Why Social Security is a Bad Deal for Younger Generations

Social Security might have been a good idea at the time it was created, but over time it has deteriorated into a destructive wealth redistribution scheme. People born after 1974 will reach full retirement age after Social Security's so-called "Trust Fund" is exhausted. They will be forced to pay into the system for their entire working lives without any expectation of getting something in return when they retire.

Jack DeAngelis: We have My World with Ashley. Ashley, how are you today?

Ashley: I'm good. How are you?

Jack DeAngelis: Had a good weekend?

Ashley: I had a great weekend.

Jack DeAngelis: And what's our conversation going to be about today?

Ashley: Well, last week we talked about the federal government owning 29% of our land and little bit of the corruption that had been going on with the federal government. And I thought it would be good to talk about Social Security and why people of my age are in trouble for the future.

But since it was created in 1935, it's been the centerpiece of the nation's social contract and it's the biggest government entitlement plan because it's taking over 20% of the federal budget. But Social Security started out as a perfectly good insurance because it had few beneficiaries, it had lots of contributors and a retirement age that was actually a little higher than the statistical lifespan in the 1930s when it was proposed.

But then people started getting a little greedy and for-profit health corporations discovered all kinds of new medicines and procedures to extend life expectancy, which is a good thing actually. But politicians also discovered what an advantage of vote-buying Social Security could be. And now Social Security is in trouble.

So even with all the massive tax increases to finance it, Social Security is bankrupt. And it hasn't even paid off the first generation of contributors yet. And just like you had mentioned earlier on another show that you and your generation just need to worry about just getting by before the system totally collapses, but older generations are going to continue to cash their Social Security checks every month. But the younger generations are really the ones who are going to be in trouble for the future.

But attempts to change Social Security have failed so many times that it's been called the third rail of American politics. And I know that in 2004 Bush lodged that campaign to partially privatize the system in legislation, but that quickly ended.

But most importantly, Social Security needed to address how demographics would shape its finances. And you're probably aware that in 1982 they planned for tax increases that also generated a big surplus, was then put into an off-budget account known as the 'Social Security Trust Fund' and they loaned it to the federal government.

But the repayment of the loans was supposed to provide a cushion for a day like now when the retirement of the baby boomer generation meant that the system was paying out more this it was taking in. But this was expected to be in 2016, but now it's 2010 and Social Security officials said that a drop in revenue caused by the recession that followed the collapse of the real estate bubble meant that payments would exceed revenue this year. But obviously payments have risen more than expected during the downturn because jobs disappeared and people applied for benefits sooner than they had planned. And at the same time the program's revenue had fallen sharply because there were fewer paychecks to tax.

So basically, for my sake, the system is flawed and it's in significant financial trouble. And most importantly, younger generations such as myself aren't going to be expecting to see a penny from it when they retire. And the bad news for younger generations is even though their parents and grandparents benefits are safe, theirs aren't, because any worker born after 1974 is going to reach a full retirement age after the trust fund is exhausted.

And younger workers might be looking at paying full Social Security taxes throughout their careers, but only receiving 78% or less of the benefits that have been promised to them. And they may also have to repay the Social Security trust fund which is a total of almost 6 trillion dollars by the time the trust fund is exhausted in 2041.

So what I'm trying to say is that for people of my age, Social Security doesn't look like it's a guarantee anymore like it is for people of your generation. You are guaranteed money, you worked. And I know you had mentioned to me before that people didn't get Social Security cards until they were 14, until they started working.

Jack DeAngelis: When I was a kid we got our working papers around 13, 14 years old and that's when we applied for our Social Security card. And that was kind of standard until the late 1970s and the early 1980s when they made everybody get their Social Security card when they were born. And it kind of seemed like they were saying it's easier that way. But in retrospective, if you do a little homework on that situation, it's because what they did was they added 14 more years of expected earnings. They added children quicker to the list until they can turn it into a derivative and then borrow on it.

And that's how they're able to print the money. They use our land we which we talked about last week, and then they use our Social Security income to borrow on. That's how they're able to print all the money that they're printing. And like anything else, if you keep factoring in what's going to be coming in, I guess you can get through this.

But like anything else, as long as I can keep borrowing money we shouldn't have any problems. And that's what everybody is worried about; what happens to the day where like a Moodys or some of these agencies come out and say, "Hey, you know what, those U.S. bonds that we used to say were AAA rating, we're now believing that they're only AA rating."

And that, again, drops the security which then creates more risks which means now we have to pay a little more to borrow that much. You'll always be able to borrow money, but look what's happening in Greece right now. Greece is the size of Rhode Island, so I don't want to make it sound like it's the United States. But it's a pretty good blueprint to pretty much say, "Okay, what could happen?" Here's a country that did exactly what we're doing; socializing almost everything, creating tremendous need for the government to supply their citizens with jobs and healthcare.

And I'm not saying that's good or bad, I'm just saying that when you take on that responsibility it's like a parent. Hey, if you got one kid, okay. If you got 5 kids, you got 8 kids, you got issues. That's exactly what Greece did. They took on this whole bunch of kids and now they can't afford it. Now they got to go out and borrow, everybody knows they're in trouble.

So here in the United States, just to give us an idea so people can see the concept, we borrow money at about 2% to 3%. Greece, last Friday, was as high as 10%. Now that's great if I am buying the bond, and as long as Greece hangs out, I'm getting myself a good return. But that cost between 2% and 10% is a drag on your economy. It's a tax.

And if the United States ever gets into that issue where we can't borrow at 2% and now we got to pay 5% and 6% and 7% and 8% to get you to lend us the money, you see how expensive this mess can totally turn into. And you're right, it may come to the day when some politician is going to make a tough decision and say, "Hey, that's it. There is no more Social Security".

Ashley: But basically now we just have to tax more because we're giving out more than we're taking in. So isn't that the logic behind...

Jack DeAngelis: That's the case. Between the 1930s and the 1960s when we had all the supplements, we were up to almost an 85% tax rate. Imagine that. In the 1980s when they make the tax cuts, they brought us back down to 50%. That's where we are today. Now you add city tax and state tax and sales tax, about 75% of our earnings now goes to the government. That's the scary part about it. And looking at what you just brought up, obviously it's only going to get worse.

Ashley: Yep.