What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing since the beginning of the pandemic. The government has spent trillions of dollars on direct stimulus payments, enhanced unemployment benefits and biden's recently passed trillion dollar infrastructure bill. The national debt recently surpassed 30 trillion dollars, which is well in excess of the country's gdp, and it shows no signs of slowing down the non-partisan congressional budget office expects the debt to explode to more than 200 of gdp by 2050 under the current policies. This would make the us one of the most indebted major nations on the planet, while the national debt numbers sound, scary.

America faces another fiscal problem which will be far more difficult to solve. Americans have come to rely on social security and medicare benefits to get them through their retirements and seeing as they've paid into the system their whole lives. It only makes sense that they feel entitled. Retirement is extremely expensive.

The social security and medicare programs are estimated to have liabilities of 96 trillion dollars to pay for current and future retirees. Unfortunately, the social security administration has been obscenely mismanaged and, at the current rate, there's no way they'll be able to make good on these obligations as it turns out. Social security is basically run like a ponzi scheme on the largest scale in human history. For the past century it has worked fine because the demographic trends in america were favorable, but now the demographic trends are changing and there simply won't be enough money to go around in this video.

We'll look at why politicians from both parties have mismanaged the social security administration and it's approaching a breaking point of no return. Quick pause from our sponsors over at masterworks masterworks has emerged as the only platform taking billionaire collectors head on by allowing ordinary investors to invest in fine art. I am a big believer in our as an asset class, both for diversification and as an inflation hedge. It has outpaced the s p, 500 by 174 from 1995 to 2020, while the same time being extremely uncorrelated.

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People had to rely completely on their personal savings to get by. The shortfalls of this system were made painfully august during the great depression, with unemployment reaching 25 people didn't have the means to save for retirement, and many seniors were forced to live in abject poverty. To solve this, president franklin roosevelt signed into law the social security act. The system works as follows: while you're working, you have to pay a certain percentage of your income into the social security system, once you retire at the age of 67, the government will start sending you monthly payments to support you through retirement.

The most important thing to realize about social security is that the money is fungible. This means the dollars you contribute into the program, aren't the same as the dollars that you take out. All the contributions to social security are put into one big pot, which is used to pay for current retirees. The mechanics of the system are very similar to that of a classic ponzi scheme.

Current beneficiaries are paid by new people, contributing once you retire. The money you contributed has already been spent to fund your payments. There has to be new workers contributing to the system by that time, if the population is growing or at least stable, this works fine. There will be an ever increasing number of young working people to contribute into the system.

The most important metric for the health of the social security system is the ratio of workers to retirees. In 1960, there were five workers for every retired person from the 1970s. Through 2010, the ratio was stable at around 3.3, with 3.3 workers contributing to every retiree. The social security administration has more than enough income to pay for their benefits.

However, since 2009 there's been a persistent downtrend in that ratio as of 2013, it has fallen to 2.8 and is even lower. Today from the 1990s through 2007, the fertility rate was about 2, meaning that the average woman is having about 2 births in her lifetime. This is the minimum requirement to sustain the current population, starting in 2008, the fertility rate started to decline rapidly. The coveted pandemic was a further headwind to birth rates, as many people delayed childbirth.

Given the economic uncertainty in 2021, the birth rate stands at just 1.6. The decline in birth rate is largely driven by cultural factors, as gender equality in the workplace has improved. More and more women are deciding to forego childbirth and focus on their careers. At the same time, advances in medical technology have led to steadily increasing life expectancies.

The average american dies at the age of 79 today, which is almost a decade older than the 71 year life expectancy in 1970., social security benefits. Last until the day you die so the longer you live, the greater the financial load you put on the system. The third factor driving the deterioration of the social security system, is a declining labor force participation rate. The participation rate is a percentage of adults who are either employed or actively looking for work from 1950.

Through 1990. Social security got a huge boost from women entering the workforce as social norms changed young women getting jobs, increased the taxes they could collect and for the first few decades it didn't increase the outflows because none of the women had retired. Yet this was a massive benefit for social security's balance of payments. Now the women who started working in the 60s and 70s are finally starting to retire, so this benefit has disappeared.

To make matters worse, the labor force participation rate has been decreasing from a peak of 67 to just 62 today. Part of this can be attributed to the higher percentage of the population being retired, but the problem is deeper than that. Over the past few decades, there's been a steady trend in decreased labor force, participation from prime working age, males, which is males between the ages of 20 and 50. in 1954, 98 of prime age males were either employed or actively looking for employment by 2016.

This had fallen to 88. One potential reason for this is what economists call advances in leisure technology. That's a fancy way of saying video games have gotten better. The proportion of young adults still living with their parents has exploded in recent years with the pandemic.

Accelerating this trend even more, it's increasingly socially acceptable for people to continue living in their parents basements for many years after they turn 18.. In a lot of cases, people give up on looking for work in favor of staying home and playing video games back in the day the labor force participation was much higher. Now the birth rate is going down and people aren't working as much. This can clearly be seen in the social security trust fund surplus.

The surplus is a total tax revenue and interest income minus the benefits that they pay out to retirees. The surplus grew to a peak of 190 billion dollars in 2007, but has declined to roughly break even today and is expected to start running a deficit very soon. The good news is that, because of the previous surpluses, the social security administration has built up a massive trust fund of almost three trillion dollars. If they invested this in the stock market for an average return of eight percent, they would make more than 200 billion dollars of investment income on average per year and social security would probably be solvent.

Unfortunately, 100 of social security's assets are invested in government bonds. Back in the early 2000s, these bonds were yielding about five percent, so it wasn't that bad interest rates have fallen precipitously. Since then, the average interest rate on newly purchased bonds has fallen to less than two percent in 2022.: that's less than inflation, so the real yield is negative. The federal government has effectively forced people to lend the money through their social security taxes.

This helps the government fund its massive budget deficits, but the trade-off is lousy. Investment returns. Social security has built-in cost of living adjustments. This means, as inflation increases the cost of living.

The nominal monthly payments to retirees automatically increases the interest rates. The trust fund makes from its bond portfolio, do not increase with inflation. So, while the 3 trillion trust fund sounds like a lot, you'll be eaten away by inflation every year. At the current trajectory, social security is expected to become insolvent by 2033..

That means there simply won't be enough money to make good on the payments in full. There are a few actions that the government could take to save social security, but none of them seem politically viable. The easiest solution would be to increase the retirement age to reflect the increasing life expectancy or you could decrease the benefits. The problem is older.

People make up a disproportionately high percentage of voters as many young people don't care enough to vote because of this decreasing social security benefits in any way would be a political death sentence for candidates of either party. The other option is to drastically increase payroll taxes from the current rate of 15 percent. The payroll taxes are regressive, meaning that you start paying 15 from the first dollar. You earn increasing payroll taxes would hit the lowest end of the income distribution the hardest, because the insolvency of social security is more than 10 years away.

It's not a top priority for many politicians. The optimal strategy for running a political campaign is to put your head in the sand and ignore the issue. A supreme court ruling from 1960 declared. The government has no contractual obligation to give you your social security benefits when you retire.

When push comes to shove in 2033, there might just not be enough money and you have no legal recourse to demand payment. This is still 10 years away and it's possible. The government can pull a rabbit out of a hat to save the system, but it looks like it's a pretty slim chance. You should probably prepare for the worst assume that you won't receive anything from social security when planning your retirement savings.

Alright guys that wraps it up for this video, do you think the government will be able to save social security before it goes bust? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall. Street millennial signing out.