HOW TO SAVE SOCIAL SECURITY

http://www.HowToSaveSocialSecurity.com

© 1996-2008 

By Lee Drannan Smithson      

Dayton OH 45402

Phone:  937-224-7787

e-mail:  LeeSmithson@HowToSaveSocialSecurity.com

OR drannan@prodigy.net 

The 2004 Social Security and Medicare Board of Trustees Report stated,

”We do not believe the currently projected long run growth rates of Social Security and Medicare are sustainable under current financing arrangements.”

I am a private citizen who came up with the following proposal, "How to Save Social Security," in 1996.  I have sent this solution to the Social Security problem to Presidents, Candidates for President, Vice-Presidents, U.S. Senators, U.S. Representatives, and many other government officials with no response that would indicate they actually read it.  I have, therefore, decided to publish it for the world to see. 

I am a retired chemist and scientist who worked for the Federal government for over 34 years.   I am not an economist....which might be an asset...since virtually no two economists agree, and no economist that I know of has come up with a realistic solution to the Social Security problem.

The condition of the Social Security System and our government finances is evidence that the "good economic advice" of economists isn't good enough, not that they should get all the blame.  I mostly blame our elected officials who have made the rules and made the decisions.

The “Social Security” Trust Fund contains a SURPLUS of

2 Trillion, 238 Billion Dollars!!!

So, why do most people think the Trust Fund is going broke?

It’s because our government spent the 2 Trillion, 238 Billion

on every thing in the world EXCEPT Social Security.

 The money they should have kept to pay Social Security benefits is GONE.

There is virtually no money in the fund

Because our government SPENDS it as soon as it comes in.

There are non-negotiable government notes in the “lock box”

that can’t be sold to anyone because they have NO VALUE.

The are “iou’s” that only the government can pay back.

My solution solves the Social Security problem in perpetuity.

· Without raising taxes.

· Without cutting benefits.

· Without raising the retirement age.

· Without privatizing anything!

The easiest, quickest, simplest, and perhaps the safest way for the government to make money with no risk is to become a mortgage lender!  I propose a

“Social Security Mortgage Agency”

which would be funded by some (and eventually all) of surplus Social Security receipts (payroll taxes). The government itself would become a mortgage lender.

Using the power of compound interest, the excess Social Security receipts (payroll taxes) could be invested at around 6% and the funds would grow enough to ensure the solvency of the Social Security system.

Fannie Mae

In 1938, the Federal government established the Federal National Mortgage Agency (FNMA) which later became known as "Fannie Mae."  FNMA was formed to expand the flow of mortgage money by creating a secondary market. FNMA was authorized to buy Federal Housing Administration (FHA)-insured mortgages, thereby replenishing the supply of lendable money.

In 1968, Fannie Mae, through an act of Congress and the signature of President Johnson, allowed Fannie Mae to be made into a private company.  

In 1970, the U.S. government “sold” (gave away would be a more accurate term) for a measly $216 million the Federal National Mortgage Association (FNMA or “Fannie Mae”). This was a grave and exceedingly costly mistake.  Our Government should have kept Fannie Mae and should have reaped the benefits rather than giving them away.

As of 2003, Fannie Mae was the second largest corporation in terms of assets in America.  In 2003, Fannie Mae provided $1.4 trillion in mortgage financing for over 10 million homes.

Since it became a "private company," Fannie Mae has provided more than 63 million homeowners with more than $6.3 Trillion in housing finance.  Fannie Mae does not make direct mortgage loans.  They loan funds to mortgage lenders so they have enough money to loan.  Our government foolishly  gave it away for $216 million!

To Read a History of Fannie Mae, go to

http://www.fanniemae.com/aboutfm/understanding/history.jhtml?p=About+Fannie+Mae&s=Understanding+Fannie+Mae&t=Our+History  

National Debt

I will show what the government must do to pay off the National Debt which was 5.8 Trillion dollars when George W. Bush assumed the Presidency and is now (February 25, 2008) 9.3 TRILLION DOLLARS, a debt of over $30,600 for every man, woman, and child in the U.S.A.

These solutions, to my knowledge, have not been proposed before.  I have spent hundreds of hours working out the details and the mathematics.  I am a retired scientist who worked for the Department of the Air Force in a military capacity for 3 years and in a civilian capacity for 31 years.  I am now a private citizen and have no connection to the government.

My Social Security solution is based
 upon what Albert Einstein

 reportedly said was the
“8^th wonder of the world,” compound interest.

  He also reportedly said,

 "Compound interest is the greatest mathematical discovery of all time." 

Whether or not Einstein actually
 said these statements doesn’t matter.

It only matters that they are
 profound statements that are true.  

ONE CENT, compounded annually at 7.2% interest, will grow to $10,737,418 in 300 years.

Yes, you read that right—over 10 million dollars! 
With a one cent investment! Therefore,

ONE DOLLAR compounded annually at 7.2% interest will grow to
 1 BILLION, 73 MILLION, 741 thousand, 841 dollars in 300 years!

To put this in perspective, if the U.S. Government borrowed $5000 today at 7.2% interest and waits 300 years to pay off the principal and interest, the government would owe over 5 TRILLION DOLLARS.

My plan does NOT take 300 years to work, but I thought it was an interesting way to show the awesome power of compound interest.                                                                                 

Banks LOVE loaning money and compound interest because it will make them rich.  If you are a borrower, like the U.S. government, you could easily go bankrupt if you don’t pay the interest and the principal.  Compound interest will bury you if you let it.
Our Federal Government is BURYING ITSELF DEEPER EVERY DAY.  

It is easy to figure out the approximate interest the government (or anyone else) will owe if they borrow money (and how much interest the lender will receive) using the “Rule of 72.”  Every banker knows this rule.  Every mortgage lender knows this rule.  Every borrower, every investor,  and every government official needs to know this rule.  

The "Rule of 72" is an easy way to determine approximately how long it takes to double your money at a particular interest rate.

You can learn the Rule of 72 in about 5 seconds. It will be the best 5 seconds you will ever spend.  

The “Rule of 72”

If you divide the annual percent interest rate into 72, you will determine the approximate time it takes in years to double your money (if you are the lender) OR to double your debt (if you are the borrower) assuming nothing is paid toward interest or principal.

Now that we have computers, you can determine the exact interest in seconds, but the Rule of 72 lets you do this in your head in about the time it takes to type the information into the computer!  The computer calculation is EXACT...the Rule of 72 "calculation" is an approximation.)

Let’s take $1.00 at 7.2% interest and apply the “Rule of 72.”  72 divided by 7.2 = 10.  It takes approximately 10 years to double your money or your debt.  In 300 years, the money will double 30 times.  To wit:

$1.00 Compounded Annually at 7.2% interest
 for 10 years to 300 years

If you look at One Dollar compounded at 7.2% interest for 300 years, you will see the number is 1 billion 73 million, 741 thousand, and 824 dollars just like I said earlier.

My solution to save Social Security does not take 300 years.  But compound interest takes TIME to work a miracle so the sooner my proposed solution starts, the better.  One dollar compounded at 7.2% for 70 years is $128, still quite a return on investment!

With this understanding of the power of compound interest, here’s my proposal to make the Social Security System solvent in perpetuity without raising taxes, without cutting entitlements, without raising the retirement age, without privatizing any part of Social Security.

The “Pay as you Go” Social Security System has worked wonderfully for about 70 years, but just like a perpetual motion machine, it runs for a while and then stops.  The Federal government has "borrowed" (confiscated would be a more accurate term) and spent all the excess Social Security funds (2 Trillion, 238 Billion Dollars) on programs OTHER THAN Social Security with a "promise" to pay it back "when needed by Social Security” at a low Treasury Bill interest rate (about 3% now).

At 3% interest it would take 24 years to double the investment, a very poor return and a very poor investment.

At 6% interest it would take just 12 years to double the investment.

At 7.2% interest it would take just 10 years to double the investment.

The government MUST start to make money by investing some or preferably all of Social Security excess receipts in SAFE investments at a reasonable return, which, in my opinion, would be a minimum of 6%.

One of the safest investments would be to go into the mortgage loan business because it pays a good return AND it is a safe investment because  Social Security would hold the mortgage and could sell homes in default.    

Here is the first Baby Step in my

Solution to the Social Security Problem

Approximately 4,000,000 babies are born in the U.S.A. every year. If Congress would pass legislation to “invest” just $4000 of Social Security excess receipts at birth for each baby ($16 billion a year) in a “Social Security Mortgage Agency Baby Fund” and would loan all the money for home mortgages and would, in turn, loan all the monthly principal and interest payments for other mortgages, the initial $4000 investment would grow in 67 years at 6% compounded monthly to $220,583.  At 7.2% interest compounded monthly, the $4000 investment would grow in 67 years to $490,723. 

The chart below shows the power of compound interest

and the tremendous difference a few percentage points can make.

Compare the return at 3% (Treasury bills) to a

 6% return which is now about the mortgage rate.

The 3% interest our government may eventually "pay"

 for using Social Security money for other programs

 is paltry and is The Problem.

Compare the return at 6% versus 7.2%.

At 18%, the return is mind-boggling.

 A $4000 investment at 18% for 70 years will return

One Billion, 80 Million, 277 Thousand, 873 Dollars.

$4000 compounded monthly at various % rates

Compound interest can be calculated by going to the website, http://www.1728.com/comint.htm

Each baby would be covered by the “baby fund” and would have an “endowment” of  $220,583  in the Social Security System at a retirement age of 67 (if mortgages stay at 6%).  The endowment would not belong to the individual.  The endowment would belong to the Social Security Agency.  At 6% interest, the $220,583 endowment would provide a monthly "benefit" of $1102.  Of course, the initial $4000 investment is not set in stone.  It was chosen to show how a small investment could do so much.  

If the Baby Fund were started in 2009, the first year’s investment of 16 Billion Dollars would grow at 6% interest compounded monthly to $882 Billion by 2076 (67 years), enough money to finance 4 million homes at $221,000 each.  At 7.2% interest, the investment would grow to almost 2 Trillion dollars.

$16 Billion Compounded Monthly for 10-70 years

Annual investments after 2009 will not have reached this number by 2076, but the investment would reach that number in each year subsequent to 2076 provided the same amount, 16 Billion, were invested. This will be a perpetual fund as long as contributions are made each year for each birth.

By investing 16 billion a year for 65 years (a 65 year total investment of 1 trillion, 40 billion--about the size of the Bush tax cut), the Baby Fund will grow to approximately 30 trillion dollars before one cent in Social Security payments will be paid to the “babies” covered by this fund.

Thirty trillion dollars would finance 150 million, $200,000 homes which would mean that every home in America could be financed to the hilt with Social Security money which would not be feasible.  It is also highly unlikely that 30 Trillion would even be needed.

It would not REQUIRE 16 billion each year for 65 years to meet the future needs of the Social Security system, but it is very important that as much money as possible be invested as early as possible to work the miracle of compound interest.

How much is 16 Billion a year?  Not that much when it comes to Federal spending.  It’s about $1.00 per WEEK per person.  It’s about the cost of one soft drink per person per week.  It's about 14 cents per person per day.

Of course, this does not take into account one cent of  Social Security “payroll taxes” that the babies will pay after they grow up and start working and paying Social Security payroll “taxes.”   Since the babies are covered by the initial investment at birth, the social security “taxes” they pay during their working lifetime can be used as needed to pay those that retire before them, just as the funds are used today.  Any excess funds can be invested in mortgages.

More than 16 billion in surplus Social Security receipts could be invested at the outset to make the fund grow faster. In 2003, there were EXCESS Social receipts of 153 Billion.  I previously showed how 16 billon would grow to show how even this “small” sum can grow in just 65 years. 

 Had 153 Billion of excess Social Security Funds been invested in 2005,

At 7.2% interest, the fund would grow as follows:

The bankers and home mortgage lenders will probably have a fit with this program, but, frankly, so what?  A bankrupt Social Security System and a bankrupt country will be far worse.  And, the government, for years, borrowed money to loan to mortgage companies (including Fannie Mae before it was privatized) which has contributed to our large debt.  The 50 billion dollar or so bailout of the savings and loan companies in the 80's will eventually cost the taxpayers a half-trillion or more in interest.

The following table was taken from Social Security and Medicare Board of Trustees 2004 Annual Report:

What about the years between 2018 and 2070?

Assuming that the preceding “Key Dates for the Trust Funds” are correct, the first year the combined Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Fund will begin to fall short of outlays is 2018 and will be sufficient to finance only 73 percent of scheduled annual benefits by 2042, when the combined OASDI trust fund is projected to be exhausted .  HI refers to Hospital Insurance (Medicare A) which is a separate “fund.”

Based upon the Key Dates above, the government will not have to start paying interest on the Social Security funds the government has borrowed until 2018.  The trust fund assets that are "exhausted" in 2042 refers to the amount of money the government has borrowed from the “trust fund” plus interest since the Social Security system was formed.

The total amount the federal government has borrowed from the fund and spent

on other things totals, as of January 2008,
 2 Trillion, 238 Billion Dollars!!!!

Here’s How to Solve the Social Security Problem
 Between 2018-2070

By the year 2030, the Census Bureau projects there will be 65,000,000 recipients with an average monthly benefit of $1361.  To pay 65,000,000 recipients, approximately 88 ½ Billion a Month or 1 Trillion 62 Billion a year will be needed.

IF the government starts NOW to invest funds in mortgages at 6% or more (not in treasury notes that are now paying about 3%) and starts to make money on Social Security receipts, rather than just spend them, the fund will remain solvent and will be adequate to fund the Social Security program in perpetuity.

According to information from the chart below, in the year 2003, the Social Security “Trust Fund” had total receipts of $631 Billion, 886 Million dollars; expenditures of 479 Billion, 86 Million, with a Net Increase of 152 Billion, 799 Million dollars.  (That’s EXCESS receipts or surplus).  “Assets” at the end of 2003 was 1 Trillion, 530 Billion, 764 Million.

The only PROBLEM is the Federal government has borrowed and spent the “assets” and replaced the money with paper  “IOU’S”  (Federal Government “securities” the government says) which are nothing but IOU’s with no maturity date.

IF the government paid back the money they have borrowed from the social security “fund,” (two trillion, 238 billion as of January 2008) NOW there would be no problem.  Social Security could start investing two trillion in “mortgages” which would rise astronomically in compound interest in a few years.

If One Trillion, 530 Billion dollars had been loaned out for mortgages at 7.2% interest in 2005, it would grow to Three Trillion 60 Million dollars by 2018, almost 3 times as much money as will be needed to pay Social Security benefits in 2018. And, this doesn’t take into account one cent of payroll taxes which would be coming in.   If the one trillion, 530 million dollar investment were not touched, it would grow to Six Trillion, 120 Billion Dollars by 2028, and it would grow to Twelve Trillion 240 Billion Dollars by 2038.

Unfortunately, the Federal government now owes so much money,  9.92 Trillion dollars ($30,243.48 for every American man, woman, and child as of January 27, 2008), the government would have to borrow the money to pay it back which is equivalent to robbing Peter to pay Paul.

U.S. NATIONAL DEBT CLOCK

The Outstanding Public Debt as of 25 Feb 2008 was

$9.3 TRILLION DOLLARS 

The estimated population of the United States is 304,200,194
so each citizen's share of this debt is $30,600.

The National Debt has continued to increase an average of
$1.48 billion per day since September 29, 2006!

The above National Debt figures were takes from  

Ed Hall’s informative website http://www.brillig.com/debt_clock/

which he updates daily to give a current picture of the National Debt.

Here's how to pay off

 the National Debt.

The National Debt can be amortized just like a mortgage.

$10 Trillion National Debt Amortization Table

Paying off the debt in 15 or 20 years wouldn’t cost that much more in monthly

payments than paying it off in 30 years,

 and it would save a tremendous amount of money in interest.

When President George W. Bush took office in 2001, the national debt was $5.8 trillion. Since he has been President (as of January 12, 2008), the National Debt has increased over $3.4 Trillion to and it is going up at the rate of more than $1.48 Billion a DAY.

At this rate of spending, by the time President George W. Bush leaves office, the National Debt will be 9.750 Trillion Dollars.  During his presidency, the Government will incur over 4 Trillion in additional debt.  During the presidency of all the other Presidents, a national debt of 5.8 Trillion was incurred.

For comparison, during the two terms of the Clinton administration, our national debt climbed by $1.4 trillion over the eight years.

During the first term of President George H.W. Bush, the National Debt climbed by $1.2 trillion.

During the second term of President George W. Bush, it is estimated the National Debt will climb an additional 2.8 Trillion, making his two term administration the most debt ridden, by far, of any other President.  In fact, his administration and his father’s administration will incur almost as much debt as all the other Presidents combined,  $4 trillion for George W. Bush, $1.2 trillion for George H.W. Bush), and $5.8 trillion for ALL the other Presidents combined.

Under the George W. Bush administration,

as of January 12, 2007,  

your share of the National Debt has increased

approximately $10,000.

 Your share of the National Debt

 is increasing at the rate of  $6.66 a Day.

Every cent of President Bush’s

 1.3 Trillion Tax Cut

  was borrowed money.

Had the Bush tax cut been given equally to every citizen

 in the U.S.A., you would have gotten

 a check for $4,000.

If you didn’t get a $4000 check,

 you didn’t get your fair share!

Danger of Debt

Almost 200 years ago, Thomas Jefferson wrote,

 "I place public debt as the greatest of dangers to be feared."

How right he was.

President Reagan, in his first address to Congress, said,

 "a national debt approaching 1 trillion dollars is incomprehensible."

And, yet, the national debt under his watch ballooned to 2.6 Trillion Dollars.

What would President Reagan have thought about today’s debt of

9.2 Trillion Dollar Debt?

If he thought it was “Out of this World,"

 he would have been right.

In fact, if you taped 9.2 Trillion one-dollar bills end-to-end,

 the bills would reach 880 Million Miles into outer space,

 enough to make 12 round trips to Mars!

That’s a lot of money.  That’s a lot of debt.

I don’t want to scare you (actually, maybe I do),

 but every American

 would have to send a check for slightly over $30,000

 to the U.S. Treasury just to pay off the National Debt.

On a more pleasant note, 9.3 Trillion Dollars

 would make every person in

 Arizona and New Mexico a Millionaire!

Senator Byrd will be happy to learn that

 9.2 Trillion one-dollar bills

 would blanket every square inch of West Virginia.

Of course, you need to keep in mind

 this is not money we have, it’s money we owe.

President George W. Bush likes to say

 “it’s your money” when giving the tax cuts to the rich.

He failed to tell you, “it’s your debt”

because every cent of those tax "cuts"

 was borrowed money!

"How much money is there in the U.S.A.?"

In February 2005, the Federal Reserve, http://www.federalreserve.gov/,  reported the M3 money supply (which in effect says how much money there is in America) as 9.5 Trillion dollars.

The money consists of cash and money held in various types of bank accounts.  The Federal Reserve tracks these funds in three different values: the M1, M2 and M3 money supplies:

1.   M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions;
    (2) travelers checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository
    institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection
    and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW)   
    and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits
    at thrift institutions. Seasonally adjusted M1 is constructed by summing currency, travelers checks, demand deposits, and
    OCDs, each seasonally adjusted separately.

2. M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds.
    Seasonally adjusted M2 is constructed by summing savings deposits, small-denomination time deposits, and retail money funds,  each seasonally adjusted separately, and adding this result to seasonally adjusted M1.

3. M3 (see important note below in red) consists of M2 plus (1) balances in institutional money market mutual funds; (2) large-denomination time deposits (time deposits in amounts of $100,000 or more); (3) repurchase agreement (RP) liabilities of depository institutions, in denominations of $100,000 or more, on U.S. government and federal agency securities; and (4) Eurodollars held by U.S. addressees at foreign branches of U.S. banks worldwide and at all banking offices in the United Kingdom and Canada. Large-denomination time deposits, RPs, and Eurodollars exclude those amounts held by depository institutions, the U.S. government, foreign banks and official institutions, and money market mutual funds. Seasonally adjusted M3 is constructed by summing institutional money funds, large-denomination time deposits, RPs, and Eurodollars, each adjusted separately, and adding this result to seasonally adjusted M2.
 
Note: Current and historical H.6 data are available each week on the Federal Reserve Board's web site (http://www.federalreserve.gov/).

Since the above was written a startling and unexplainable development

occurred at the Federal Reserve.

The Federal Reserve ceased reporting on the value of

M3 on March 23, 2006.

The Federal Reserve has reported M1, M2 and M3 money supplies for over 50 years.

The Federal Reserve reported they were ceasing to report M3 because

“the costs of collecting the data required for the index outweighed its benefits.”

I personally think theThe Federal Reserve is trying to hide something.  

Some have speculated that they are trying to hide the real cost of the “Iraq War.”

I speculate that the Federal Reserve is trying to hide the fact that all the money owned by Americans

(the M3 Money Supply) would barely be enough to pay off the National Debt of 9.2 Trillion Dollars. 

I _______________________

? from Wikipedia, The Free Encyclopedia - Money Supply

On March 23, 2006 the Federal Reserve ceased publication of the M3 monetary aggregate, in line with an announcement it made in November, 2005. The M3 is a measure of money supply in the United States,

The M3 is most general of the many measures of money supply, the quantity of money available within the economy for purchasing goods, services, and securities. The money supply is monitored and adjusted by a central bank, to keep inflation in check, because money supply has to change in tune with real Gross Domestic Product (GDP) to prevent inflation (or deflation).

In November last year, the US Federal Reserve announced that it would cease publishing M3 data, saying, "[the] M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years", adding that the costs of collecting the data required for the index outweighed its benefits.

Some commentators have questioned this decision and have speculated that this would allow the Federal reserve to covertly fund the US budget deficit and its negative balance of trade or hide the fall in international demand for the US dollar. In March, 2006, Rep. Ron Paul introduced a bill (HR 4892) requiring the Federal Reserve to reverse its decision.

___________________________________________________________

FEDERAL RESERVE STATISTICAL RELEASE

Feb. 2005      M1               M2                   M3       

                1366.9 Billion    6456.3 Billion       9502.5 Billion 

    The value of M3 above is the answer to the question,

"How much money is there in the United States?"

The answer:  9.5 Trillion Dollars.

As of January 27, 2008, our National Debt was

$9,200,072,674,174.39

That means if all the money in the U.S.A. were sent to the U.S. Treasury, it would barely pay our National Debt.

 I hope the American public and our government officials will wake up before its too late and our government defaults in paying back its loans.   

You often hear government "officials" say that U.S. treasury bills (loans to the government) are backed by "the good faith and credit of the the United States Government."  Try to take "good faith and credit" to the bank...if you fail to pay back a loan.

The  U.S. government is staying solvent by living on borrowed money.  When foreign governments quit loaning the U.S. government money, and when our citizens quit loaning money to our government because the government LOSES that good faith, our government will collapse.  The only way to prevent this calamity is for the government to quit spending money that it does not have OR raise taxes.

The US government is now having to borrow as average of 2.3 Billion Dollar A DAY to keep operating.  The borrowing MUST stop, and the National Debt MUST be paid back or the debt will literally bury us.

The Government can NOT borrow its way out of the Social Security Problem, but it can LOAN its way out of the problem!  Borrowing money to “privatize” part of Social Security is ludicrous.  The interest on the money borrowed to "privatize" part of Social Security would bury us before the Social Security retirees get a cent.

The following chart shows the amount of Social Security receipts, expenditures, net increase during the year, and assets at the end of the year from 1957 through 2007.
 

Trust Fund Data