The consequences of eating more marshmallows than you produce

The consequences of eating more marshmallows than what you produce

As many of you my dear readers know, I wrote a book about delayed gratification titled Don’t Eat the Marshmallow Yet.

Its main concept is that everyone should plan for the future, must understand the value of sacrificing now to get more later and the need for immediate gratification is a problem which can affect people their whole lives.

Well, for years politicians and policymakers have assured the public that the Social Security system, which sends monthly checks to well over 50 million beneficiaries, is in no danger of going bankrupt and is in fact solvent now and for years to come.

Well, surprise, surprise. Federal spending and income data from the Treasury Department reveal that the Social Security program is already in the red, in fact, very much in the red, with expenditures exceeding payroll tax revenues by $76 billion in 2010 alone.

This new development, of course, calls into question the optimistic fiscal forecasts made by the Social Security Administration regarding the program’s future solvency.

You all know that I am a writer and a motivational speaker, and my job is to try to motivate everyone into achieving success, happiness and even financial independence.

Writing an article like this gives me no joy because I have to paint a picture which is not motivational at all but I believe that in times like this, you have to call it as you see it and you have to be realistic so that you can deal with whatever obstacles come in the future.

The annual report of the Social Security Trustees, published in August 2010, forecast that the primary Social Security program, the Old Age and Survivors Insurance Trust Fund (OASI) would not exceed its tax receipts until 2018.

Imagine my surprise when I found out that it already happened in October 2010, eight years before it was supposed to happen. In 2010 the outlays for the OASI funds were about $580 billion, while receipts came to only $540 billion. You don’t have to be a genius to figure that a $40 billion shortfall in one year could develop into a very serious situation.

In fact, it is even worse, unfortunately. If you add the deficit from the second Social Security fund, the one that deals with Disability Insurance and the gap between total SSA outlays (707 billion in 2010 according to the Treasury) and tax receipts (631 billion) grows to $76 billion, more than 10% of the program’s expenses.

What happens when you eat 10% more marshmallows than what you produce? And to do it in a consistent basis, it could mean bad trouble.

We can clearly see that their short term estimates were off the mark. The SSA trustees had estimated a $41 billion deficit (excluding interest income), but the final deficit came to $76 billion, almost twice what they had guessed. Just as troubling, their estimate for total SSA income in 2010 (which included both Social Security payroll taxes and interest paid by the Treasury on the Social Security Trust Funds) was 791 billion, a number that missed the actual income of $741 billion (tax receipts of $631 billion plus interest of about $110 billion) by $50 billion.

Looking at this situation as objectively as I possibly can, the fact that the trustees could miss estimates only a few months into the future by such huge margins makes me doubt the accuracy of their long term projections, which are stated in the report, available to the public, and I quote:

“Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983. The projected deficit of $41 billion this year (excluding interest income) is attributable to the recession. This deficit is expected to shrink substantially for 2011 and to return to small surpluses for years 2012-2014 due to the improving economy. After 2014 deficits are expected to grow rapidly as the baby boom generation's retirement causes the number of beneficiaries to grow substantially more rapidly than the number of covered workers. The annual deficits will be made up by redeeming trust fund assets in amounts less than interest earnings through 2024, and then by redeeming trust fund assets until reserves are exhausted in 2037."

SSA’s estimate for total income in 2011 is $855 billion, fully $114 billion more than the program’s actual income of 2010 (741 billion). With the high levels of unemployment that we have now, and no signs of getting better in the short term, is it logical that there will be a 15% jump in payroll taxes?

To help us answer that question, let’s look at what happened to Social Security receipts in 2009, a recession year and 2010, a year of very discreet economic recovery.

According to the Social Security Administration, the system’s income for 2009 was $807 billion (698.2 billion in the OASI and $109.3 billion in the DI). Income in 2010 was $741 billion, a massive one year decline of $66 billion.

Looking at the significance of this recessionary drop in income, how in the world can they expect us to believe their insanely optimistic forecast of a 15% tax increase in 2011?

As it has been reported, job gains have been very modest in the 154 million worker US economy and many of those jobs created were of a temporary nature or part time. You add to that lower incomes for those brave souls that are self employed, and you can understand why payroll tax receipts have been flat.

I give credit where credit is due. The trustees forecast of Social Security expenditures in 2010 were more accurate than their estimates of income. The report predicted outlays of $714 billion, and it came in at $707 billion. That is not too bad. The report’s estimate of 2011 outlays is $742 billion, an increase of $35 billion, which is higher than the 3.5% ($23.8 billion) jump in 2010 costs over 2009 outlays.

Let’s make sure we understand this: The $742 billion estimate for 2011 is almost equal to 2010 income of $741 billion. That means if outlays were to go up even a bit more than what is expected, or income were to decline from 2010 totals, Social Security would hit a deficit that the trustees aren’t expecting to occur until 2025. Given the fact that already, shortfalls have reached levels that were not expected until 2018, it is not absurd to conclude that whoever is making this projections is not being as realistic as they should be, taking into consideration today’s economic conditions.

What do these figures, these potentially enormous deficits in Social Security mean?

Very simple: The Treasury will have to borrow more funds on the global bond market to fill the gap, (a lot of it from the Chinese, which are not eating their marshmallows) increasing our unprecedented federal deficit.

My advice to you?

You will have to trust yourself, what you can save, what you can do with your finances and not trust social security to solve your financial problems when you retire.

Tough decisions will have to be made very, very soon, and they won’t be pretty. You must be prepared. If you are still young, start saving your marshmallows. If you are retired or almost retired, this might mean that you will have to get another job or that you will have to wait a few more years to be able to retire.

When the money isn’t there, it isn’t there. And, if the deficit keeps growing and growing, it will be more difficult to find countries willing to lend us money, the value of the dollar will plummet and that will affect every facet of our society, including national security.