In a recent issue of Fortune Magazine Allan Sloan takes on the topic of Social Security. The article is a great read, and Allan uses himself as an example. Social Security is intended to be a small safety net. It has become, for many people, the only source of income in retirement.
Allan explains that Social Security will need a large bailout soon, even with Social Security running cash flow positive. The money Social Security takes in, it "invests" in U.S. Treasury Bonds. But thats great! U.S. Bonds are among the safest investments in the world.
Well it doesn't quite work that way. When Social Security buys treasury bonds, it is essentially handed an I.O.U. by the Treasury. The Government is funding its operations with Social Security's surplus money. This is a big problem.
When Social Security goes into the red (spends more money then it takes in), it will redeem some of those Treasury bonds. But the Treasury doesn't sit on a huge pile of cash to just hand out when bonds are due, the Treasury sells new bonds. These new bonds will have to be sold at public auction, increasing our national debt. Something investors the world over take very seriously.
Allan presents some solutions at the end of his article and I recommend everyone read it. Social Security is becoming too big. We need to wind it down and set up programs that help people achieve independence in retirement.
The next great bailout: Social Security
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