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Social Insecurity: Inside the 'Trust Fund' Illusion

By Charles Hugh Smith, DailyFinance

NEW YORK (DailyFinance) -- The recent tax deal approved by Congress and the president cut the payroll taxes that employees will contribute to Social Security for 2011 by about a third, and that $112 billion reduction in receipts has advocates of the program worried that the political meddling in Social Security's finances may threaten its viability.

Unfortunately, the Social Security Administration's (SSA) finances have been meddled with for decades, and a one-year tax holiday is the least of the program's problems. As I reported on DailyFinance this week, Social Security is already deep in the red, with outlays exceeding payroll tax revenues by $76 billion in 2010 -- a deficit that wasn't expected to occur until 2018.

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Though the program's trustees continue to reassure the public that Social Security's funding is secure through 2037, rising outlays and slumping revenues -- not even counting the "tax holiday" cut -- call that rosy outlook into question. And the trustees' short-term projections have been so far off the mark that the validity of their longer-term estimates must also be in doubt. Their estimate of total revenues was too high by $50 billion in 2010, and their estimate for 2011 income is $855 billion -- fully $114 billion more than the system's 2010 income.

It would require a stupendous increase in employment to hit that mark, and precious little evidence suggests such a powerful hiring boom is in the works. Instead, there's plenty of evidence that the current recovery is a jobless one: 9 million jobs -- 8% of all private-sector jobs -- have vanished since 2008, and another 8% more have slipped from full-time to part-time or temporary. America's millions of self-employed, freelance and contract workers have seen their incomes decline by 5%.

But if payroll taxes don't rebound strongly in 2011 and beyond, the long-term viability of Social Security will be in doubt, because with the baby boomers beginning to retire en masse, the number of people receiving benefits is climbing rapidly.

About One-Fifth of the Federal Budget

To understand the basics of Social Security's cloudy future, we need a quick refresher on the system.

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