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Social Security Loopholes Will Accelerate Systemic Insolvency

I had the misfortune of listening to a financial "expert" today who pointed out multiple loopholes in the Social Security system's enrollment and claims processes.  Savvy enrollees have almost a dozen ways to game the system and milk it for more benefits.  Only a small percentage of Americans figure out how to do this every year as they become eligible.  Their impact on the system is probably small, but Social Security will be more unsustainable as a result.

The Social Security Administration (SSA) publishes its financial reports every year.  The FY14 statements show the SSA receipts and outlays as part of the total finances of the federal government.  Remember that the next time someone says Social Security is an insurance program with its own asset base as collateral for liabilities.  It is no such thing.  It is a transfer payment from current taxpayers to current beneficiaries.  More well-informed people legally gaming the system will increase the burden on current payees to keep the system solvent.

I read the "Highlights of Financial Position" section of the SSA's FY14 report.  The chart on page 31 for the number of months of expenditures the FY-end asset reserves can pay shows a decline from 42.5 in 2010 to 37.1 in 2014.  That should concern anyone who thinks they can extract more early benefits with legal tricks.  I will quote directly from page 31's long-term financing discussion:  "Social Security's financing is not projected to be sustainable over the long term with the tax rates and benefit levels scheduled in current law."  The trust fund asset reserves will be depleted by 2033.  The fawning, laughing fools who listened to today's financial expert have another 18 years to jump through loopholes for a few thousand dollars more each year in benefits.

I am getting much better at suppressing my inclination towards eye-rolling and smirking when self-proclaimed experts say dumb things.  Today's expert showed his ignorance by claiming financial advisers don't sell TIPS because investors can get them commission-free directly from the US Treasury.  True, but many advisers manage ETF wrap accounts that include TIPS ETFs that are eligible for covered call writing.  A yield-enhancing ploy like covered call income more than makes up for a few basis points of expense.

I felt disturbed when this expert claimed the US would renege on the bonds it owes to China before it would renege on the nonmarketable, intergovernmental holdings owned in the SSA's funds.  He thought it was a joke.  This guy had no clue what a selective bond default would do to the sovereign debt rating of the US.  Selective defaults would make further bond issuance much more costly, jeopardizing the government's ability to fund future benefit recipients.  Just ask Greece's finance minister.  The valuations of bonds SSA currently owns would logically suffer if government accountants were honest and marked them to market.  Since the bonds are technically nonmarketable, some exceptional financial excuse could keep their valuations artificially high so the SSA trust funds could remain technically solvent.  Any argument for selective default also completely ignores the hyperinflation risk the US would experience in the event of a global run on the dollar.  The international bond market would purge as many Treasuries as possible, making the Federal Reserve the instant buyer of last resort for every US bond on the planet.  Way to go, mister expert.

The audience entertaining this dude today just laughed it all up.  I won't disclose the expert's identity or the venue, but suffice it to say it's one of my favorite intellectual haunts in The City.  The expert admitted that the US government wants a broad constituency of payers and beneficiaries to maintain Social Security's political support.  The financial services sector would call that a Ponzi scheme given its obvious unsustainability.  The eventual political changes to the program will force means tests and lower benefits.  It makes more sense for old folks between the ages of 66 and 70 to claim benefits ASAP before they evaporate.  Maybe they'll make a few bucks before the whole Ponzi collapses.  People in the audience were laughing heartily at the expert's lame jokes toward the end of the presentation.  I could not laugh at all.  The eventual impoverishment of many Americans who falsely assumed Social Security would be there for them is no laughing matter.

Full disclosure:  No investments in TIPS or ETFs related to TIPS at this time.