The Social Security Cashflow Bomb

The Social Security Cashflow Bomb

To say that the future of Social Security is contentious is an understatement.  We’ve been hearing for decades that the government entitlement program faces a looming cashflow crunch.  Proponents of Social Security point to its gargantuan $2.9 trillion trust fund, while detractors say the trust fund is an accounting fiction.

And to be honest, for a long time I just didn’t care.  For decades the system has simply kept humming along as if nothing was wrong.  The sun rose in the east every morning, Social Security checks were direct-deposited like clockwork and life went on.

Then, out of sheer curiosity, I compiled historical and projected cashflow data on the pension program.  I was shocked by what I discovered.  This is the kind of information that you won’t find discussed by a panel of experts on CNBC or splashed across the front page of the Wall Street Journal.

The chart at the top of this article shows annual Social Security cashflow for the historical period from 1957 to 2018, as well as the program’s projected cashflows from 2019 to 2034 (according to the Trustees’ 2019 Annual Report).  It considers payroll taxes, income taxes on benefits and Federal reimbursements for payroll tax holidays (as occurred in 2011 and 2012) as positive cashflows to Social Security while benefit payments, administrative expenses and transfers to the Railroad Retirement Program are counted as negative cashflows.

You’ll notice that I’ve intentionally excluded the interest earned on the Trust Fund from the calculations.  This is because any interest earned on the Trust Fund doesn’t change how the Federal government ultimately funds the program.  When the time comes to payout benefits, the government must either do so from collected taxes or the proceeds of Treasury bonds sold to the public.  Interest income and bond redemptions generated by the Social Security Trust Fund must be paid out of the government’s general fund – generally via the sale of an equivalent amount of Treasury securities to the wider public.

So for all the attention it gets, the Social Security Trust Fund really doesn’t matter very much.  You could lop a zero off its $2.9 trillion balance sheet without changing the program’s funding requirements very much.  Likewise, you could add a zero to the Trust Fund and get the same result.  In the end, the money for benefits comes from current taxes and bond sales to the public, Trust Fund be damned.

This is all tediously academic…at least until you take a good look at the chart above.  It shows how Social Security went cashflow negative in 2010 in the aftermath of the Great Recession, never to go cashflow positive again.  For the last 10 years the entitlement system has been persistently cashflow negative – so much so that it is quite easy to dismiss as immaterial.

And I would agree with that assessment, up to a point.  The annual Social Security cashflow deficits from 2010 until the present have been quite manageable, generally fluctuating between -$40 and -$80 billion in any given year.  And the system will remain completely viable for a few more years in its current form.  According to projections, the deficit will remain under -$100 billion through 2021.

But after that things start to get ugly.  Social Security’s cashflow deficits will deteriorate from around -$100 billion in 2021 to -$400 billion in the early 2030s.  As if that isn’t bad enough, the projections don’t take into account the possibility of an economic recession, which is a ridiculous assumption.  If a recession were to occur anytime over the next 15 years, the situation would quickly go from dire to disastrous.

And a recession is coming, you can count on it.

This is why I find the Social Security Trustees’ projections that the Trust Fund will last until 2035 to be laughable.  What will really happen is that we’ll most likely have a severe recession over the next few years which will accelerate all of the negative trends we see in the chart above.  We’ll probably be seeing -$400 billion cashflow deficits in the program by the late 2020s and I find it reasonable to assume that the Trust Fund will be exhausted around the year 2030, give or take.

Now you may be wondering why I care when the Trust Fund runs out of money, considering I’ve openly stated that’s its size is immaterial.  The answer is quite simple.  The existence of the Trust Fund provides political cover for Congress to ignore the festering negative cashflow issue.  Social Security is famously known as the third rail of American politics.  Any politician who tampers with it gets permanently booted out of office, never to be re-elected again.

So the path of least resistance is to just ignore Social Security’s impending issues and pretend everything is alright.  It is only once the Trust Fund is empty sometime between 2030 (in my estimation) and 2035 (according to the Social Security Trustees who assume no recessions) that ugly reality will stare us all in the face.

What does this mean for you and me?

If you are currently receiving Social Security payments, you are probably golden for the next 10 years.  Even after that, there is a good chance you will be grandfathered into any reforms, meaning that you may well continue to get your checks on time and in the expected amount.  Of course, this good news may seem like a Pyrrhic victory once you read what comes next.

If you aren’t old enough to draw on Social Security yet, then I suggest you start making other arrangements.  The U.S. government is currently running a budget deficit of around -$1 trillion in 2019.  This is a shockingly high number against the backdrop of a purported economic expansion.  Thus far, negative Social Security cashflow has been a relatively minor part of this general budget deficit, contributing between 4% and 8% of the total.

However when the current Everything Bubble bursts and the economy inevitably enters a major recession, these numbers will deteriorate far more rapidly than most people expect.  The Federal deficit will simply blow-out to -$2 to -$3 trillion per year, with Social Security making a significant (negative) contribution.

The only reasonable solution will be for the government to engage in money printing, aka helicopter money.  In fact, academics have recently been attempting to rehabilitate the long-sullied reputation of money printing.  Now they call it Modern Monetary Theory (MMT for short), claiming that it isn’t evil, just misunderstood.  This is meant to fool the historically ignorant.  But the results will be the same – the more money the government prints, the less value your existing dollars will have.

This is why I advocate that forward-looking individuals invest in tangible assets like antiques, bullion, fine art and gemstones.  These hard assets can’t be printed at the whim of desperate central bankers or corrupt politicians.  As a result, they will retain their value in a scenario where more traditional financial assets – like cash, stocks and bonds – crash and burn.

 

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Set of 1830s French Silver-Gilt Teaspoons in Louis XVI Style

Set of 1830s French Silver-Gilt Teaspoons in Louis XVI Style
Photo Credit: moniques-antiques2

Set of 1830s French Silver-Gilt Teaspoons in Louis XVI Style

Buy It Now Price: $371.25 (price as of 2019; item no longer available)

Pros:

-This magnificent set of 11 French silver-gilt teaspoons from the 1830s features an ornate Louis XVI style with laurel leaves, scrollwork and torches.

-The set weighs 209.7 grams (6.74 troy ounces) of solid .950 fine silver in aggregate.  Each individual spoon is 19.06 grams (0.6128 troy ounces) in weight and 5.625 inches (14.3 cm) long.

-This set of French silver-gilt teaspoons has all the appropriate hallmarks for the 1830s: the head of Hippocrates facing right (indicating the First Quality .950 fine standard used between 1819 and 1838) and a Greek mask (representing the Paris guaranty mark for medium-sized items).  There are other hallmarks as well (including the maker’s mark), but they cannot be identified from the photos provided.

-These fine solid silver teaspoons have been fire gilt!  Fire gilding, also known as mercury gilding, is a near-legendary type of gold-plating.  Unfortunately, the art of fire gilding gradually died out in the mid 19th century due to the introduction of the cheaper (but inferior) electroplating method.

-According to the seller, these French silver-gilt teaspoons were made by Charles-Salomon Mahler – a prolific silversmith who operated in Paris between 1824 and 1838.

-Even though these spoons have a medallion at the end of their handles meant to accommodate a monogram, they have never been personalized.  The fact that these lovely old teaspoons are not monogrammed will tend to boost their value slightly.

-Although there are many different kinds of old European silver available to the discerning collector, in my opinion French silver has the perfect combination of decorative flair and understated charm.  This is in contrast to German silverware, which is often too stiff, and British silver, which can be too conservative in its decoration.

-Antique French silver is substantially undervalued in today’s marketplace.  The fact that you can pick up this set of 180 year old French silver-gilt teaspoons for only $371 – less than $34 per spoon – is proof enough!

 

Cons:

-Antique silver flatware can be either double-struck or single-struck.  Double-struck means that the design elements are present on both sides of the handle, while single-struck means they are only on the front.  Unfortunately, this set of French silver-gilt teaspoons is single-struck with a blank reverse, which is less desirable and valuable than more ornate double-struck versions.

 

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Antique Silver in a Post-Antibiotic Era

Antique Silver in a Post-Antibiotic Era
Photo Credit: Grannies Kitchen

One of the questions I’m asked again and again by antique enthusiasts is why I believe that antique silver is a good buy.  Some people think it is too formal for today’s households.  Other people simply view it as an anachronism in a world dominated by smart phones and social media.  And to a limited extent, I sympathize with these opinions.

Antique silver will certainly never be used the way it was during the late 19th century, when prim and proper upper-crust Victorians used frilly silver utensils – sugar tongs, fish servers, citrus spoons, etc. – for every conceivable purpose.  But that doesn’t mean that I believe silver flatware is dead in the modern world, either.  Instead, I think there will be a powerful trend toward the adoption of sterling silverware for a very important practical attribute – antibiotic resistance.

Ever since they were first developed in the late 1930s, antibiotics have been a wonder-drug without equal.  They have allowed mankind to nearly eradicate bacterial infections that were deadly in prior eras, including killers such as tuberculosis, cholera, diphtheria and typhoid fever.  Many of us have never even heard of these dread diseases and, as a result, we largely take their continued medical insignificance for granted.

This is a grave mistake.

You see, we are rapidly entering a post-antibiotic world.  It was a good run, having lasted about 80 years, but many of the antibiotics that served us so well for so many decades are now losing their effectiveness.

Antibiotics kill bacteria in two primary ways: by preventing them from building cell walls or disrupting their DNA or RNA replication.  But bacteria have a way to fight back against this pharmacological onslaught: evolution.  Although nearly all of a bacterial colony may be destroyed by a given antibiotic, there will always be a few naturally resistant germs.  These resistant bacteria are then able to replicate unimpeded.  Eventually, after a long enough period of time, the world comes to be dominated by these drug-resistant super-bugs.

This is the new, frightening world we are now on the cusp of entering – the post-antibiotic age.

Medical science has gone to great lengths to delay this day of reckoning.  In most developed countries antibiotics are only available via a doctor’s prescription.  This tightly controlled distribution system is meant to ensure they aren’t taken casually, thus leading to drug-resistant strains.  But this tactic only serves to slow the evolution of antibiotic resistant infections – a strategy that has largely run its course by this time.

Medical researchers have also worked hard to develop new strains of antibiotics that bacteria aren’t immune to.  Even so, the golden age of antibiotic discovery was in the 1950s and 1960s, when fully 50% of the antibiotic drugs in use today were introduced.  Not coincidentally, the mid-20th century saw U.S. life expectancy increase by nearly 10 years.

But as we’ve recently begun to enter the post-antibiotic era, the  medical pickings have become increasingly slim.  New antibiotics are still being developed at tremendous monetary cost, but they often have dangerous side effects or limited applicability.  And it can easily take a decade or longer to bring a new antibiotic drug to market.

As a result, antibiotic resistant bacterial infections are on the rise worldwide.  The Centers for Disease Control (CDC) estimate that 2 million people in the United States contract an antibiotic resistant infection every year.  Over 23,000 of those people end up dying.  These numbers might seem manageable today, but they will undoubtedly rise in the future – possibly dramatically.

This is a situation custom-built for the resurgence of antique silver.

You see, silver is one of nature’s great antimicrobial agents.  It is effective in killing not only drug-resistant bacteria, but many viruses as well.  Better yet, there is little indication that germs develop widespread resistance to silver-based medicines like they do with conventional antibiotics.

Mankind has a long history of using the bactericidal qualities of silver to ward off disease.  The crews of sailing ships used to put silver coins in their stowed barrels of fresh water before embarking on long voyages.  This helped keep the water from growing unwelcome microbes.  Similarly, early North American pioneers placed silver coins into jugs of milk in order to keep them fresh longer.

The phrase “born with a silver spoon in one’s mouth” means that a person has been born into a wealthy family.  But the origins of the saying are quite literal.  In medieval times, only the aristocracy could afford silver utensils.  The peasants and common folk had to make do with wooden bowls and spoons.  However, only real silverware gave newborns (and anyone else who used it) protection against the common infectious diseases of the age.

Silver was a common fixture in the medical profession as recently as the 1940s.  Hospitals used to regularly give newborn babies silver nitrate eye drops.  This was done to prevent blindness from sexually transmitted diseases like chlamydia and gonorrhea, which can be passed from mother to baby during childbirth.  Alas, this cheap and effective method of disease-control was abandoned with the rise of antibiotics.

But as we fully enter the post-antibiotic era, the advantages of solid silver flatware will become increasingly obvious.  The more you use silver in your everyday life, the more protection you gain against infectious diseases.  Eating with real silver place settings is a start.  Adding other solid silver items, such as cups, bowls and pitchers offers additional benefits.  Big spenders can splurge on luxurious silver coffee or tea sets in the pursuit of a healthier, germ-free lifestyle.

But where does one find sterling silver utensils in a post-antibiotic world?  Our economy no longer produces non-stainless steel silverware in large quantities.  And what little real silverware is still being made today is only offered at premium prices.  So if you want to inoculate yourself against the rise of the super-bugs, you’ve got one realistic alternative: buying antique solid silver flatware and hollowware.

And that’s why I think owning antique silver is a trend for the 2020s and beyond.  Yes, I concede that it may take a decade or two for average people to figure out that science isn’t going to bail them out with some improbable miracle drug.  But they will figure it out; their health (and that of their family) depends on it!

In my opinion, those who have the financial means will buy antique silverware by the bucket load.  Those without the means will settle for old silver-plated utensils (which I consider a poor substitute for the real thing).  The poorest of the poor will be relegated to using cheap, but plentiful stainless steel.

I don’t know about you, but I’m buying antique sterling silver before the rush, while prices are still ridiculously low.  The post-antibiotic world has finally arrived, and it is just a matter of time until everyone else figures it out.

 

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1970s 10 Ounce CMI USS Constitution Silver Bar

1970s 10 Ounce CMI USS Constitution Silver Bar
Photo Credit: hrcpm

1970s 10 Ounce CMI USS Constitution Silver Bar

Buy It Now Price: $220 each (price as of 2019; item no longer available)

Pros:

-Each vintage 1970s USS Constitution silver bar contains 10 troy ounces of .999 fine silver and bears a logo depicting the famous U.S. Naval vessel.

-This USS Constitution silver bar has been extruded into a classic kit-kat shape.  Struck and extruded silver bars were first produced in the 1970s as a response to overwhelming consumer demand for precious metal investments as a hedge against inflation.  Extruded bars were faster and cheaper to produce than hand-poured bars.  As a result, by the early 1980s poured silver bars were no longer commonly made.

-The USS Constitution, also known by the nickname Old Ironsides due to its stellar performance in the War of 1812, is a three-mast U.S. Navy frigate built from live oak.  The ship was launched in 1797 and, after a gallant career, retired from active service in 1881.  She is currently open to the public as a museum ship in Massachusetts’ Charlestown Naval Yard.

-The Constitution Mint Inc., or CMI for short, was a silver fabricator that operated out of Provo, Utah during the 1970s.  It was known for producing 1 ounce silver rounds and extruded, kit-kat style silver bars in 10, 25, 50 and 100 troy ounce sizes.

-CMI silver bars are some of the more readily available vintage ingots in the marketplace today.  They were produced in quantity during the 1970s and a fair number have escaped the melting pot over the past 40-odd years.  This means they generally command modest premiums over the spot price of silver, making them a great choice for novice antique silver bar collectors.

-This USS Constitution silver bar comes in its original shrink-wrap plastic!  The snug factory plastic has kept most of the bar shiny and bright over the decades, while allowing its unprotected ends to tarnish.

-Vintage ingots – like this USS Constitution silver bar – are an economical way to stack silver while also providing some numismatic investment exposure to the desirable antique silver bar market.

-Vintage poured and extruded silver bars are currently trading at some of their lowest premiums over spot in the last several years.  With spot at around $17.50 an ounce right now, this USS Constitution silver bar is selling for a premium of only 25.7%.  At an asking price of $220, this CMI silver bar is quite a bargain – with as low a premium as you could realistically hope to get.

 

Cons:

-If you’re really lucky, you might be able to pick up one of these wonderful old silver bars in your local coin store’s junk silver bin for only 50 cents or $1 over spot.  Sadly, this is becoming a rarer and rarer occurrence as word gets out about the insatiable collector demand for these unique pieces.

 

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