US Government Financing Status: Chapter 2: The Social Security System’s Financial Spiral
If you read our April Commentary, we didn’t tell you that it was Chapter 1, but it was. This edition will focus on the Number One financial threat on the US Government’s list of major financial liabilities. It’s the Social Security System’s promises to pay inflation-indexed monthly retirement benefits to nearly all citizens, beginning in their late sixties, or with a reduced benefit as early as sixty-two, and continuing for the rest of their remaining years of life. And that number of years is continuing to grow, as it has throughout most of the System’s existence.
As we described in our last edition, twenty-first century US Congresses have repeatedly failed at their most fundamental job: preparing and adopting annual budgets. Each annual episode is a rough-edged, razor-thin, back and forth majority-party syndrome that does not create twelve departmental budgets. Instead, in this century, it always winds up as a soft-shoe, show-business version of a “reconciliation” which levitates on a balance-point that resembles a spinning gyroscope. All the while, Congresspeople maintain a stiff upper lip and an outward appearance that massive annual deficit spending is not only routine, but also sensible. We see them, the Congresspeople, as clones of Alfred E. Neuman…..
Before we discuss the Social Security System, we remind you of our belief that neither you, nor we, nor US Congresspeople can comprehend the trillions of dollars they glibly discuss and spend. We consider that trillion-speak is a simplifying convenience which converts quantities that are beyond human comprehension into familiar 1- and 2-digit numbers. Trillions, we assert, are in the same category as infinity… regardless of experience, there is nothing in a human brain that can assimilate infinity. Next stop: 1,000 trillion = just one quadrillion.
The End of “risk-free” US Treasury Bills, Notes and Bonds
Not so sound, said Moody’s Ratings service, when, in May of this year, Moody’s became the lastof the three major debt-rating companies who knocked the US Government’s credit rating down to one notch below the impeccable AAA rating it has always had. The Moody’s downgrade cited these three problem areas: (1) the looming size of the government’s debt and especially its growth rate, (2) the large and rapidly rising proportion of federal resources dedicated to debt service and (3) the potential for worsening of the situation caused by (then) pending tax cuts. They listed key concerns about increasing interest payments, but our own synopsis goes further than Moody’s.
A Big Kahuna Among “Guaranteed” US Government Costs
Ninety years ago (1935), in the heart of the Great Depression, the United States Social Security System was launched. It was a well-designed, soundly financed lifetime pension benefit plan for workers aged 65 and older. The System was largely modeled after Germany’s system that was created during the between-world-wars period. Over the years, Congress made several one-off benefit increases to make retirement benefits catch up with inflation (the CPI rate); 1973 and 1974 inflation rates had been 6% and 11%, respectively, and Congress had adopted an automatic annual inflation adjustment formula, beginning in 1975.
The System’s financing was designed and calculated by insurance actuaries. In its first several decades of operation, only about half of American workers were living beyond the age 65 startup of their monthly Social Security retirement payouts. Moreover, most of those who lived didn’t live very long. A US male born in 1935 had a life expectancy of age 60. But today, according to the CDC, men are expected to live almost seventy-six years, and women even longer with an eighty-one year life expectancy… and it’s still increasing.
Although the Social Security System was given birth by President Franklin Roosevelt, it was not at all a government handout. Individuals and their employers were required to fund it in every payroll period. Initially, workers and employers each paid-in 1% of the first $3,000 of their annual pay… the “FICA” tax. This was the first time in US history that a universal tax on all paychecks was being collected at the payroll source.
For decades, the System was collecting robust amounts of FICA taxes, compared to the skinny total of retirement benefits it was paying out, because there were relatively few benefit claims. The post-War 1950s Baby Boom was creating a tidal wave of future new FICA-taxpayers. In brief, the Systemhad a nearly unlimited financial horizon.
As expected, the System rolled along until the early 1970s, producing a hefty pile of money accumulation in its two trust fund accounts. That trust-money was routinely invested in interest-paying US Treasury IOUs (as prescribed by legislation). The IOUs were actually created for this special purpose; they were official US Government notes and bonds, but they could not be sold in the bond market; instead, when needed, they could be cashed in at the Treasury.
The sound, non-partisan design of the fledgling Social Security program convinced many of the US’s big-payroll corporations to create and pay for privately sponsored pension programs that would dove-tail with Social Security’s benefit payouts. And they convinced Congress to adopt legislation that would allow businesses to deduct, for tax purposes, their contributions to their pension plans. Those corporate pensions and Social Security would together deliver an adequate retirement income that truly could not be outlived.
The 1930s actuaries did not, indeed they could not, anticipate what would develop in the final third of the 20th Century. Technology in US health-science and life-style innovation emerged; it completely changed the US national life expectancy. The post-World War II Baby Boom gave way to the late 20th Century Baby Bust, as the country’s birth rate steadily receded below the population’s “replacement rate” (i.e., 2.1 babies per child-bearing-age woman). The most recent measure by the CDC for 2024 found a continuous 17 straight years of US birth rate decline. Thus, the Social Security System’s present and future outlook have been experiencing a double-whammy: declining FICA tax collections from a shrinking number of working age people on one hand and increased inflation-adjusted retirement payouts on the other.
Beginning of the End
Lyndon Johnson was truly a career politician. Elected to the US House at age 29, in 1937, just when Social Security first began to operate, he learned Washington’s ropes from his savvy Texas colleague, House Speaker Sam Rayburn. Along his way to the Senate and then the US Presidency in 1963, Johnson observed that Social Security’s financing was an un-tapped, baby-boom-driven Cash Cow, as far as the eye could (then) see.
After one year as president, Johnson won his first (and only) presidential election over conservative icon Senator Barry Goldwater in a landslide within which he captured 44 states. Armed with that popularity and coupled with an accelerating, costly Vietnam war, Johnson’s first expenditure budget was a few billion dollars short of revenues. In early 1968, Johnson shuffled the federal budgeting deck (presumably to put Vietnam in a better financial light). There was general Washington controversy because there were three different sets of budget numbers. So, Johnson arranged for a new “unified” format for 1969’s budget. Included in that budget, for the first time ever, was the Social Security System’s operations and its ever-fattening trust funds. That maneuver did ot go down well with many old school purists who appropriately feared for the System’s financial future, if the trust funds were swallowed up in the federal budgeting process.
But Lyndon had an emerging dilemma that would eventually bring his presidency to conclusion. The exhaustingly controversial Vietnam war was not only disdained by so many Americans, but it was also seen to be draining a portion of its funding from Social Security’s trust funds. [Moreover: Johnson’s pet vision for a “Great Society” legislative program was ever hungry to gulp more funding.]
Unfortunately, the Social Security funding morass we see today was painted into a corner by both of the political parties and a number of post-Johnson presidents. Their collective failure to plan, failure to execute and refusal to officially recognize the emerging funding crisis facing the public federal retirement system have indeed doomed it into an existential failure mode. None of the Social Security System’s failure-causes have been sudden. Along the way to where we stand now, there has been no bad luck and no accidents of timing. While there have been and still are unfavorable birth rate declines, they were not sudden. In brief, the System’s past and present funding scheme is fatally flawed. [Please see Footnotes.]
Fixes in the Past
In 1977, only ten years after Lyndon Johnson’s “unified budgeting” in order to tap into the System Cash Cow, President Jimmy Carter, to his credit, confronted an emerging problem: Social Security’s actuaries had forecast a looming System shortfall in its funding. So, Carter engineered a legislative “fix” which raised the System’s payroll tax rate and lowered payouts to future retirees. That fix would take care of at least the next 50 years, said Carter at that time. But only six years later, Congress, for the first time: (a) upped the retirement age to receive a full benefit, from 65 to 67 and (b) made the System’s retirement benefits subject to income tax. Over the years from 1937 to 1990, the payroll tax rate gradually rose significantly, from 1% to 6.2% of employees’ “covered pay” (matched by employers). Also, the maximum annual FICA-taxable covered pay rose unevenly from $3,000 in 1937 to $176,100 in 2025; more than two and a half times the rate of inflation over that period.
The Proposal That Could Have Saved the System
Exactly twenty years ago, we published an extensive review of then freshly re-elected President George W. Bush’s proposal for a partial re-direction of the Social Security trust funds’ assets. That proposal would have allowed, but not required, workers below age 55 to direct a defined portion of their personal Social Security account into one or more government operated stock market index pools. The reasoning behind Bush’s plan was simple: common stocks are the only liquid investment format that can deliver asset growth over time. Bush’s modest proposal was similar to, but actually less risky than the way that thousands of privately-run 401(k) plans were being operated, then and now.
Unfortunately for the System, President Bush’s proposal, even after his offered compromises, was summarily dismissed by a skittish Congress that saw no need for it. We recall that one of the most acid blackballs of the Bush legislation was a Congressional complaint that it amounted to a boondoggle, brewed up to the president’s desk by Wall Street’s ever-crafty fat cats.
The Crossover
Since 2009, FICA tax collections have been less than the amount of current benefit payouts. For the year 2024, the System’s FICA tax inflow was $1.35 trillion, versus its $1.48 trillion of benefit payouts…. a $67 billion cash flow shortfall. That shortage was covered by cashing out $67 billion of Treasury IOUs. Little or nothing was or is being said about it in the halls of Congress. As is now well known, this scenario is an ongoing, growing annual shortfall, so that, by 2034, FICA tax collections will stabilize at about 80% of each year’s benefit payouts and, in that year, there will be no IOUs left in trust. So, does this mean that retirees will see a 20% cut in their monthly benefit? Surely not, we think, because it’s a political axiom that some work-around will emerge, amid Congressional smoke and fire. As things stand now, the Treasury would have to borrow and pay for the 20% funding gap (that’s more than $300 billion per year, if we simply project 2024’s numbers)…. So now you understand one reason why Moody’s has downgraded the Treasury’s credit rating two months ago.
The Musk Bruhaha
So now, in 2025, we have a new Social Security controversy stirred up by one Elon Musk. Winding up his three-month job as head of the new government efficiency department, Musk infamously torched the System, when he trumpeted his online conclusion that Social Security’s pay-as-you-go structure resembles a Ponzi scheme. For blurting out this analogy online, Musk was pummeled in the public media. But his reasoning actually did not require perception or genius; it was actually this simple: Via the payroll tax, current active US workforce is now and has been, since 1969, paying more than 95% of the System’s current benefit payments to its retirees. This scenario will continue until 2034 and thereafter, when the System will be sourcing about 20% of its benefit payouts from each year’s general federal tax revenues.The System faces “imminent demise”, because it operates in a country that is experiencing a persistently low birth rate. (It is now already below the 2.1 children per child-bearing-age female that is required to sustain population “replacement”.)
Footnotes:
Social Security retirement benefits are designed as a “retirement welfare” program. The System is meant to continue retirees’ indexed average pay over their career. There is a three-tier benefit calculation: low-pay-tier: receives more than 90% of pre-retirement pay-replacement. Stacked on top of that tier is a middle-wage-tier which adds another 32% of pay. Atop those two tiers is a high-pay-tier that adds another 15%.
Back in 1935, the male US population’s life expectancy, at birth, was slightly less than 60 years. Hence, a significant portion of the mostly male workforce did not live to collect retirement benefits at age 65 and beyond. Those folks, therefore, would pay the FICA tax, but never collect any retirement income. Fast forward to 2000: the average US life expectancy at birth was almost 77 (females 79, males 74). In 1983, Congress meekly addressed the emerging, dramatic changes in US life expectancy statistics. They gradually increased the full-benefit age eligibility, from 65 to 67… where it still stands today, after 42 years, and many more increases in life expectancy. Because this easily adjustable “system fix” is always sensible and always available to Congress, we count their persistent failure to do so as Fatal Flaw #1 in the System’s sad, methodical spiral into financial insufficiency.
The System’s first four decades until the1970s were satisfactorily on track for FICA taxes to be more than adequate to not only fund the benefits that were then being paid but also build up a Reserve for future payouts. Unfortunately, the legislation provided that 100% of the System’s cash was required to be invested exclusively in US Government notes and bonds…. That specific detail over the 90 years until now steadily became Fatal Flaw #2 in the System’s financial operation. Investments in notes and bonds have zero capability to offset inflation.
That Fatal Flaw was little noticed until 1971, when the US birth rate, for the first time, fell below its “replacement” level. Such a societal change is impossible for actuaries to predict until it has begun. That unanticipated, fairly rapid birth-rate decline has continued during the 55 years since 1970… and it’s getting worse. It has progressively become a Fatal Flaw #3 impact on the System’s financial inadequacy. (And even worse: this Flaw also has a compounding effect: the female birth-rate in the population has of course likewise declined.)
Funny Bookkeeping: Meanwhile, since the five-year Lyndon Johnson presidential era, the System has been maintaining accounting records that simulate the would-be operation of the System’s two trust accounts which are being “funded” with special US Treasury IOUs that cannot be traded in the public market. You may have heard that eight years from now the System will “go broke”. Actually, it won’t. The System will continue to collect its FICA payroll tax on employers and employees (12.4% of everyone’s pay, up to $176,100 in 2025).
Debt/Deficits May Be All We Know, but Might We Change Our Economic Underpinnings (including Social Security)?
As we and others have summarized before now, the US Government’s debt burden is not just a large, fast-growing number, it is a threatening number, by way of its relationship to (1) existing and forecasted tax resources, including the Social Security System, and (2) compounding interest expense that will become the government’s largest annual outlay, and (3) the absence of Congressional resolve to deal with it. President Trump has launched a plethora of re-imagined methods for financing the government, of which international tariffs and super-charged business growth (riding on low interest rates) are envisioned.
Suppose President Trump’s minions were drawing up strategies, during his entire four year out-of-office period which will deal head-on with the oppressive government debt-drag on the US economy. [We must hope for that result, given the newly reduced tax revenues that have just been enacted in Mr. Trump’s Big Beautiful Bill.] As of now, the president’s vision appears to be focused solely on superb economic growth and, hence, major tax collection growth, spurred by accommodative income taxes, drastic manipulation of tariffs, and major trimming of federal outlays for non-defense, non-essential programs. The growth projection seems to be structurally dependent upon: (a) onshoring of massive manufacturing and technology jobs that have been created in countries like China and India and (b) US equalization of trading partners’ tariff-rates that have been charged against US exports and (c) perhaps an exploitation of inactive government land assets, along with creation of a national sovereign wealth fund (similar to the mature ones in the State of Alaska, Norway, China, Australia, Turkey, and most of the oil-rich countries).
The Trump team has apparently identified new, valuable sources and uses of existing US Government-owned assets that are not now valued as assets on the government’s books. They suppose that the government can invigorate existing federally owned non-productive assets, so that they begin to deliver both tech and non-tech jobs. One important, major category of possible assets is “rare earth” elements.
Red areas on this map are federally owned land.
The federal government owns and manages about 640 million acres of land, which is about 28% of the total US land area.
The western one-third of the country is mostly federal land. More than 80 percent of Bureau of Land Management lands remain open to oil and gas leasing. According to a 2025 report released by the Department of the Interior, there are recoverable resources of 29.4 billion barrels of oil and 391.6 trillion cubic feet of natural gas on federal lands across the United States. Hence, the US can be a major exporter of fossil fuels (while China, Europe and others are apparently locked into being importers).
What is already known about these huge areas is that they contain significant, maybe even “vast” pockets of valuable minerals that are essential to much of the electronics of the 21st Century.
They are mostly so-called “rare earth” minerals…. which are not actually rare. But they are widely dispersed in the soil and rocks and therefore require significant mining and refining efforts to derive the pure minerals.
The White House has stated that the federal government directly holds $5.7 trillion in assets and “a far larger sum of asset value” indirectly through natural resource reserves. US Secretary of the Interior Doug Burgum suggested in his Senate confirmation hearing that timber, fossil fuels, and minerals under federal lands could be worth as much as $200 trillion. However,
our own several Artificial Intelligence searches for valuation estimates of un-mined rare earths found estimated numbers in the tens of billions. As for the vast fossil fuel deposits, it is important to note that the more oil and gas we find and decide to pump, the lower the global price will be. Our conclusion, as of now is that fossil fuels and rare earth deposits on federal land are worth nowhere near enough to match-off with the government’s current fast growing $37 trillion debt burden.
COMMENTARY
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