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July 06, 2006

Social Security- Security or Insecurity?
by David Morgan

The following article is a rewrite of an editorial in The Morgan Report earlier this year.

In May 2006, President Bush traveled to the Bureau of Public Debt at Parkersburg, West Virginia, to prove that the idea of a Social Security trust fund is a myth. The "holdings" of Social Security stand at $1.7 trillion in treasury securities, which have been borrowed to cover the general budget shortfall of the U.S. This is the simple truthful explanation of the budget "surplus" during much of the Clinton years. The money borrowed from the Social Security system was applied to the general budget deficit, and therefore the general budget showed a "surplus."

This is an area dear to your editor because as I was working toward my masters in Economics/Finance in the '80s, my main professor asked me to apply for the White House fellowship program. Without going into any detail, I did apply and part of the application process was to write a policy change paper. The policy change paper written by me was how to "fix" the Social Security system. This was done over twenty years ago, when the possibility of finding a solution was much more viable than today. My application was rejected and I never made it to the first round of interviews. I had touched one of the political sacred cows and no one was going to reach out and touch me.

One of several proposals now being offered is to fund Social Security with U.S. bonds. This is something that your editor has discussed with Jim Puplava of http://www.financialsense.com/.

This may forestall a problem that is becoming increasingly difficult; that is, that foreign governments are becoming saturated with U.S. debt and yet in order to continue to expand the money supply, the U.S. government must have a buyer. Certainly, the non-government entity the Federal Reserve could buy the debt, and this tactic is being used, but will not, in my view, come into full force until the baby boomers become net redeemers of their "money."

So in the meantime, why not have the U.S. citizen purchase bonds with their Social Security contributions and solve two problems? First, how to sell more U.S. debt, because this is becoming a problem as foreign governments are getting their fill of U.S. bonds; and secondly, how to help "privatize" Social Security? Fiscal conservatives state that the real crunch to Social Security comes in 2017, when annual benefit payments will surpass tax revenues. The government then will have to begin redeeming the IOUs in the "trust fund" to pay benefits.

The liberal slant is that a greater population base would solve the problem, but this is mere fantasy because the U.S. population statistics do not support an expanding population. This was the main point made in our discussion of The Great Bust Ahead -- the demographics are shifting and this alone will cause problems for the economy.

America's Social Security finances are strained, but look around the world: a major demographic tide of declining birthrates is pushing nations further and further away from the promises that they've made to seniors. As nations age, they have fewer and fewer workers to support more and more retirees.

Nations around the world are "grappling with the long-term affordability" of their pension systems, according to a World Bank report. China faces a demographic crunch. By mid-century, its population will be older, on average, than America's, thanks to its one-child policy. Starting about 10 years ago, China responded by broadening a social security system and enlarging a private pension system of "enterprise annuities," states Richard Hinz, coauthor of the World Bank report.

India, also with more than one billion people, has been trying to enlarge its pension system beyond that for civil servants and employees of sizable corporations to those occupied in the "informal" and small-business economy.

This discussion overlooks the most important point of what the Mises Institute recently pointed out in an article about Social Security. The article pointed out that there is a popular misconception that there is some kind of "full faith and credit" obligation on the part of Congress to honor these "bonds." The plain and harsh truth is most have been led to believe that the current system is a retirement program funded with segregated entrusted assets, the integrity of which is guaranteed and backed by the U.S. government.

The debate about whether there is a Social Security cash flow crisis in 2017 or 2042 also turns on whether those "bonds" have any value. The basic assumption is that the "bonds" in the fictitious trust fund somehow have value either for the U.S. or for workers and their families. They do not!

As the Mises article states: A bond is just a contract. A contract is an agreement between two or more parties that creates an obligation to do or not do a particular thing, such as pay out interest at a certain rate. Thus, one may not enter into an enforceable contract with oneself, which is exactly what the U.S. is pretending to do with those social security "bonds."

For a bond to be a real bond, there needs to be at least two parties; for example, the U.S. and a citizen who owns a U.S. treasury bond; or the U.S., as owner of a German bond, and Germany. The U.S. cannot issue "bonds" to itself and have their terms bind future Congresses.

Bottom line: These Social Security "bonds" are neither assets of the U.S. nor property of workers and their families. In the not too distant future, the Social Security system will not perform its function of providing any real security. You must take action for yourself and depend on your own abilities. The ability of any government to be all things to all people is an illusion that will become a harsh reality to the general population over the next several years.

The $75,000 Social Security Solution

We know that we have many readers outside of the United States, and our discussion about Social Security may not affect them directly, but it could indirectly. Because so much of the world's economic activity depends upon the spending power of the U.S., it should be factored into your thinking about the ramifications of the current situation.

Long-term studies of commodity prices have shown that over time, commodities return to their mean. This "average" price, however, can remain outside of this range for a very long time. Silver has certainly remained outside of its purchasing power range for the past 25 years, and remains so today. Therefore we fully admit that having this knowledge for the past quarter-century was of little practical value. However, things are changing rapidly in the world's financial landscape, and the new silver age is rapidly approaching, first from a technological standpoint and later from a monetary and wealth building/preservation perspective.

After Warren Buffett announced his silver purchase in 1998, Forbes magazine ran a brief article on silver and included a very interesting graph. We of course are well aware that Buffett recently announced that Berkshire Hathaway did sell their silver just about the time the Barclays Silver iShares Exchange Traded Fund began.

(see attached chart, or visit web site http://goldinfo.net/silver600.html) This graph provided 600 years of silver prices in 1998 dollars. So, all the inflation is taken out of the equation, and the prices reflect silver's true value. In constant dollars, silver's purchasing power averaged $150 per ounce in 1998 dollars for 600 years. This is the average purchasing power for 600 years; obviously, silver has nothing close to that "value" today, which provides one unbelievable investment opportunity.

The question becomes whether silver will ever reach either the $150 nominal value or, better yet, the purchasing equivalent of the 600-year average? According to long-term historical standards it must, but will we all live long enough to benefit from this? The Silver Investor is on record as stating that silver could trade as high as US$100 per ounce in nominal terms and perhaps higher. It is our belief that this will most likely occur on a price spike and the price will quickly adjust downward but establish a new range. We are looking at 2007-2008 as the area for a large price spike, but not the final spike! We will need to study the market activity to make our best call at the time.

Coming back to the Social Security discussion, what this system is supposed to do is provide a sufficient income stream to keep the contributors in a livable retirement for the rest of their days. The amount of $150 per day equals $4500 per month in purchasing power, or $54,000 per year -- certainly sufficient in purchasing power for most Americans to retire upon. To obtain this level of income from "safe" T-bills would require over just over $1 million at the 5% current yield on T-Bills. Compared to 10,000 ounces of silver bullion that would cost roughly $110,000, it certainly is a risk profile that demands serious consideration. Not everyone will have a million in cash equivalents saved by the time they retire.

Before you think this writer has completely lost it, consider the fact that for centuries silver was used as money and the average worker earned roughly an ounce per day. One ounce of purchasing ($150) could be considered valid, using the 600-year average we are discussing. Ten thousand ounces is equivalent to 10,000 days, or, roughly, 27 years. This amount of silver would provide a safe retirement in days gone by -- and perhaps a safe retirement in the future?

What makes this exercise so interesting is the amount of people that could actually secure their future in silver. With 105 million ounces on the Comex, only 10,500 people could own enough silver in historic terms (10,000 ounces). Think about this .0004 percent of the total population of the United States each buying the equivalent of two silver contracts and taking delivery would totally wipe out the Comex silver supply as it stands currently.

No not really, because we focus on bullion more than the total supply of silver (bullion plus coins). However, the amount of silver in coin form is estimated to be 550 million ounces. We know approximately 100 million ounces of that is in the silver eagle program started in 1986. Of the remaining 450 million ounces, we do not know what percentage would fall into the rare or semi-rare category. But if we took the entire 450 million ounces, this would be 5 billion dollars in coin form. A pitifully small amount compared to what America held at one time.

Compare this to what Social Security holds, the $1.7 trillion discussed earlier. The amount of paper promises outstanding versus the amount of real money in the world is staggering, and at some point the two will start to close in on each other as a very small percentage of people wake up to the economic reality that has been pointed out recently by Paul Volcker and even the World Bank. Simply, the U.S. faces monetary problems ahead that might develop into a crisis at some point.

Have U.S. banks have already prepared for a worldwide collapse? The most profound evidence of this fact is that the Federal Deposit Insurance Corporation (FDIC) has limited depositor's insurance to $100,000 per person under the Bank Reform Act of 1991. Originally, an individual could have any number of accounts all protected to the one hundred thousand dollar limit. Prior to this legal change, the FDIC clearly stated, "Deposits Federally Insured to $100,000." Now it is the "Depositor," only!

This subtle but real change should be factored into your "cash" holdings. In Wisconsin some depositors received the following notices in their bank statements: "Due to a change in federal regulations, beginning July 1, 1993, our funds availability policy is amended to permit exception holds to be placed on items such as cashier's, certified, teller, government, U.S. and government checks in certain circumstances." Source: Money and Wealth in the New Millennium, by Norm Franz, copyright 2001.

P.S. For those that wish to pursue this subject further
The Legal Ponzi Scheme
The Social Security Ponzi Scheme Paradox
Cato Institute on Social Security
God Bless this Ponzi Scheme
End the Fraudulent Social Security Program Now
The Luckiest Ponzi Scheme
Social Security Benefits are NOT guaranteed
The American Thinker looks at Social Security
The Outlook for Social Security
Is Social Security Voluntary?

Mises Institute Articles
The Fiction of Social Security Bonds
Bushes Impossible Social Security Plan
Economic Aspects of the Pension Problem

David Morgan
Silver-Investor.com

Mr. Morgan has followed the silver market daily for over thirty years. Much of this Web site, www.silver-investor.com, is devoted to education about the precious metals.

Mr. Morgan has been published in The Herald Tribune, Futures magazine, The Gold Newsletter, Resource Consultants, Resource World, Investment Rarities, The Idaho Observer, Barron's, and The Wall Street Journal. Mr. Morgan does weekly Money, Metals and Mining Review for Kitco. He is hosted monthly on Financial Sense with Jim Puplava. Mr. Morgan was published in the Global Investor regarding Ten Rules of Silver Investing, which you can receive for free. His book Get the Skinny on Silver Investing is available on Amazon or the link provided. His private Internet-only newsletter, The Morgan Report, is $129.99 annually. To suscribe to the Morgan Report click here.

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment objectives vary, this Summary should not be construed as advice to meet the particular needs of the reader. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice. Any action taken as a result of reading this independent market research is solely the responsibility of the reader. Stone Investment Group is not and does not profess to be a professional investment advisor, and strongly encourages all readers to consult with their own personal financial advisors, attorneys, and accountants before making any investment decision. Stone Investment Group and/or independent consultants or members of their families may have a position in the securities mentioned. Investing and speculation are inherently risky and should not be taken without professional advice. By your act of reading this independent market research letter, you fully and explicitly agree that Stone Investment Group will not be held liable or responsible for any decisions you make regarding any information discussed herein.

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