Sam is a bit of a wheeler-dealer. He has interests in a multitude of businesses. He seems to be able to keep up with them all. His neighbors resent his expansiveness. They are bothered by his success. "He's a high roller," some say. Others whisper, behind his back, that he borrows too much money from too many lenders. Someday, they say, he'll get into trouble.
Even so, when Sam enters a room, he has everyone's attention. He tends to get his way. Those who are close to him say his heart is in the right place. Those who aren't so close aren't so sure.
Sue is a very different kind of person. She's quiet. She's interested in security. She's cautious. She doesn't talk much. If Sam and Sue visit, you'll know a lot more about Sam at the end of the evening than you will know about Sue.
Nonetheless, Sue is very people oriented. Unlike Sam, she has devoted her work life to a single business. She provides a service for the elderly and disabled. While her business has grown rapidly, it is still much smaller than the razzle-dazzle collection of businesses that Sam runs.
Sue doesn't like to borrow money. She also doesn't like investing it. She wants her investments to be castle-keep safe. If she could, she would keep her savings in a coffee can, but she knows that doesn't make sense.
So she asks Sam to invest for her. "I don't want to take risks. I don't want to make the top return," she tells him, "I just want the money to be safe. I also want it to be available when I need it."
"I understand," Sam tells her, "So you shouldn't invest it in any of my businesses. This is what we'll do. I'll give you an IOU each time you give me money. I'll pay you interest on each IOU. That way you'll know how much money you have. It will grow every year. You would probably do better investing elsewhere, but you'll know your money is safe with me."
This arrangement works fine for years. Sue gives Sam money. Sam gives Sue an IOU.
Then he tells her how much her interest has increased her savings.
Then, as planned, Sue needs to redeem some of the IOUs.
"I haven't got the money," Sam confesses. "It's all been used in my businesses. I can't get it out. In fact, I'm having to borrow money--- a lot of money--- just to keep my businesses going."
"Gee, Sam, that isn't the arrangement we made. You said the money would be available when I needed it. Can you borrow some extra money and redeem some of your IOUs? If you don't, I'll be in a real jam," Sue tells Sam.
"I'll try," Sam answers.
For the first time, they visit a lender together. "Are you aware that you are insolvent?" the lender asks.
"Who's insolvent?" Sue says, "I have plenty of money. Sam owes it to me."
"I'm sorry," the lender responds, "but it doesn't work that way. We see you and Sam as a unit. Sam's IOUs may be an asset to you but they are also a liability of his. From my chair, your asset and his liability cancel each other."
"Can I sell the IOUs to someone else?" Sue asks, a little desperate.
"To whom? Sam already owes money everywhere. A buyer would only pay pennies on the dollar because he knows he'll have to collect the money from Sam," the lender explains.
"My interest as a lender is how you, as a couple, will pay back the money you want to borrow from me. Your marital arrangements aren't my concern. To me, it looks as though Sue needs money and can't get it from Sam. And Sam needs so much new money he won't be able to pay back what he's already borrowed.
"If we lend Sam any money at all, it will have a lot of strings attached. It's doubtful, for instance, that we would allow him to pay off any of his IOUs to you before he paid off his debt to us," the lender said.
Is this just another overspending couple?
It is until you start adding lots of zeros to the numbers.
As this is written, Social Security (AKA Sue) holds over a trillion dollars in IOUs from Uncle Sam (AKA Sam). Social Security, still trusting Uncle Sam, is currently telling its clients that its IOU collection (the Social Security Trust fund) won't be exhausted until 2042.
The important date, however, isn't 2042. It's sometime between 2013 and 2018. That's when Social Security and Medicare will start to pay out more in benefits than they collect in employment taxes. That's when Sue will go to Sam and ask to redeem some IOUs.
Related Web Sites:
Status of the Social Security and Medicare Programs, 2003
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