Social Security: The Long Slow Default

When an investor buys an annuity or another retirement product from an insurance or mutual fund company, the contract is constant and enforceable through the United States court system. When a United States taxpayer is forced to pay for a government backed retirement system such as the Old-Age, Survivors, and Disability Insurance program (OASDI) — also known as Social Security — the “contract” can be, and is, changed on a regular basis by the United States government, and those changes are generally not to the benefit of the taxpayer.

Participation in the Social Security system became compulsory in 1935, and the first monthly retirement checks were issued in 1940. The first monthly check was issued to Ida May Fuller of Ludlow, Vermont. She had paid approximately $25 into the Social Security system and received over $22,000 in benefits from the system due to living to 100 years of age. The other early retirees of the Social Security system on average also did very well. Retirees in 1977 are estimated to have received seven times what they paid into the Social Security system. Retirees entering the program as recipients today will probably receive a negative return on their “investment.”

The “Primary Insurance Amount”

The way that Social Security benefits are calculated is complicated, and can, of course, be modified at any time.

The amount of monthly income a Social Security enrollee receives is called the Primary Insurance Amount. The current Primary Insurance Amount (PIA) benefit formula was created in 1979 and is based on two “bend points.”

For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2015, his PIA will be the sum of:

(a) 90 percent of the first $826 of his average indexed monthly earnings (AIME), plus,
(b) 32 percent of his average indexed monthly earnings (AIME) over $826 and through $4,980, plus,
(c) 15 percent of his average indexed monthly earnings (AIME) over $4,980,

where the Average Indexed Monthly Earnings (AIME) is currently the average of the Social Security recipients’ top thirty-five years of income during his lifetime divided by 12.

Significantly, each year’s monthly income is expressed in 2015 dollars using the Consumer Price Index (CPI).

Benefit Cuts Since the 1970s

By the late 1970s, it became obvious that the Social Security system was going to have significant solvency problems since the ratio of workers to retirees decreased from around 40-to-1 in 1945 to around 3-to-1 in 1980, and most of the money paid into the system had been spent on other government programs.

Payroll taxes were therefore increased, and a series of changes were made to the Primary Insurance Amount (PIA) payment formula to cut the benefits that Social Security enrollees would receive.

The PIA formula before 1979 was even more complicated than the one used in 2015. It had ten bend points, but gave more credit to high income workers. According to Robert J. Myers in his book Social Security, the changes in the benefit formula in 1979 resulted in, on average, a 7 percent reduction in monthly Social Security payments for new retirees. Under that current benefit formula, if a Social Security enrollee has a life-time income over $2 million, he will very likely have a negative return on his investment. For lifetime incomes between $0.5 million and $2 million, the enrollee has a chance to break even. Enrollees with a lifetime income less than $0.5 million have a good chance of still benefiting from the Social Security system. The number of years included in the earnings base (the number of years of income averaged to determine the monthly benefit payment) was gradually increased from twenty-three years, for people born in 1917, to twenty-nine years for people born in 1923 to thirty-five years, for people retiring in 2015.

For mothers who took time off from their career, people who spent a long time in graduate school, and people whose income was much larger during later parts of their life, this resulted in a significant decrease in benefits. (See The Social Security Book by Jack and Erwin Gaumnitz.)

Using the CPI to Keep Payments Down

Since the 1970s, the AIME used to determine the PIA has been indexed using the Consumer Price Index (CPI). So the higher the CPI, the larger a recipient’s monthly Social Security benefits will be. Social Security benefits for current retirees are also increased annually by the CPI. This means that one way the government can lower benefit payments is by under-estimating the inflation rate. The Bureau of Labor Statistics (BLS) has redefined how the CPI is calculated several times since the 1980s, lowering the CPI in each case. According to economists at Shadow Government Statistics, the CPI currently underestimates the inflation rate by at least 4 percent per year. If this is the case, Social Security recipients receive a 4 percent reduction in their buying power each year.

“Mini-Defaults” in the Social Security System

The US government knows it cannot keep up its end of the original Social Security bargain. So, to address its insolvency issue, the federal government simply responds by reducing benefits while increasing taxes. Increasing the retirement age, for example, is an easy way to reduce benefits.

The retirement age was increased from sixty-five for those born in 1937 or before to sixty-seven for those born in 1960 or after. Since enrollees do not get maximum benefits until age seventy, it could be argued that seventy is really the current full retirement age.

The taxable earnings base (the maximum income that is subject to Social Security taxes) and Social Security tax rates have increased drastically since the system was first created. The taxable earnings base was $3,000 in 1937, $25,900 in 1980, and $118,500 in 2015. The Old-Age and Survivors Insurance (OASI) tax was 2 percent in 1937, 9.04 percent in 1980, and 10.98 percent in 2015. This number includes both the employer and employee portion. When the 1.42 percent Disability Insurance tax and the 2.9 percent Medicare tax is added, the total payroll tax is currently 15.3 percent.

In 1983, legislation was passed to tax Social Security benefits for the first time. Currently, if a taxpayer’s provisional income is more than $25,000 on a single return or $32,000 on a joint return, their Social Security benefits will be taxed at between 50 percent and 85 percent of their normal tax rate.

Further Tax Increases and Benefits Cuts are Likely in the Near Future

According to the Social Security Administration, by 2033 future payroll taxes will only cover around 77 percent of estimated benefits. It is therefore likely that even further benefit cuts and tax increases will occur in the near future. Increasing Social Security tax rates from 12.4 percent to 15.5 percent and eliminating the taxable maximum (i.e., making all income subject to Social Security taxes) is currently being considered. Other tax increases being proposed include taxing contributions to flexible spending accounts and creating a national Value Added Tax (VAT).

Further cuts to Social Security benefits are also on the table. Proposals to cut benefits include increasing the retirement age from sixty-seven to seventy years, increasing the number of years included in the earnings base from thirty-five to thirty-eight or forty, and increasing the percentage of Social Security benefits that are subject to income taxes. Redefining the CPI index to further underestimate the inflation rate is also on the table.

Social Security has long been sold to the public on the notion that what a worker will receive back is what he or she pays into the system. For decades, however, the government has been changing the terms of this “agreement” as part of an effort to avoid outright default. This long, slow method of piecemeal default, however, is likely to continue.

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U.S. Economy Deteriorating At An Even Faster Pace

Despite doubling the national debt and the expansion of the money supply to some $8 trillion since the beginning of Obummer’s misbegotten presidency, the U.S. economy is once again in a free fall. Actually, there has been no real recovery, but a continual deterioration of living standards despite the lies and distortions from the financial media and government authorities.

Conditions, however, are now descending at an even faster pace.

Recently, the leading manufacturer of heavy equipment, Caterpillar, announced that job cuts would exceed 10,000 through 2018. Up to 5,000 employees will receive pink slips between now and the end of 2016. Retail sales for the manufacturing giant have slumped 11% between June and August.

While Caterpillar’s contraction is an ominous sign, a more telling indicator of worsening economic conditions came from the Federal Reserve’s refusal to raise interest rates at its latest FOMC meeting. Many commentators had speculated that the Fed would raise rates at least a quarter of one percent on the belief that the economy was strengthening.

The Fed, of course, based its refusal to raise rates on “international concerns” – China’s stock market selloff. The real reason is that the nation’s central bank understands, although it will not publicly admit it, that the economy is far too weak to “absorb” a rate hike, no matter how infinitesimal.

More importantly, the Fed cannot raise rates to any significant degree because the entire financial system, which is built on “cheap money,” would immediately plunge into a significant downturn similar to that of 2008, or worse. The federal government and many of the states and municipalities would default since they could not continue to finance their current profligate borrowing and spending patterns with higher interest rates.

Thus, the Fed is trapped in a world of zero interest rates for the foreseeable future. As economic conditions continue to worsen, the central bank will more than likely turn to another round of money printing like its infamous “QE” program.

While the Fed is locked into a zero interest rate policy, the Obama Administration and Congress remain oblivious to economic reality. A few years back, Obama and the one-time Democratically-controlled Congress tried a “stimulus” program which did nothing but increase the national debt. Also weighing down the economy is the disastrous Obamacare program, which will only become more burdensome as time passes.

Just as troubling, none of the current crop of presidential hopefuls, with one possible exception, has proposed or suggested any credible measure that will improve matters. None of the fundamental problems that are crippling the economy have been seriously addressed.

The reason why there has been no recovery is that the malinvestments and bubbles created during the last boom have not been allowed to contract and/or burst. Instead, the Fed pumped massive amounts of “liquidity” (money printing) into the markets, which kept these institutions (mostly banks) and their assets afloat.

A credit implosion will not come about “voluntarily.” The Fed will not increase interest rates, nor will the Obama Administration or Congress have the courage to cut spending to relieve pressure on the Fed to finance its unsustainable deficits and continue to inflate the stock market.

Instead, there eventually will be a monetary crisis surrounding the dollar, which will force interest rates to rise, which will lead to widespread defaults and bankruptcies and an ensuing depression which will dwarf every previous economic downturn in American history.

Alternative financial analysts have, for some time, pointed to the declining living standards not only in the U.S., but throughout the Western world. Egon von Greyerz of Matterhorn Asset Management has predicted some very unpleasant times in the not too distant future: “The coming years will not be easy. I wrote an article a few years ago called ‘The Dark Ages Are Here’ and I now really think they are imminent. These will be difficult times for most of us.”

Ultimately, the only way the U.S. economy will be turned around is through a change in ideology. The ideas and policies upon which not only the U.S. but the entire Western world’s economies are predicated upon must be debunked. Until the principles and beliefs of the current economic system are intellectually discredited, the U.S. economy will continue to stagnate and eventually collapse.

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Congress And The Fed Refuse To Learn From Their Mistakes

This month marks the seventh anniversary of the bursting of the housing bubble and the subsequent economic meltdown. The mood in Congress following the meltdown resembled the panicked atmosphere that followed the September 11th attacks. As was the case after September 11th, Congress rushed to pass hastily written legislation that, instead of dealing with the real causes of the crisis, simply gave the government more power.

Just as few understood the role our interventionist foreign policy played in the September 11th attacks, few in Congress understood that the 2008 meltdown was caused by the Federal Reserve and Congress, not by unregulated capitalism. Not surprising to anyone familiar with economic history, the story of the 2008 meltdown starts with the bursting of the Fed-created tech bubble.

Following the collapse of the tech bubble, the Fed began aggressively pumping money into the economy. This money flooded into the housing market, creating the housing bubble. The Bush Administration and the Republican Congress also added fuel to the housing bubble. These so-called “free-market” conservatives expanded federal housing programs in hopes of creating an “ownership society.”

If Congress understood the Austrian theory of the business cycle, it would have allowed the recession that followed the housing bubble’s inevitable collapse to run its course. Recessions are the economy’s way of eliminating the distortions caused by the Federal Reserve. Attempts by Congress and the Fed to end a recession via inflation and government spending will only lead to future, and more severe, economic downturns.

The corporate bailouts, government spending, and money creation via quantitative easing that Congress and the Fed have engaged in since the fall of 2008 have failed to produce even the illusion of prosperity. The daily experience of most Americans shows that the government’s doctored statistics drastically understate both unemployment and inflation.

This is not to say that no Americans have benefited from Federal Reserve policies. Even Donald Trump has called quantitative easing “a great deal for guys like me.” Much of the growth of government over the past seven years, from the bailouts to the increases in military and domestic spending to Obamacare, has also benefited politically-connected crony capitalists.

The Federal Reserve’s continued delay of an interest rate increase suggests that, contrary to its public statements, the Fed understands that the economy has not recovered from the meltdown and is on the brink of another major recession. Fear that the Fed is not being fully forthcoming with its view of the economy is one reason the stock market declined following the Fed’s recent decision to once again postpone increasing interest rates.

Learning the full truth about how the Fed evaluates the economy and its plans to respond to another downturn are two reasons why it is important to pass the Audit the Fed bill.

A vote on Audit the Fed would probably be the only good thing to occur in Congress this year. A Congress that cannot defund Planned Parenthood is unlikely to make any serious cuts in spending. Instead of waiting for politicians to do the right thing, those who know the truth must spread the ideas of liberty as far and wide as possible. Only when the teachings of the Austrian school are embraced by a critical mass of Americans will Congress cut warfare spending, cut welfare spending, and audit, and then end, the Fed.

The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by

Congress Fiddles While The Economy Burns

Reports that the official unemployment rate has fallen to 5.1 percent may appear to vindicate the policies of easy money, corporate bailouts, and increased government spending. However, even the mainstream media has acknowledged that the official numbers understate the true unemployment rate. This is because the government’s unemployment figures do not include the 94 million Americans who have given up looking for work or who have settled for part-time employment. John Williams of Shadow Government Statistics estimates the real unemployment rate is between 23 and 24 percent.

Disappointingly, but not surprisingly, few in Washington, D.C. acknowledge that America’s economic future is endangered by excessive spending, borrowing, taxing, and inflating. Instead, Congress continues to waste taxpayer money on futile attempts to run the economy, run our lives, and run the world.

For example, Congress spent the majority of last week trying to void the Iranian nuclear agreement. This effort was spearheaded by those who think the U.S. should waste trillions of dollars on another no-win Middle East war. Congressional war hawks ignore how America’s hyper-interventionist foreign policy feeds the growing rebellion against the dollar’s world reserve currency status. Of course, the main reason many are seeking an alternative to the dollar is their concern that, unless Congress stops creating — and the Federal Reserve stops monetizing — massive deficits, the U.S. will experience a Greek-like economic crisis.

Despite the clear need to reduce federal spending, many Republicans are trying to cut a deal with the Democrats to increase spending. These alleged conservatives are willing to lift the “sequestration” limits on welfare spending if President Obama and congressional Democrats support lifting the “sequestration” limits on warfare spending. Even sequestration’s miniscule, and largely phony, cuts are unbearable for the military-industrial complex and the rest of the special interests that control our government.

The only positive step toward addressing our economic crisis that the Senate may take this year is finally holding a roll call vote on the Audit the Fed legislation. Even if the audit legislation lacks sufficient support to overcome an expected presidential veto, just having a Senate vote will be a major step forward.

Passage of the Audit the Fed bill would finally allow the American people to know the full truth about the Fed’s operations, including its deals with foreign central banks and Wall Street firms. Revealing the full truth about the Fed will likely increase the number of Americans demanding that Congress end the Fed’s monetary monopoly. This suspicion is confirmed by the hysterical attacks on and outright lies about the audit legislation spread by the Fed and its apologists.

Every day, the American people see evidence that, despite the phony statistics and propaganda emanating from Washington, high unemployment and rising inflation plague the economy. Economic anxiety has led many Americans to support an avowed socialist’s presidential campaign. Perhaps more disturbingly, many other Americans are supporting the campaign of an authoritarian crony capitalist. If there is a major economic collapse, many more Americans — perhaps even a majority — will embrace authoritarianism. An economic crisis could also lead to mob violence and widespread civil unrest, which will be used to justify new police state measures and crackdowns on civil liberties.

Unless the people demand an end to the warfare state, the welfare state, and fiat money, our economy will continue to deteriorate until we are faced with a major crisis. This crisis can only be avoided by rejecting the warfare state, the welfare state, and fiat money. Those of us who know the truth must redouble our efforts to spread the ideas of liberty.

© Copyright 2015 Ron Paul

The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by

Big Banks Profit While Main Street Suffers

If anyone doubts that the Western world’s monetary order is rigged to enrich the banking system, the first quarter financial reports of America’s top banks should disabuse any unbelievers.

The Financial Times reported that four of the five big U.S. trading banks had a combined revenue of $19.4 billion in the first quarter of 2015. Goldman Sachs had a 14.7 percent* return on its equity in the first quarter, while J.P. Morgan, the nation’s largest bank, earned $5.91 billion (or $1.45 a share), up 3.6% from a year earlier.** Revenues for J.P. Morgan grew 4% to $24.8 billion.

The enthusiastic coverage of the big banks’ healthy first quarter proceeds and the chest-thumping of its bank executives left out, not surprisingly, the real reason for their windfall gains – the Federal Reserve. The big banks have been the chief beneficiaries of the Fed’s easy monetary policy since the start of the financial crisis.

The Fed’s “zero interest rate policy” (ZIRP) and its “quantitative easing” (QE) program have been the catalyst for the large banks’ recent record performance. Ostensibly, these policies were instituted to assist the economy in its recovery from the Great Recession; however, in actuality they have been done to save the big banks from collapse while the economy has been flooded with billions of increasingly worthless dollars causing significant price inflation.

Low interest rates have enabled the banksters and financial houses to borrow at next to nothing and invest in all sorts of ventures, many of which are highly risky. Easy money is also the cause for the huge run up in assets prices and the highs in nominal stock prices.

Worse, ZIRP has allowed the federal government to sustain its ridiculous level of spending, borrowing what it cannot raise in taxes at a near zero rate of interest. When interest rates do rise, the federal government will most likely default, bringing the banks down with them.

While the big banks and Wall Street have done quite well from the Fed’s massive money printing, everyone else has suffered and has seen their standard of living plummet even from official estimates.

The Federal Reserve reported a slowdown in hiring in March, a big drop off in industrial production, and lower housing starts in the first quarter–to mention just a few troubling statistics. Things are getting to the point that the Fed is reconsidering whether it should raise interest rates in the second half of the year as it had hoped to do. Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, admitted that “Data available for the first quarter of this year have been notably weak.”***

The first quarter sizable earnings of the big banks are an example of what a number of commentators have termed “crony capitalism.” Through government assistance, businesses earn wealth not by pleasing customers and satisfying their needs, but by currying favors from the state. In the banksters’ case, instead of making wise and prudent loans, they receive largesse in the form of billions of Federal Reserve notes.

Not only is such a system immoral, but it gives legitimate market activity – those firms that do not receive state assistance – a bad rap as profitable enterprises are lumped in with state favorites. This ultimately leads to greater regulation as calls for the government to tax “windfall profits” would affect all firms–even those who earned rightful profits.

The solution to crony capitalism and the ill-gotten gains of the banking system is not greater oversight, but instead the abolition of the Federal Reserve and a return to sound money based on gold or silver. Under such a system, banks and financial houses would profit only if they satisfied consumers’ wants.

In the banks’ case, this would mean safeguarding depositors’ money and making prudent loans with the funds they were entrusted with to lend. For those financial institutions that succeed at such tasks, profits would be their reward; those who do not and mismanage investment funds would be out of business and allowed to fail. Banks would operate under the same economic laws as any other enterprise.

The prevailing system of crony capitalism which benefits the 1% must be exposed for the grand redistribution scheme that it has long been. Only when bankers earn their wealth as Main Street does will America return to a just and sound monetary order.

*Tom Braithwaite & Ben McLannahan, “Goldman in Robust Return on Equity Showing,” Financial Times, 17 April 2015, 14

**Ciaran MCEvoy, “JPMorgan Profit Beats Wall St. Views, As Does Wells Fargo by Shrinking Less,” Investor’s Business Daily, 15 April 2015, A1.

***Jon Hilsenrath, “Fed Shies Away from June Rate Hike,”  The Wall Street Journal,  17 April 2015.

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This post originally appeared on Western Journalism – Equipping You With The Truth