From The Founder's Desk
columnist: Walt Thiessen

Topic: Social Security
Social Insecurity

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The Bush administration can't even handle this issue right. We need an opt-out system, and we need it quick.

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by Walt Thiessen
(libertarian)
Monday, September 24, 2007

The Associated Press is reporting that Treasury Secretary Henry Paulson is calling for a combination of tax increases and benefit cuts in order to solve the coming Social Security crisis. The truly bizarre part of the article is the end which states:

"The Treasury paper said that there was a 'significant cost of delay' in making the necessary reforms to Social Security because it reduced the number of people who would be able to share in the burden of reform.

"'Not taking action is thus unfair to future generations,' the paper said."

Let me see if I've got this straight. It's fair to cut benefits and increase taxes now because it's unfair to future generations if we wait to do this, and this is the same program that he wants us to be forced to contribute to indefinitely?

You're wrong, Mr. Secretary. It's unfair to make people pay into such a program at all. Of course, force of this kind is a central feature of the Social Security program.

The article also mentions:

"Bush put forward a Social Security reform plan in 2005 that focused on creation of private accounts for younger workers but that proposal never came up for a vote in Congress, with Democrats heavily opposed and few Republicans embracing the idea."

That's a distortion of the truth. What Bush really wanted to do was to create an alternative government program that workers could select to contribute to instead of Social Security. Bush's new program would still be government managed. Presumably, you and I can't be responsible for managing our own retirement savings, but a government which repeatedly and consistently mismanages its other financial affairs can be trusted with managing your retirement account. This was Bush's idea of "private." A truly private alternative would have been to allow people to opt out entirely, but that point seems to be beyond Bush's comprehension.

If anyone needed final proof that Social Security is already bankrupt (and has been for quite some time), this fact should do it. The only reason the politicians want to force everyone to stay in the Ponzi scheme is to be able to force current workers to pay more and more each year for upcoming baby boomer retirements, while boomers collect less and less.

I was born near the end of the baby boom in 1957. Where will Social Security be by the time I reach age 65 in 2022? I'll tell you where it's going to be. It's going to be in bankruptcy, and that's regardless of whether the majority get their way or Bush gets his way. It'll be bankrupt no matter which way we look at it.

2017 is the year that even under the most rosy assumptions Social Security starts running a deficit. By the time I'm ready to retire in 2022, it's almost a sure thing that they won't have the money, meaning I'll be forced to keep working until age 70 or more before I can collect some of the many tens of thousands of dollars that have been stolen from me over the years I've worked for a living. By the time I'm 65, these same rosy predictions state that Social Security will be running a $100 billion a year deficit. By the time I'm 75, that annual deficit will have tripled.

Given all that, I'm among those who would be harmed the most if younger workers were allowed to opt out of Social Security. So why do I favor letting them opt out? I favor it because the cycle of theft must be stopped, and if I have to be among those who pay the highest price for stopping it, so be it. I'm willing for my generation to pay that price so that future generations can avoid it entirely and forever.

Social Security is and always has been a Ponzi scheme. Named for Italian immigrant Charles Ponzi (1882-1949), a Ponzi scheme is a swindle where great returns on investment are promised without having a sufficient mechanism for creating new wealth to support those returns. They inevitably fail because the returns are based on fraudulent efforts that can't be continued indefinitely. Social Security was just such a scheme from the moment it was introduced.

The Social Security Administration (SSA) rejects this claim, saying that Social Security is more accurately a pipeline investment system where you pay into the system money which comes out in benefits to those that are in retirement. Then, as you move to the other end of the pipe, you start collecting what younger people at the first end are putting in. SSA argues that this makes it a sustainable, and therefore justified, system of investment.

There are two major problems with this assessment, of course.

1. Social Security is not an investment. In this sense, it is a retirement protection racket. You pay into it or else. Investments, by definition, are voluntary. They are selected financial instruments that one chooses to put one's money into, in hopes of earning a return while recapturing the initial investment. If one doesn't like the investment, then he or she doesn't invest in it. Only a very distorted reading of the word "investment" could conclude that a captive population of workers is "investing" whether they want to or not!
2. SSA's argument assumes that benefits remain stable at about the same financial amount as what you put in. In other words, by putting $100 into the program in 1970, you can pull $100 out by 2010. SSA describes this by saying, "As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out," then SSA declares that its system is stable and sustainable. The biggest problem with their argument is that Social Security was never intended to be even "roughly" equal at both ends. From day one, the so-called "investment" was intended to increase in value. It was sold to the public as a way to increase their "savings" toward a golden future retirement.

So how did SSA get away with increasing benefits over time? Simple. They took advantage of the fact that the population was also increasing steadily so that the program could afford to pay out larger and larger benefits over time.

A five-year-old could see the flaw in this. If the population stops growing, then the system can't keep up. What made matters worse was the baby boom generation supplied an enormous increase in available workers, precisely at a time during the 1970's thru 1990's when politicians voted repeatedly to boost Social Security benefits in order to gain senior citizen votes. These benefits have been usually framed as "cost of living increases." Of course, a pipeline system that produces no wealth can't support "cost of living increases" because there is no wealth production in the system. An increased quantity of money does NOT necessarily mean an increase in value, and it certainly doesn't mean there is any return on the investment! That's the lesson that Ponzi taught us, but which our civic leaders have never learned. After all, such increases can also be caused by simply having more people pour in money, with no actual wealth production at all! That's what has happened over the years with Social Security.

By definition such a system is bankrupt from day one. The problem is that the bankruptcy may not be noticed in dollars and cents for many years, because it can take years for the inevitable shortfall to show up, but show up it will...you can take that to the bank (if there's anything left at that point).

Those same baby boomers (myself included) who the politicians depended upon to keep feeding their "cost of living" increases are now becoming the problem. Instead of paying that money out in cost-of-living, the "increased" money should have been socked away for the time that the baby boomers retire, since there was bound to come a time when they would retire, and the next generation of workers would not have sufficient numbers to keep the whole, insane fraud lurching along.

That's where we're at now. The amount of money coming out of the "pipeline" won't even reach what was put in by the retirees while they were still working, and the shortfall point begins in 2017.

Yet, as bad as all that is, it still doesn't capture the whole problem, because from day one none of the money that is put into the system actually produces any new wealth. Even putting that same money into a simple, low-rate bank savings account would actually produce wealth, through the interest collected on loans made from that saved money. Social Security produces no wealth, so it actually underperforms a simple bank account.

This leads to an inevitable question. Why would anyone want to continue such a tragically and fatally flawed system? The reason is that millions of retired people are financially dependent on that flawed system, and the politicians don't want to lose their votes. Thus, no one wants to be the one to "fix" it, since any "fix" must inevitably hurt some combination of retired people, workers in their middle years, and/or younger workers. In other words, this "pain" is the inevitable shortfall that the fraudulent system creates.

Our parents and grandparents who voted for the politicians who instituted and supported this system are to blame, of course, as are those particular old-time politicians themselves. The leading architect of the system, one Franklin Delano Roosevelt, is still heralded as a hero, although he should be derided as a fraud. Most of those people are dead now, and the rest are in their late retirement. By the time the spam hits the fan, they'll all be dead.

So it's up to our generation. We were hoodwinked (and we continue to be hoodwinked) into politically supporting this swindle. If we bite the bullet, we can bring it to a permanent end. I only wish I could say with confidence that I think we'll bite that bullet. We won't...but we should. It would be the right thing to do.

The really bad part is that if we don't bite the bullet, then the next generation gets the same decision, only with worse consequences. And the generation that follows gets the shaft. They get screwed. Meanwhile, the deficit will keep getting larger and larger.

By the way, those even rosier projections that things will even out for Social Security by 2062 can be tossed out the window. As U.S. Comptroller David Walker is pointing out this year, by around 2040 the entire Federal budget will have to be used to pay interest on the national debt and nothing else. There will be no money left at that point for Social Security, or Medicare, or any of the other government boondoggles. Game over. Bankruptcy. Massive financial catastrophe.

Personally, I suspect that the whole house of cards known as big government will come tumbling to the ground long before then, but I can't prove it.

So what's the solution? It's two-fold.

1. We have to admit that Social Security is fundamentally flawed and that our first goal should be to eliminate it.
2. While we're working on eliminating it, we should reduce the pain to future generations by allowing them to opt out.

Here comes the inevitable scream from opponents. "But what about people who are dependent on Social Security now and in years to come? Some people can't live without it. Do you want homeless elderly on your conscience?"

I must be heartless to want this, right? But that's not the way I look at it. Yes, there will be tremendous hardship now. I'm comparing that hardship to what's coming down the road. If you think the pain is bad now, just wait until you see how bad it's going to be in 2040 when all the money goes toward paying interest on the national debt!

As the old gas station commercial used to say, "You can pay me now, or you can pay me later." The inference of course is that the "later" will be much more expensive than the "now". It was true for people who didn't change their oil filters who ended up having to get their engines rebuilt, and it's also true for people dealing with the pain of sacrificing their benefits now while taking whatever earning years they have left to keep social security deductions for themselves and put them into an IRA account, as opposed to dealing with the pain of NO benefits later and leaving all of us bankrupt.

The fact is that we need the time that an opt-out program would give us to transition away from a Social Security system. An "opt out" option would serve as a pressure release valve that would signal that the crisis is real now, that the pain is real now, and that the only truly sustainable long-term solution is still reachable and achievable...private retirement investment. But without that release valve, we will face a human catastrophe later on down the line, and that line is running out a lot faster than people think.

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©2007 Walt Thiessen, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Monday, September 24, 2007
Last modified: Monday, September 24, 2007

The views expressed in this article are those of Walt Thiessen only and do not represent the views of Nolan Chart, LLC or its affiliates. Walt Thiessen is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.

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