Recently, markets have been roiled by news of a national credit rating downgrade by Standard and Poors and by rumors of another recession. However, the full truth is not being reported by the media, as usual.
In writing their downgrade notice of the United States government, S&P cited difficulty making Social Security payments. They said this, in addition to political brinksmanship over raising the debt ceiling, caused the actual downgrade.
Social Security costs are growing. However, they are growing at a sustainable pace. Our national population is growing due to immigration, so the only thing that is needed to protect Social Security for the next generation is to make one of three choices: 1. raise the retirement age a few years 2. increase the income cap on Social Security taxes or 3. reduce benefits slightly.
Contrary to some conspiracy theories, there is still $2.6 trillion in the Social Security fund, slowly gaining interest as treasury bonds at about 4.642% including old, higher interest bonds. Here's more information if you're curious.
Here's the actual state of our Social Security program:
"Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The $49 billion deficit last year (excluding interest income) and $46 billion projected deficit in 2011 are in large part due to the weakened economy and to downward income adjustments that correct for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink to about $20 billion for years 2012-2014 as the economy strengthens. After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Through 2022, the annual cash deficits will be made up by redeeming trust fund assets from the General Fund of the Treasury. Because these redemptions will be less than interest earnings, trust fund balances will continue to grow. After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085."
However, experts expect politicians to agree to one of the three choices I mentioned earlier. Any one of those choices would keep the trust fund stable. Even if no action is taken before the fund is depleted, Social Security would continue to pay out at 75% of current, inflation-adjusted benefits.
Unfortunately, S&P has taken the low road here. They, like most Wall Street players, would love to see the entire $2.6 trillion trust fund invested into the stock market through private accounts. This is called Social Security privatization and it was the reason most investment banks donated to George W. Bush's campaigns.
The downgrade, which occurred regardless of S&P recognizing their own $2 trillion accounting error, was primarily motivated by greed. This is the same greed that caused the agency to rate subprime mortgage-backed securities as AAA while being paid by the bank requesting the rating. They had a huge conflict of interest in rating mortgage debt and they have a greater conflict of interest in rating United States debt.
Despite being rated lower than France by S&P, there is almost no risk that the United States will default on its debt. Since the debt is denominated in dollars, which only the United States may print, the only way to default is for our government to refuse to make interest payments. That could only happen if Congress chooses to stop paying.
Our economy may be weak right now, but the whole world is sharing in our recession. The worst move right now would be to dump our small, but guaranteed Social Security nest egg into the boom/bust markets of Wall Street. Even investing it into gold would involve diving into an asset bubble that may spectacularly burst in a few years. That trust fund built from decades of hard work is supposed to cover a minimal retirement for us if our other investments turn sour.
Clearly, S&P has a lot to gain by electing a new president who does not believe in financial regulations. They've spent millions lobbying against new regulations of rating agencies. As much as I am not an Obama apologist, the worst thing we could do right now is to choose S&P's anointed successor for the presidency.
We must continue to protect Social Security and what little financial regulations we still have. Even from the criminals at S&P.
P.S. Full disclosure: I became a bull on Wall Street after the last few days of unjustified market sell-off. The market's lack of confidence feeds on itself only until they realize Europe won't completely explode and life goes on. Long GLW, SLW.