Editors Note: Walter Daniels is a founder of and principal in the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.It couldn’t be stated in plainer English. The following is a recent quote from Jo Anne Barnhart, Commissioner of the Social Security Administration (SSA):

“…the Social Security System is facing serious future financial problems, and action is needed soon to make sure that the system is sound when today’s workers are ready for retirement.”

Commissioner Barnhart goes on:

“Unless action is taken soon to strengthen Social Security, in just 14 years we will begin paying more in benefits than we collect in taxes. Without changes by 2042 the Social Security Trust Fund will be exhausted…At that point there will be enough money to pay only 73 cents for each dollar of scheduled benefits.”

These figures were provided by the actuaries of the SSA based on the intermediate assumptions from the Social Security Trustees’ Annual Report to the Congress.

For years politicians have led citizens to believe that there is this thing called the Social Security “Trust” Fund that is like a savings account into which you pay and out of which monies will be withdrawn later to pay for your retirement. Nothing could be farther from the truth. The Trust Fund is merely a repository for a transfer tax in which one generation is taxed to pay for retirement benefits for the next generation. Unlike your IRA or 401(k) account, there is no body of money that is built up and reserved…there are no savings involved.

Commissioner Barnhart is at least honest about it. In her words:

“Today there are almost 36 million Americans age 65 or older. Their Social Security retirement benefits are funded by today’s workers and employers who jointly pay social security taxes…just as the money they paid into Social Security was used to pay benefits to those who retired before them… by 2042 … the number of Americans 65 or older is expected to have doubled. There won’t be enough younger people working to pay all of the benefits owed to those who are retiring.”

So what does this mean?

One.These numbers are based on intermediate estimates provided by bureaucrats to politicians. It could be worse, and you know what Mr. Murphy has to say about that.

Two: Since the problem is estimated to hit 14 years out, most politicians won’t have the will to address it now. Don’t assume the problem will get fixed in the short term.

Three: The fix, if any, will mean higher social security taxes for businesses and individuals because the powerful AARP vote won’t allow benefits to be cut.

Four: If you are 45-55 you will be hit with a triple whammy:

  • You will have paid for current retirees, then you will likely have to pay more for current retirees, and then you won’t be able to receive the benefits that you have been led to expect. As Commissioner Barnhart stated: “We can’t provide your actual benefit amount until you apply for benefits. And that amount may differ from the estimates because … the law governing benefits may change.”

  • Because you may be taxed more to pay more benefits for the current retirees, you will have less to save for your own retirement

  • If you do save to protect yourself, you will likely be taxed on your capital appreciation when you draw it out so that benefits can be provided to those that didn’t save.
  • Five: If you are below forty-five, you need to realize that there aren’t enough of you to take care of the generation before you, so you already have a tough burden to carry. This is on top of the burden of paying for the massive trillion-dollar-plus governmental deficits that have been incurred in recent years. In addition, you also will not be able to rely on Social Security since you will be paying into a Trust Fund that is bankrupt at the time you are paying in. That means you will need to save for your own retirement and won’t be able to rely on the government to bail you out.

    I have been an employer for many years and have consistently noticed that young employees would rather have more salary and less retirement benefits like employer contributions to 401(k) plans. This is natural and normal, but not wise, and the need for a reality check in light of Commissioner Barnhart’s admonition is paramount: “Social Security can’t do it all. You will also need other savings, investments, pensions or retirement accounts to make sure you have enough money to live comfortably when you retire.”

    So buy less expensive cars and start now with personal savings program if you haven’t already.

    Six: I believe the historical Social Security charade is biggest political fraud in America — it makes Enron look like child’s play. Think about it: an expected gap of 30% of Social Security benefits for all Americans. If you are below 55, you need to speak with your vote to make sure that your elected officials are objective and responsible in dealing with this problem. Otherwise you will be either leaving or facing an intolerable legacy. I, for one, don’t want to stick my kids with this baggage.

    Seven:. Private saving, by the way, is good. It enables capital formation and investment in our economy that in turn enables our economy to grow and sustain itself. In the final analysis, wealth has to be created in order for it to be drawn upon to fund social benefits. Without capital formation it is hard for wealth to be created. It is personal savings that enable most entrepreneurs to take their first step. It is out of prior wealth creation and savings that today’s angel investors have provided seed funding for our most promising young companies that will likely be the employers of future generations. Similarly, it is the alternative investment allocations of pension funds that in turn fund most venture capital firms that provide the bulk of investment capital for growth companies.

    Alternatively, if the government merely borrows money to fund the Social Security deficit, the government will be pulling capital out of the market that would otherwise go to investment.

    Yes, part of what I am saying is that we will have to save and invest our way out of this mess.

    Eight: This problem affects the technology industry and every other industry as well. If you are in the technology industry or if you are thinking about starting your own technology company, read item 7 above again. The Social Security problem affects us all.

    Technology leaders are too often inward focused. It is important for leaders in the technology community to pay attention to this broad issue and to step up to the table in the political arena to make sure the problem is addressed responsibly. The sooner the better, as the bombs will start going off just beyond the life cycle of one venture capital fund.

    Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. Walter Daniels concentrates his practice in the representation of rapidly growing companies, most of which are technology-based. He serves on the Board of Directors of the Council for Entrepreneurial Development and the Statewide Advisory Board for the North Carolina Small Business and Technology Development Center. Questions or Comments can be sent to wdaniels@d2vlaw.com.