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You are here: Law & Politics Government Was Social Security System Doomed From The Start?
Shortly after the Reagan Administration took charge in Washington D.C. in 1981, professional investor and author of the book “Roadway to Prosperity” (www.roadwaytoprosperity.com) Al Jacobs essentially opted out of the Social Security System.

From then on Jacobs has contributed only minimally to the system, while retaining a vested interest in both Social Security and accompanying Medicare benefits from the U.S. Government.

“Social Security provides necessary security for those who have worked until they are 65 and not accumulated enough savings to live on,” says Jacobs, “but for those who have accumulated the means to do without Social Security income, they’d be wise to extract themselves if they are able.”

Jacobs says there are many reasons that the U.S. Social Security System was in trouble from the start. Here’s a look at the Social Security System past, present and future:
The current Social Security System, a part of President Franklin Roosevelt’s New Deal that came to fruition in 1935, and meant to implement social insurance for the elderly and unemployed, was enacted as a result of the Great Depression of the 1930s which wiped out the savings and income of many elderly and retirees.

Maximum initial payments, limited to $30 per year, were made into the system only by employees. If the U.S. Government had a crystal ball, it might have foreseen the problems Social Security would cause. In 1940, life expectancy for all Americans was 68 years of age, thus the government didn’t expect to pay benefits to its citizens very long. Ida May Fuller was the first to receive a monthly Social Security check. She paid $24.75 into the system, lived to be 100-years-old and collected $22,882.92 during her retirement years.

Not all beneficiaries were as lucky as Ida May, but it was an ominous beginning for the system. Throughout the next 70-plus years, amendments were added, employers were forced to pay in and optimism that the system could roll on as it had always done continued well into the 1980s.

As one century faded into another, Americans began to live longer for various reasons, and as they did, Social Security began to show signs that it couldn’t last. The system soon became a hot item on the political trail, even prompting Donald Trump to tell everyone he didn’t need his $2,663 a month. He even encouraged his fellow billionaires – and those less fortunate millionaires – to stop taking the payment. The message didn’t resonate, however, as these groups of earners are collectively taking in more than $1.4 billion a year in Social Security benefits.

According to a Pew Research Study, since 2010 Social Security’s cash expenses have exceeded cash receipts. By 2019 the US Treasury will start dipping into its reserves and, according to the study, unless something changes, by 2034 Social Security will only be able to pay out 75 percent of benefits owed.

Today the full benefit age for Social Security is 66 for people born in 1943-1954, and it will gradually rise to 67 for those born in 1960 or later. The average lifespan for citizens is 78 years.
For most working Americans, Social Security is a program from which they may not escape. The maximum $30 per year contribution, enacted 80 years ago, went the way of the pterodactyl.

For you payors, with annual earned incomes in six figures, the amount on which the feds will assess FICA tax has risen from $118,500 in 2016 to $127,200 this year. This means 15.3 percent of your income will be taken. That can be up to $19,462. In case you want to know who to blame, you may glance in the direction of prior Federal Reserve Chairman Alan Greenspan who, in 1981, headed the commission recommending these annual raises as a way to keep the system in business.  He’s still around at 91, so if you’d care to express an uncomplimentary remark, he just might hear you.

For you collectors, the amount in social security benefits you receive is tied to a variety of factors, some of them quite abstract. In theory, the FICA taxes you paid into the system over the years should relate to the monthly payments you receive. But, in reality, the amount may vary based upon all sorts of regulatory provisions. Though it might be helpful if the administrators made this information readily accessible to the public, this is asking for something not meant to be. If you request specific details from a Social Security employee, you’ll possibly receive them; if it’s general advice you want, it’s not there for your benefit. I can only guess why this situation exists – and it’s not encouraging.

If there’s a fundamental defect in the Social Security system, it’s what you’d expect from any other pyramid scheme. For those of you unfamiliar with the term, this is a type of business model which recruits members via a promise of payment in exchange for enrolling others into the scheme, rather than actually investing in or marketing anything in particular. As the number of participants increase, recruiting new members becomes ever more difficult. In time the pyramid scheme proves to be unsustainable and the latter enrollees lose whatever they may have contributed. This sort of contrivance was appropriately ridiculed in a comment attributed to the late British Prime Minister Margaret Thatcher concerning the programs of socialism, to the effect: “Eventually you run out of other peoples’ money.”

We’ll conclude with a bit of good news. Though for most persons the system is mandatory, there are some of us who can bid it goodbye. These are generally the self-employed, with a certain amount of investment or other non-earnings income, who possess the ability to opt out of the system, either wholly or partially. The method employed is conversion of income subject to the FICA tax into income not subject to the tax. As manipulative as this may seem, it’s permissible. You’ll find a discussion of the procedures in a Newsletter titled “Social Security Prognosis” on Al’s website, Take a peek and see what you think.

About Al Jacobs
A professional investor for nearly five decades, Al Jacobs holds a degree in civil engineering from Rensselaer Polytechnic Institute, a Real Estate Certificate from the University of California and a Certified Property Manager designation (CPM) from the Institute of Real Estate Management. He organized his own investment firm in 1968 and has since specialized in development and management of real estate, and has a deep involvement in corporate securities. His written works can be found in the book “Roadway to Prosperity” and also in several newspapers near his hometown of Monarch Beach in Orange County, Calif. Jacobs writes a weekly column for his website (www.roadwaytoprosperity.com) as well.
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