Suppose that you had 2 pockets.

Each Friday you get paid and put your Money in your left pocket.

For any money you need to spend, you take it out of your right pocket.

Without noticing it, you have been taking more money out of your right pocket than you have been depositing to your left pocket.

When asked you how you are doing financially, you show all of the loot your left pocket (the pocket where you make deposits but never any withdrawals).

How Does Social Security Work?

This is similar to how Social Security works.

The left pocket is Social Security.  The right pocket is the US Treasury.

The left pocket keeps getting deposits.  It gets deposits from two sources:

1. From the money taken from the paychecks of  your children and grandchildren
   (much of the money you deposited long ago from your paycheck has  already been distributed)
2. From the interest earned that comes from the right pocket

You may remember that the right pocket (the US Treasury) has a problem.  It spends money and the balance keeps declining.  In fact, in order to pay interest each year to the left pocket, the right pocket has to borrow money.

Would it be okay if we simplified things and just put the money from both pockets into one bucket (both pockets belong to you anyway)?

Social Security Cash Flow

Here’s what we have – a picture of the income and outgo of the Social Security system when viewed as one bucket:

What do you notice about the income and the outgo starting in 2010?

Social Security paid out more than it took in.

Wait a minute.  Didn’t you just read on CNN.com that the Social Security Trust Fund will last through 2034?

Yes.  The trust fund, a totally fictional accounting gimmick, will last through 2034 (maybe).  But in terms of cash losses, the Social Security Administration has been paying out more than it takes in for 6 years. That negative cash flow will continue to grow.

Let’s state this another way.  The money you get from Social Security each month is collected from the paychecks of your children and grandchildren.

Because that amount taken from the paychecks is not sufficient to cover what all of the retirees receive as Social Security Benefits, the US Treasury borrows money to make sure it can make good on all of those Social Security checks.

You have likely seen this graphic in the past:

I don’t see how this can possibly work out well.

I passed the CPA exam when I was 19 so I am a pretty good accountant. You can bet that the above numbers and analysis are accurate.  You can bet that this is the most straight-forward and honest look (albeit simplified) you have seen for how Social Security works.

Please ignore what you hear from AARP, your Congressperson or some other person with political motivation to obscure the facts. The cash flow figures above are from the 2016 OASDI Trustees Report.

It is only when you set aside political agenda and put facts before opinion that you can see truth and make better decisions.

Once in a while you encounter members of the human species with so much intellectual superiority that they can change their minds effortlessly.
The Black Swan, Nissim Taleb

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