The truth about Social Security: They got it right in Mayberry

Jun 19 2012 - 1:58pm

When I sat down early Saturday morning to my daily ritual of a tall glass of orange juice and reading the Standard-Examiner, I was a bit taken back by a column entitled "Social Security fully funded," (June 17) The author of the column came to the conclusion that Social Security is just fine by citing a series of statistics which he extracted from the 2012 Social Security Annual report. The only problem with his analysis is that we're not living in Mayberry.

When examining any organization's annual report, to assess the financial health of the organization submitting it, one must review its financial statements. Typical financial statements are:

* 1. The "Balance Sheet" -- an assessment of assets and liabilities.

* 2. The "Income Statement" -- a recognition of the current years costs and revenues.

* 3. The "Cash Flow Statement" -- an assessment of liquidity and financial health.

For purposes of this article, let's consider the Social Security Administration's balance sheet. The standard equation for balance sheet analysis is: Assets = Liabilities + Owner Equity.

"Gee whiz, Andy, I think you up'n lost me there with all this highfalutin finance talk." " Just hang on Gomer, it'll be clearer than the water in the fishin hole when were done."

Financial experts consider a business to be healthy when it has a strong balance sheet. Strength of a balance sheet is measured by its debt to equity ratio. The higher the debt to equity ratio, the less financially healthy the entity is. The lower the debt to equity ratio, the healthier the business entity is.

Unfortunately, the 2012 Social Security report does not present a traditional balance sheet. However, there is sufficient financial data on page 64 of the report to create it. The report shows that the assets of the Social Security fund are $2.7 trillion. These assets are special Treasury securities that Social Security has lent to the federal government. The federal government spent this money on programs unrelated to Social Security. Usually the term "fund" implies a highly liquid asset that can easily be converted to cash. Unfortunately, the Social Security special treasuries are not liquid and cannot easily be converted to cash because they have been spent on other programs.

Liabilities are shown at $11.3 trillion. These liabilities represent the amount of retirement benefits owed to current participants of the system. So the standard balance sheet equation for Social Security is: (Assets) $2.7 trillion = (Liabilities) $11.3 trillion + (Owner Equity) with a total of -$8.6 trillion. That's right; the equity of the Social Security system is a negative $8.6 trillion dollars!

"Golly gee Andy a negative $8.6 trillion: that can't be right?" "Oh, but it sure as shoot'n is Gomer, that's what the numbers say, right there on page 64 of the report in plain ol black and white."

In business, any corporation or company with negative equity is considered bankrupt. Recall the larger the debt to equity ratio, the poorer the health of the business. With respect to Social Security, its negative equity means the debt to equity ratio of the Social Security System is infinitely large.

The Social Security system management calls this $8.6 trillion of negative equity, "the unfunded obligation." The unfunded obligation is the dollar amount of retirement benefits owed to people currently living that cannot be funded by the tax revenue, interest earnings to the system from the U.S. government, and the existing $2.8 trillion in system assets. The $8.6 trillion in unfunded benefits Social Security is expected to pay over the coming years equals $73,168 for each of the 117.5 million households that were in the United States in 2010.

"Ouch Andy! Who has $73,168 lying around?" "Well Gomer, I can rightly say I don't. Maybe Opie will grow up and become one of those big-shot millionaire Hollywood movie producers. I'll never be able to pay it, I sure hope someday Opie can."

Corporations which issue publicly traded stock are required by the U.S. Securities and Exchange Commission to fund their private retirement plans in a manner to ensure the solvency of the private retirement plan. Those corporations which cannot meet this requirement must issue qualified financial statements.

Corporations which issue qualified financial statements are usually unable to raise new capital through the issuance of new shares of stock or new bonds. In other words, they are in a world of hurt. The tragedy here is that the federal government does not hold the Social Security system to this same standard of solvency it holds private retirement funds.

"Well Andy, in these parts they'd throw em all in jail: every last one of em." "That's right Gomer!"

"Aunt Bee! Why don't you bring Gomer a big slice of that fresh pie you just made, he needs something to cheer him up after all that fancy talk on Social Security." "Well Andy, I would except for that's our retirement pie and there just isn't enough to go around."

Dickson is a retired executive in the energy and natural resources sector who lives in Pleasant View.

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