Why is the social security system in trouble
Are Social Security and Medicare in Trouble?
hi this is Matthew Crowder from trader
University and today I want to talk
about whether Social Security and
Medicare are in trouble I've been
getting these questions a lot and so I
thought I'd do a video just devoted to
these if you're interested in learning
how the economy really works and how to
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sure to hit that subscribe button so if
we take a look at the US debt clock page
here we can see that the largest budget
items in the US federal budget are
Medicare Medicaid Social Security which
we're gonna be talking about defense
slash war and interest on the debt so
let's take a quick look at these
Medicare Medicaid is the largest of all
these a lot of people sometimes think
that Social Security is but it's
actually Medicare one point two eight
five trillion
this covers hospital hospital coverage
medical insurance prescription drug
benefits if you're 65 or older also
younger people with with disabilities
Social Security is the one that
everyone's heard of for retirees and
their families or for the families of
deceased retirees disabled persons as a
much smaller percentage close to 1.1
trillion
obviously defense spending is what it
sounds like point six nine trillion and
I would suggest that a lot of what this
is is just making the world safe not
making the world safe for democracy
necessarily but making the world safe
for the US dollar which is the world
reserve currency you need to have if
you're a world superpower and you have
the world's reserve currency you need to
keep those trade channels open you need
to keep the various straits open keep
the oil flowing and not let the Pirates
take your ships so that would be defense
spending finally this is a very sad one
as well interest on the national debt
three hundred eighty four billion or
0.384 billion now what's interesting and
the reason I add all these up is that if
you add up these for Medicare Medicaid
Social Security defense spending an
interest income or interest expense I
should say on the national debt you end
up with a three point four three
Trillian versus the US government has
only been collecting about three point
two three three point two four trillion
in taxes so you have a situation here
where the four biggest budget items are
greater than than all the tax revenue
that's coming in even after many years
of high capital gains etc and a very
strong rebound in the stock market after
the Kovacic crisis so if we go through
and look at these we can see that these
are basically well they're basically
mandatory items well we'll see what
mandatory means in a minute defense
spending I'm not a huge fan of weapons
and war etc but it does make a certain
amount of practical sense to have a very
strong military if you're a superpower
we can debate whether the US has done
this responsibly I'm not sure that it
has but this is not a budget item that I
expect to see disappearing especially
with the rise of nationalism all these
movements toward anti global ISM and you
know rumblings about war with Russia or
war with China you wouldn't expect this
budget the defense budget to go down in
fact you actually expected to go up
interest on national debt we are not
going to default on our national debt
because we can just print more money
this interest will keep getting paid
obviously at what I would argue is that
Medicare and Medicaid Social Security
these will also not be cut we've seen a
lot of riots in the u.s. obviously for
for different reasons in the last few in
the last few weeks but you can only
imagine what sort of writing you would
get if an entire generation mostly the
baby boomers we're talking about here
we're denied money that they paid into
the system so I think these things are
here to stay US defense spending include
this chart just shows how we spend more
on defense in the next ten countries
defined combined and actually defense
spending as a share of GDP has been
falling over the last few years now we
talked about this term mandatory
spending mandatory spending is another
name for obviously it's spending that
that's
that has to occur under the law and it's
really another word just for entitlement
programs you can may hear entitlement
programs the really big ones as we'll
see our Social Security and Medicare and
they make the bulk of entitlement
spending or mandatory spending account
for nearly 50 percent of the federal
budget as we as we saw now what is
happening the crisis that everyone
always hears about is that beginning
next year the projections are supposed
to be 20/20 and now looks like it will
almost certainly be 2021 and the effects
of kovat obviously probably accelerate
this but the outflows the payments out
of Social Security Medicare it might say
Social Security I'm talking about
Medicare Medicaid as well the outflows
will be greater than the inflows so you
have existing workers paying into the
fund through payroll taxes and then you
have the benefits being paid to retirees
and the most simplest in the simplest
terms they're actually a couple funds
here I'm sort of talking about them all
as one now when you're outflows are
greater than your inflows what you need
to do then is to tap into your reserves
and so Social Security Medicare have a
trust fund of about three trillion so
they're going to need to start drawing
that down this was money that was set
aside it's sitting in US Treasuries and
according to projections which I will
link to this Social Security trust fund
it's actually a number of funds but it's
always recurred to referred to as the
trust fund this will completely run out
by 2035 and at that point
the amount of money that is coming in
will only be something like so I want to
say 75% of the money that's going out
and so Social Security will technically
not be able to pay anyone anymore
retirement benefits or a lot of people
benefits will be cut retirement age will
be raised there all these all these
hypotheses of what would happen here's
the 2020 I guess it's a 2019 report on
Social Security and I will link to this
so you can you can take a look at this
but this Oh a SDI this is the Social
Security trust fund cost is projected to
exceed total income starting in 2021 and
the trust fund reserves will
lying-in though until you become
completely depleted in 2035 now what are
the reasons for this we talked about a
little bit the program was first set up
in 1935 and since then we've had much
lower fertility rates people having
fewer children people haven't below even
the replacement level of children and
also higher life expectancies due to
better medical technology antibiotics
all these things that happened since 19
1935 and so as a result you have fewer
workers because fewer children and then
more retirees so sort of a top-heavy
upside-down pyramid where you need to
support all these retirees with fewer
workers and obviously all the
unemployment caused by kovat these these
COBIT seems to exasperate exacerbate a
lot of these negative trends ageing of
the population we said also especially
due to co vid less payroll taxes being
collected more unemployment in general
also what a lot of people fail to notice
is simply because interest rates have
gone down so much over the last call it
20 years that the fund the trust fund
that truly three trillion dollar trust
fund is actually learn earning less
money than it used to simply because
it's mandated it's required to be
invested in US Treasuries yields have
fallen much lower and so very close to
zero the tenure notice below 1% though
it has rallied a bit the yields of rally
today and so that trust fund is earning
less money here's a great chart of
population predictions for seniors which
which is defined as people over 65
versus people under 18 crossing
somewhere around call it 2032 it looks
like right before 2035 when the Social
Security trust fund is expected to run
out of money now let me show you the way
out of this y-you don't have to really
worry about Social Security or Medicare
being defunded and in order to do that
we have to take a look at how the
government is funding itself right now
it's the federal government in the u.s.
so as we saw the federal government
does not collect enough in taxes in tax
revenues to cover its spending so if we
take a look here US federal tax revenue
this is probably for 2019 over the last
twelve months about three point two
trillion federal spending is now
continuing to go up if we get a couple
more relief kovat relief plans like the
administration is talking about they're
talking about do it another trillion
dollars but even so of this federal
spending is six point three trillion
it's much higher than the tax revenue at
three point to three point two trillion
so what do you do if you don't have
enough money you need to spend it the US
government just like you or me needs to
needs to borrow money so what happens is
Congress goes to the US Treasury and
says we need some money I'm very I'm
simplifying this but trying to make it a
little bit fun so Congress goes the US
Treasury says we need to borrow some
money we need some money because we're
spending we're only bringing in three
trillion and we're spending six trillion
so what the US Treasury does is it sells
US government bonds which are called
Treasuries it sells them at auctions to
the big banks to what are called the
primary dealers or the big banks it
takes the cash from those sales and
gives the cash to Congress the banks get
a piece of paper and may get an IOU from
the government saying I'm going to pay
you some interest I'll pay back the
principal that's what a government bond
is or a Treasury so then get primary
dealers these big big big banks have
these Treasuries on their balance sheets
they own them and they've they've paid
the treasury cash for them so they have
these Treasuries that they need to get
rid of and so traditionally they've sold
them to private citizens I've owned
Treasuries at various points in my life
they sell them to hedge funds they sell
them to foreign investors particularly
Asian investors over the last 20 years
Japanese and Chinese governments in
particular and as we said foreign
governments so it used to be right when
the u.s. went off the gold standard and
everyone went into Fiat Fiat money
European countries used to own a lot of
Treasuries and the European Central
Bank's would buy these Treasuries and
they would hold them as US dollar
reserves there was almost like gold a
modern version of gold but really
less than desirable version of gold but
thereby Treasuries hold them on the
central bank balance sheets then the
Europeans began to do their own thing
especially after the Euro they were less
interested in buying US Treasuries and
so the Asian countries have really taken
over Japan in the 80s and 90s and then
China was brought into the WTO World
Trade Organization 2001 in part is my
belief - so they could really stop up
soak up a lot of these Treasuries
so from 2001 to 2014 we bought a lot of
stuff from China China took those US
dollars that we paid them recycle them
back into US Treasuries bought a lot of
our Treasuries and in that way sort of
sterilized the US debt if you're a US if
you're a government you're selling a lot
of debt you need someone to be a buyer
and so we had all these foreign foreign
investors governments and institutions
foreign banks foreign hedge funds but
mostly foreign central banks that were
buying Treasuries since I believe I want
to say the third quarter of 2014
foreign investors including foreign
central banks have not been net buyers
of Treasuries they've been buying things
like gold instead Russia has been
extremely smart China's been extremely
smart
they stopped buying Treasuries they've
been rolling over their existing
treasury positions but not increasing
them maybe decreasing them slightly and
they've been net buyers of gold instead
but the US Treasury still needs people
to buy these Treasuries and so various
laws have been passed especially in the
wake of the great financial crisis
telling the US banks they have to hold a
lot of Treasuries which is very
convenient if you're a government that
needs to dump your treasury somewhere
u.s. individuals are less I used to hold
a lot of Treasuries in the early 2000s
when they paid about 6%
I had 6% tea bail 6% tenure notes but
now they've been a lot less exciting and
they're less really less exciting to
everyone because the yields are so low
and the stock market has been doing
doing so well so really most Treasuries
since 2014 had been bought by US banks
this is JP Morgan bank of America all
the big other big investment banks
Goldman Sachs and holding them on their
balance sheets also hedge funds do
various risk risk parity strategies and
so they only don't hold a lot of
Treasuries which they can lever up
which they can hold with leverage and
hold them against some mix of equities
etc so instead of foreign investors
buying all these Treasuries it's been
domestic US investors especially banks
big institutional investors hedge funds
pensions etc but what happened is there
have been such high budget deficits
especially over the last four years that
there have been too many Treasuries
issued they've been stuffing them in
every corner that they can they stuffed
the banks full of them they stuffed
private individuals full of them they
stuffed hedge funds full of them and
finally reach the point where they're
just too many Treasuries now hedge funds
when they buy Treasuries they usually
finance it and the big banks offer them
financing but if the big banks
themselves are stuffed full of
Treasuries and actually cannot hold
anymore Treasuries because they need a
certain amount infant super liquid cash
what happens is you have a giant a giant
flood of Treasuries that need to be
stuff somewhere and everywhere there's
no one left to hold them so what
happened as a result of this is
short-term interest rates where'd called
the what's called the repo rate or the
overnight repo rates spiked it went up
to nine or ten percent and this was a
sign that that basically the US
government was issuing too much debt too
much Treasuries no there were no there
were no more foreign investors who could
soak it up there are no more domestic
investors that could soak it up and so
interest rates to hold this stuff spiked
and when you get the repo rate spike and
what that means is that every interest
rate has to move up if you allow it to
stay up so a nine or ten percent repo
rate would mean a 12 or 13 percent US
Treasury ten-year note rate which would
mean you'd have about a fourteen or
fifteen percent mortgage and a 20
percent car loan these sort of numbers
wouldn't work that completely tanked the
economy and so what happened in the
third quarter of 2019 the Federal
Reserve the central bank in the US had
to actually start to step in and start
buying these Treasuries there was no one
else left to buy them there was no one
else in the solar system
everyone had enough of them so the
central bank basically made up some new
money printed new dollars and started
buying Treasuries
we can see this happening in this chart
right here where for 2018 that they'd
actually the US central bank the Federal
Reserve had been selling off their
Treasuries and then you can see that got
to the lows in about August of 2019 and
then when the repo crisis hit they had
to start buying Treasuries and then of
course when the kovat crisis hit they
had to really start buying Treasuries
and when they were letting these
Treasuries roll off their balance sheet
we had a very weak stock market in 2018
whence they started buying Treasuries
again the stock market has really gone
straight up with the exception of a one
or two month crash after Kovic but
basically you essica stock mark is
highly correlated to the US Treasury
that to the US central bank the Federal
Reserve buying Treasuries so no more
domestic buyers no more foreign buyers
no more buyers from outer space and so
the Federal Reserve had to start buying
Treasuries so how does this work why as
we said the Fed creates the Federal
Reserve creates new money out of nothing
just prints new new US dollars in this
case digital dollars buys Treasuries
from the big banks the primary deal
dealers the primary primary dealers buy
these treasures from the US Treasury and
the US Treasury gives the cash to
Congress to spend so this is what's
going to happen for your trade your
Social Security Medicare checks the Fed
is just gonna print new money give it to
the primary dealers who give it to the
Treasury who give it to the US Congress
who will who will spend it on your
Social Security and Medicare tricks I
can't remember maybe these checks come
directly from and they must come from
the Social Security Administration but
either way this money is printed it gets
to Congress or the Social Security
Administration and then is sent to you
in the mail or sent directly to your
bank account so this is a way in which
new dollars they've created out of
nowhere are going into your bank account
and so if you were running things would
you just say to all the retirees well we
don't have enough money we're gonna cut
your benefits you're not even get as
much money out as you paid in of course
you wouldn't say that this is a very
sneaky way you can keep the checks going
there's no politician there's no
Congress person who is going to risk
re-election by cutting Social Security
or Medicare benefits and so we're gonna
have this very sneaky thing where we're
creating new dollars out of nothing and
they are being funneled into the
entitlement programs like Social
Security and Medicare now this is good
for retirees but it is bad it's also bad
for everyone as a whole because you'll
get your retirement checks but they
won't buy you as much purchasing power
of the US dollar will go down as we
print more dollars and this is one
reason I'm so bullish on gold and
especially on Bitcoin now remember these
are mandatory spending programs these
are entitlement programs this money has
to be spent and as I said no one is
gonna risk their political career by
going after by trying to hurt retirees
many of whom are quite wealthy and have
political power and have a lot of free
time to organize for example to keep
people out of office so it's much easier
to do this very sneaky thing that people
don't understand just have the the
central bank print more money use it to
sterilize or monetize the US debt and
give checks to retirees in the context
of this stocks will go up gold will go
up Bitcoin will go up but the question
is will they go up enough to offset the
loss of purchasing power in the dollar
I think gold and Bitcoin definitely well
stocks may or may not but this is a
really long way of saying that yes your
Social Security Medicare is going to be
there for you it's very unlikely that
anything gets it gets cut maybe there's
a slight adjustment to retirement ages
they could adjust the you know
sixty-five to sixty-seven or they could
change early retirement they can fiddle
around at the edges but I would suggest
that they don't even need to simply
because as Ben Bernanke the old FOMC
chair said we have a technology in the
u.s. called a printing press and we can
print newest all new US dollars and what
will happen is the Federal Reserve will
read didn't need to really continue to
increase its holding of you holdings of
US Treasuries just in the summer of last
year they are down to about two trillion
US Treasuries now they're almost double
that they've gone from two TRO
to Fort Riley just let those numbers
sicken it's absolutely unbelievable and
with every new bailout package with
every new fiscal stimulus package when
Congress says we're gonna inject another
when the President or Congress or both
of them working together say they're
gonna inject another trillion dollars
into the US economy this money is not
coming from taxes it's not coming from
anything it's coming from the Federal
Reserve
who's gonna print more money buy more
Treasuries cash will go to the to the US
Treasury and to Congress and will get
spent so when you hear about when you
hear about fiscal stimulus versus
monetary stimulus they're now basically
the same thing simply because all fiscal
stimulus is monetary stimulus this money
needs to be printed by the Federal
Reserve even if you taxed I think even
if you text every billionaire in the
United States at a hundred percent just
text 100 percent of their income or even
did wealth confiscation taxes some sort
of wealth net worth tax it's not gonna
be enough money the Fed is gonna have to
keep printing probably for the rest of
our lifetimes or until the US currency
is no longer the US the the world
reserve currency hit that subscribe and
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hope you're all doing well and I'll see
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