Social Security Is Bankrupt Now

By Bill Frezza

This just in from the trustees that issue the annual report on the health of those two pillars of the modern entitlement state: Medicare and Social Security. For the first time in its history the Social Security program will pay out more money than it takes in. This watershed event will occur this year, to the tune of $41 Billion dollars. Under any rational accounting standards this makes the Social Security program bankrupt. And that's right now, not in 25 years when the so-called Trust Fund becomes insolvent.

You see, most pension programs hold income producing assets in their Trust Funds. Stocks, bonds, real estate, oil and gas partnerships, that sort of thing. A fully funded pension program owns enough of those assets to pay its liabilities even if the company closes its doors and not a penny more of new money comes in from current employees.

Social Security plays by a different set of rules enshrined under the New Deal and Great Society programs. These are the same rules that landed Bernie Madoff in jail. Although the Social Security system has been regularly taking in billions for decades and socking it into its Trust Fund just like a normal pension plan, Congress has just as regularly been draining the money out for current spending. All of the money collected from every American's paycheck throughout all of our careers is now gone. In its place are not stocks, bonds, real estate, and oil and gas partnership. In its place are IOUs from Harry Reid, Nancy Pelosi, Charlie Rangel, and Barney Frank. $2.5 Trillion dollars worth of IOUs.

Now, imagine if a private company had a pension plan that its executives had completely drained wining and dining Congressmen in return for IOUs. What do you think would become of those executives when word got out that the only way they could make pension payments was to beg a flat-broke Congress for money?

Tar and feathers come to mind.

So after years of telling us this problem is decades away the fateful day has finally arrived when Congress has to make good on that giant pile of IOUs. The same Congress that just massively expanded "access" to healthcare for all Americans regardless of their ability to pay. The same Congress that bailed out Fannie Mae, Freddie Mac, General Motors, and AIG. The same Congress that can't resist festooning every spending bill with earmarks for essential programs like butterfly gardens. And all of this right in the middle of the worst economic downturn since the Great Depression

Wake up you little princess and princesses. It's time to face the music.

And where are these trusted paragons of fiduciary responsibility going to get all that dough? The same place they get the rest of the money they spend that they don't have. First, they grab what they can from current taxpayers. But, oops, income tax payments are way down thanks to the jobless recovery served up by the geniuses who believe we can spend our way back to prosperity. So the next stop is to borrow the money, again, mostly from the Chinese. For reasons known only to Confucius, Chinese Communists think it's a good idea to keep lending our Congressmen money. These people deserve each other, don't you think?

The Social Security commissioner, Michael J. Astrue, sanguine about his awesome responsibilities, was quoted as saying this is "not a cause for panic." The man would have made a perfect captain of the Titanic.

With the confidence of a cardsharp that thinks he has his rube flummoxed, the liberal pundisphere received this annual report with brassy spin. "Medicare Stronger, Social Security Worse in the Short Run," blares the New York Times. The short run? Ah yes, the Obama recovery is right around the corner. Just close your eyes, spend, spend, spend and sing Happy Days are Here Again.

This story gets worse if you look at Medicare, which has taken the crown from Social Security as our largest runaway entitlement program. The trustees' report predicts that thanks to payment cuts included in the new healthcare bill, Medicare won't go broke until 2029. Treasury Secretary Timothy Geithner claims this shows "some very positive developments." But these are the same cuts that have been eliminated every year in the so called Doc Fix required to keep doctors from refusing to see Medicare patients. Medicare's chief actuary, Richard Foster, doesn't believe for a minute that those cuts are going to stand. You see, a Congress that has to borrow money from China to keep Granny from being thrown into the street doesn't want to have to explain why her doctor won't see her anymore.

How much longer the American people are going to let the lunatics run the asylum remains to be seen. But the longer it takes to throw the bums out the tighter we are going to have to cinch our belts to dig out of this hole. At least for those of us that don't depart for better climes.


Bill Frezza is a partner at Adams Capital Management, an early-stage venture capital firm. He can be reached at bill@vereverus.com. If you would like to subscribe to his weekly column, drop a note to publisher@vereverus.com.

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