What are those policy options?
They include things like raising social security taxes by roughly 30%, increasing the eligibility age, reducing payments to beneficiaries or eliminating cost-of-living increases.
Fortunately for Congress, if all else fails, the Supreme Court has ruled that those who paid social security taxes have no contractual right to actually collect social security payouts.
In other words if the US government ever decided to just stop making social security payments, they already have the judicial blessing to do so.
How Did it Come To This?
One of the most amazing facts in the SSA report is that since its inception the Social Security Administration has confiscated collected roughly $19 trillion dollars from the public. After paying out $16.1 trillion dollars in benefits it has a pile of bonds currently worth $2.8 trillion
How could someone with nearly $3 trillion in assets be on the brink of bankruptcy?
It’s quite simple really.
The US government violated what entrepreneur and investor Simon Black likes to call the Universal Law of Prosperity which he summarizes as: “in order to prosper, you have to produce more than you consume.”
The government has violated this law in every aspect of its finances.
The US annually spends hundreds of billions of dollars in excess of the tax revenue it collects. These cumulative deficits total more than $19.3 trillion as of this writing.
This blatant disregard for the Universal Law of Prosperity means that ultimately the US government will have no option other than to default on you, me and anyone else to whom it owes money.
That’s unfortunate but it’s the sad mathematical reality.
Fortunately, the government’s prodigality doesn’t have to impact our personal financial freedom.
Creating Your Own Financial Freedom
In one of my first posts, I identified financial freedom as one of the four pillars in your Place to Stand?
One of the most important aspects of financial freedom is independence, i.e. not relying on others to take care of you.
The SSA’s report is a good reminder that the government won’t necessarily be there to take care of you when you retire.
This isn’t a cause to freak out.
The folks at the SSA have been good enough to give us an 18 year heads up that this is coming. Even if you are nearing retirement age 18 years is a good, long while to come up with a backup plan.
So take a deep breath and start getting creative in thinking of ways to mitigate the government’s broken promises.
What assets can you start accumulating that will produce a cash stream to replace some of that lost social security income?
Are you interested in building a portfolio of reliable dividend paying stocks?
In eighteen years you could pay off nearly two-thirds of a mortgage. Could you buy a rental property now that would provide you with a healthy stream of rental income 18 years from now?
What skills do you have? Could you start a side business selling a product or service?
Start Slow and Enjoy the Journey
If all of the options I just mentioned sound intimidating and difficult then I’ve got great news.
Very few people are naturally good at investing or starting/running a business. It takes time to learn the skills required.
Most of your peers will spend the next 18 years complaining as they watch the slow approach of the social security train wreck. You on the other hand will spend those 18 years educating yourself and taking action to avoid the train wreck altogether.
The key is not to delay. Start now.
Pick up a couple of books on stock investing for income. Enroll in a real estate seminar or online course. Subscribe to an investment or business newsletter. Start reading the financial news.
Whatever you select, find a good mentor. Someone to help you avoid common pit falls and provide support when things get difficult.
These resources will help you learn the language and develop the skills and mindset necessary to operate competently in new environments.
It will take time. You will make mistakes. You may lose some money as you learn.
But if you start now and work diligently 18 years from now when most people are cursing Congress for not fixing the problem you will be able to quietly sit back and enjoy the financial freedom that you worked hard to create.
Even more importantly, you will likely be in a position of strength to help others navigate the choppy waters.
Who knows, you may even have the opportunity to mentor some friends and teach them the very skills that you are starting to learn today.