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The Social Security Default

Obama: "I'm Not Paying"

Written by Christian DeHaemer
Posted April 11, 2013

Debt crises and defaults by sovereign nations, citystates, kingdoms, and empires are as old as debt itself.

The first recorded default goes back to 400 BC, when ten of the thirteen Greek citystates defaulted on a loan from the Delos Temple.

The more things change...

There are three basic ways to default on loans:

  1. Hard default. Just don't pay.

  2. Restructure the debt to extend the loan or lower the rates. This reduces the amount given to the lender and is therefore a default.

  3. Debase the currency.

The third option has been the preferred method of kings and princes throughout the eons. It is politically easier.

The United States will default on its current obligations via this method.

Back in the day, debasing the currency meant exactly that: corrupting the coin itself. The coin would be minted with less gold or silver or would be made smaller. You would suddenly have more coins, but your debt remained the same.

The denarius coin of Rome went from an original nearly pure 4.5 grams of silver down to 3.8 grams under Nero; by the second and a half century, it was only 2% silver, at which point it was replaced.

Old-style debasement changed to newfangled restructuring in the mid-sixteenth century with defaults in France, Spain, and Portugal. Prussia defaulted in 1683. But Spain and France led the field with a total of eight defaults and six defaults, respectively, between the sixteenth and eighteenth centuries.

Default is as old as debt and just about as easy to get into.

Default This

Obama just put out a budget with a de facto default. His new budget has a rule change that will unhook Social Security from one inflation data set to a “Chained CPI” that will reduce purchasing power.

What this means is Social Security won't keep up with inflation.

It's accounting gibberish and political cowardice, but at least it acknowledges the problem.

According to Businessweek:

It’s presented as a technical, politically neutral fix, but make no mistake: The Obama administration’s proposal to change the basis for Social Security raises to “chained CPI” is all about saving money by slowing the growth rate of benefits.

Whether you think that’s a good thing or a bad thing depends on whether you believe workers have been paying too much to support their elders.

The federal government ties Social Security benefits to measured inflation. Chained CPI gives a lower measure of inflation. So using it would result in slower benefit growth. It’s that simple.

The upshot of this is that the government would pay out less Social Security in the future.

At the same time, they will debase the currency.

Things will simply cost more in retirement. And you can bet your sweet bippy that next year, thanks to ObamaCare, the price of health care will go up a lot more than the current CPI — chained or unchained.

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They're Running Out

In February the Congressional Budget Office (CBO) put out a report detailing the end of The Great American Ponzi Scheme...

For 2013, the CBO said SS beneficiaries will receive $816 billion in benefits, while revenues from payroll taxes will be $846 billion. This leaves SS with a surplus of $30 billion.

But in just ten short years, the CBO estimates payouts will exceed $1.4 trillion compared to revenues of just $1.3 trillion, a shortfall of about $100 billion. The funds backing Social Security will hit zero by 2031.

These are the numbers put out by the government. Many believe these projections are skewed in the government's favor in terms of inflation, revenue, and payouts.

Don't get me wrong; Obama's budget won't clear the house. There are few politicians who would vote to cut Social Security. The unwashed masses wouldn't put up with it...

They think they put in retirement money, and so it's their money. The fact that it won't be there when they retire isn't really considered.

That's the problem with Ponzi schemes. They are more of psychological phenomenon than a monetary one...

They create a powerful idea of an event that is statistically not possible. And this belief is so strong that anyone who points out the math is ridiculed, cut off, and dismissed by the eventual victim.

But not everyone is duped. Many people are taking Social Security early, at 62, despite the penalties. They know that sooner or later — especially if they are affluent — the taxman is going to show up, or the benefits will be cut.

Might as well get yours while you can.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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