If you are an email subscriber to Kung Fu Finance (thank you!), and are not simply viewing this article on the website, then you have probably read my free report on the #1 threat to your financial future and 3 proactive steps you can take right now to begin your journey to financial independence.
And if you’ve been reading for any length of time, you know my stance on financial independence and how important I feel it is, particularly given our fragile global economic situation (and especially if you are still years from retirement).
What is financial independence?
It is simply the opposite of financial dependence:
“Not relying on your government, your employer, your financial advisor, nor anyone other than your “own sweet self” to take care of you in your retirement.”
I’ve always been a strong advocate for personal responsibility and for taking charge of your own financial future, but today I read something that underscores the importance of this once again.
Some quick back story:
On Friday I attempted to answer a question from Jeremy from Australia about the impact of China’s lessening demand for Australia’s mining exports on the Australian economy, and whether or not the U.S. would truly be in a better position than any other country if China does slow down, because China is a huge buyer of our debt (so if they stopped buying our debt, who would pick up the slack other than the Federal Reserve, and wouldn’t this therefore imply a devaluation of the U.S. dollar?). Smart guy, that Jeremy! 🙂
I attempted to answer Jeremy’s question, but although I intuitively knew who the largest holders of U.S. debt were, I couldn’t find the data to support it (which always bothers me tremendously).
So, I dug into the quest to find the answer to the question “who are the largest holders of U.S. debt?” this week (because yes, I am a total finance-geek :)) and here is what I found:
The Top 5 Holders of U.S. Debt (with thanks to CNBC):
5. Japan: $1.083 trillion
4. Savings Bonds & Other Investors: $1.102 trillion (as of 4Q’2011)
(Includes individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts, estates, savings bonds, and corporate and non-corporate businesses)
3. China: $1.169 trillion (The largest foreign holder of US Treasury securities)
2. U.S. Federal Reserve: $1.659 trillion (as of 5/24/2012)
And the #1 Holder of U.S. Debt is…
1. Our very own Social Security Trust Fund, with $2.67 trillion in U.S. Debt!
Yes, that is correct…the U.S. Social Security Trust Fund, or OASDI (Old-Age and Survivors Insurance and Disability Insurance funds) holds over $1 trillion more in U.S. debt than does the Federal Reserve!
Now, while U.S. Treasury bonds could perhaps be a decent investment in the very-near-term due to the continued fallout from the global economic crisis (or “slow-down”, as the mainstream media would have you believe), I just don’t see how anyone can see them as a tremendous long-term investment right now.
But what do most people who have followed traditional advice from mainstream financial planners count on to take care of them in their retirement, at least in part?
Yes, that’s right…Social Security.
It’s one of the core “legs” in that hallowed “three-legged stool” of retirement (Social Security, Employer Pension, Personal Savings):
Now there has long been a debate over whether or not Social Security is in fact bankrupt (I believe it is), and when if ever the money will “run out” (I believe it will, and unfortunately sooner rather than later), and sure enough, today I read an update on the Social Security Administration’s website that confirmed my worst fears…
Here is a quick excerpt from the Social Security Administration itself, on their 2012 Annual Reports:
“Message to the Public:
This message summarizes our 2012 Annual Reports. The long-run actuarial deficits of the Social Security and Medicare programs worsened in 2012…largely because of the incorporation of updated economic data and assumptions. Both Medicare and Social Security cannot sustain projected long-run program costs under currently scheduled financing, and legislative modifications are necessary to avoid disruptive consequences for beneficiaries and taxpayers.
Lawmakers should not delay addressing the long-run financial challenges facing Social Security and Medicare. If they take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.” – Social Security Website (emphasis mine)
It used to just be crazy “conspiracy theorists” who thought that Social Security was in trouble.
Heck, Paul Krugman (I know, I know…) assured us in the New York Times back in 2008,
“The only way Social Security gets in trouble is if Congress votes not to honor U.S. government bonds held by Social Security. That’s not going to happen.” — Paul Krugman, Crazy Keynesian Economist
But that should have been our first clue…
Believe me, if there is one thing I have learned on my own journey to financial independence in the last ten or so years, when a politician (or in this case, a Nobel-laureate economist) declares that something is “NOT GOING TO HAPPEN”, it’s only a matter of time before it does.
It’s the classic contrarian signal!
Consider a few infamous quotes from our very own Ben Bernanke:
(October 20, 2005) “House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.”
KFG: (Um, not so much.)
(February 15, 2006) “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”
KFG: (Um, not so much.)
(January 10, 2008) “The Federal Reserve is not currently forecasting a recession.”
KFG: (Correct! It is actually a depression, not a recession)
(When asked directly during a congressional hearing if the Federal Reserve would monetize U.S. government debt) “The Federal Reserve will not monetize the debt.”
KFG: (Um, consider TARP, QEx, Operation Twist…)
The Social Security Administration also provides us with this helpful chart, if you scroll waaaay down the page:
Yep, I’m out of luck…the furthest date out I see here is 2035, which is the year the trust funds are “exhausted”, and I don’t turn 65 until 2038. So much for Social Security!
And a bit further down the SSA Public Trustees issue their own statement:
“The Social Security outlook has worsened significantly relative to last year’s report. The actuarial deficit in its combined trust funds is now 2.67 percent of taxable payroll, the highest recorded since the last major Social Security financing reforms roughly three decades ago…
The combined Social Security trust funds’ balance continues to grow in nominal terms, but has been declining generally relative to the total cost of paying benefits since 2008, and will be shrinking after 2012 in real (inflation adjusted) terms. Thus by almost any objective measure, the financial health of the Social Security system has entered a concerning decline.”
Why are we not seeing this in the mainstream media?
I do not mean to be a “doom and gloomer” (honestly) but I truly believe that you don’t have the luxury anymore of depending on anyone other than yourself (or perhaps your awesome family, if you should be so lucky…) to take care of you!
It’s time to seize the bull by its horns and declare your financial independence from whichever country you may hail from…unfortunately, it’s no longer a luxury…it’s a necessity!
Please let me know what you think in the comments and if I am right on target or way off base… I truly appreciate your input!
Thanks so much, and let’s get started on building our wealth chests!
And more kung fu ways on exactly how to do that coming soon…
To your financial success,
— Kung Fu Girl