Topic: Social Security
Social Security, Ponzi Schemes, and the Bush Bullet We Didn't Dodge This is the first of several articles proposing a different solution to the problems of social security in America. Many believe that we dodged a bullet when the congress refused to take up social security reform during President Bush's second term. As bad as investing in Wall Street has been since 2004, the outlook for social security is at least as bad.by Paul Benedict
(libertarian)
Wednesday, January 21, 2009
Recently President Bush revealed during his final press conference that, in hindsight, he wished that he had begun his second term with immigration reform rather than social security reform. Hindsight is also very clear that the congress and the American people were proven prudent in rejecting the notion of transforming Social Security into a national 401K plan. The initial results of such a transformation would have been a disaster. The congressional Republicans would have been thrown out on their collective ears. Imagine that! Despite the fact that the wealthiest Americans supplement their social security benefits with 401K plans, the instability of our financial institutions and the absolute bankruptcy of ethical values on Wall Street and in Washington, has made it plain that serious moves to reform Social Security into an equity portfolio is a course fraught with peril.
Had President Bush successfully reformed Social Security, we would, of course, not be experiencing the world wide financial collapse that cost the Republicans two houses of congress and the White House during a single second term of the Bush presidency. No, the massive infusion of capital into the financial markets would have spawned dozens more reckless, unregulated, financial instruments so deceitful that we would be in a bubble that would last well into our children’s future. We would be in a delirium of euphoric delight over wealth we had on paper while the wickedness of our negligence continued to rot away the fabric of our financial institutions. The ultimate collapse would have dwarfed the calamity we are now, thankfully, forced, in part, to acknowledge. Let a politician even burp an accidentally slushy blerb at an innaugural party that sounds even remotely like Social Security reform and that unfortunate soul will be resoundly excluded from public office for a generation.
Nonetheless, although FDR has avoided a direct comparison with Bernie Madoff, comparisons between Social Security and illegal Ponzi schemespersist. Charles Ponzi, like Bernie Madoff, was guilty of fraud. Ponzi, of roaring 20’s fame, claimed to be passing on the 400% profit he was earning on "postal reply coupons." Bernie Madoff claimed to be passing on the profits from hedge fund investments. In truth both were simply paying initial investors with money taken from later investors. Since Social Security discloses that the benefits it pays retired workers comes directly from the money paid by current workers, it is not, entirely, fraudulent. However, like a Ponzi scheme or a pyramid scheme, Social Security is, by its own definition, impossible to sustain. Like all pyramid schemes, sooner or later Social Security must go broke.
Though the Social Security trustees themselves cannot be called frauds, fine print, often passed over quickly in political sound bites, is filled with ominous double meanings. Even though the government websites about the Social Security trust fund plainly disclose the difference between the "special issue" federally backed securities held in the trust fund and the marketable securities that are widely sought as sound investments, the definitions of Social Security solvency based on any discussion of the trust fund can easily become misleading. Once, the difference between these securities and marketable securities becomes clear, the answer provided by the government that Social Security is solvent until 2041, when the "trust fund reserves are exhauseted", is plagued with ambiguity. The special issue treasury bonds will begin to need "redemption" by about 2017. That’s when "Ponzi shceme" nature of Social Security really kicks in. In fewer than ten years social security will again be, by common bookkeeping practices, technically insolvent. After about 2017 only higher taxes or more government borrowing will allow Social Security benefits to be fully paid.
This social security crisis is not new. Such crises have happened repeatedly, throughout Social Security's history, because of the unsound pyramid scheme nature of the program itself. As one might predict by any common sense analysis of a pyramid scheme, each crisis in the Social Security program has made it more profoundly enslaving to each new generation involved in the program. Rates that began as low as 1% for participants have increased to 6.2% today. Likewise the value of benefits for participants has eroded. This must continue, no matter what "fixes" desperate politicians employ. The program itself must be completely overhauled, completely revised.
Hence, lesson one: we can no more afford Social Security than we can afford to invest with Bernine Madoff. Despite Wall Street’s complete loss of the public’s trust and respect, we have dodged no bullet by avoiding changes to the Social Security system that allows younger workers to have genuine investment accounts that they can leave to their children. The euphoric joy we might have experienced by the influx of payroll taxes into the hands of wicked investment bankers would have been no less illusory than the blessed ignorance politicians are currently bathing us in. Perhaps all future financial planning on a public level should be abandoned. Perhaps employers, state governments, and federal governments should all resist the arrogance that tempts them to think they know what is best for every American worker thirty years into the future. Perhaps we should simply call for the end of all payroll and employer taxes and contributions for retirement programs of any kind. Americans have been fooled too long into believing that the government is wiser than they are when it comes to planning for each American’s retirement. The consequences of liberty include responsibility. Americans might be well advised to demand their financial liberty again by reclaiming their individual responsibility for their own financial futures…
Oh, I forgot… We can’t…That’s lesson two: national debt means something.
For a detailed description of a plan that allows the Median Family (thirty-five or under) to secure their own retirement at higher benefit rates than Social Security promises, while, at the same time, making good the baby-boomer bailout their parents committed them to, see: "Ending Social Security by Applying Payroll Taxes to Primary Residences" by Paul Benedict.
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People ought to be able to realize now that neither parties in dc have our interest at heart. They just want your vote every few year so they can stay in office and work on new campaign donations. Millions of folks are going to be disappointed in the next few year, and they desrve to be. It is actually the American citizens fault, they are too lazy or apthetic to pay attention to what DC has been doing.
hi paul, excellent article. By 2007 the "Social Security Trust Fund" had 2.2 trillion in government bonds. That figure is suppose to double in about eight years and with the bailout who knows what it will do. The fund has been raided by the government to help service the national debt. In that sense the Social Security fund has become just another tax to feed the debt. The Social Security Fund was at its inception a viable mutual insurance fund [of course, inflating the economy also belittles the fund]. The problem is that the federal government itself is what you referred to as a "ponzi" scheme, not the SS system. When push comes to shove, the government will choose its own solvency over that of the Social Security System thereby converting all the former premiums into taxes. I am dwelling on this point because I think the blame needs to be put where it belongs. I don't think people should believe that somehow this lifetime of contributing somehow wasn't enough, the fact is the fund has been pillfered by the same people who are responsible for structuring it.
Posted By: Paul Benedict
Date: 2009-01-22 19:45:54
Hi Gene,
It is important to recognize the fundamental difference between pension plans that are investment based and Social Security. Regular pension plans are individually owned and the benefits, in many cases can be "cashed out" and transferred. In still other retirement plans the invesment that yields the benefits can be transferred to others as a part of an inheritance.
Social Security began as a 1% investment plan, but becuase of the benefits are based on hand over the payrol tax of others, its Ponzi scheme nature has made it a horrendous burden. Self-employed Americans must now pay 12% a year into Social Security. It is the design of Social Security that makes it insolvent, not inflation, not big government.
Big government is not insolvent because it is a Ponzi scheme. Big government is insolvent because it is worse than a teenager with a credit card. No one is ever held accountable for the insolvency. No matter how accountable the Social Security trust fund board members might be, Social Security, by design cannot work.
Hi Paul, social security was designed as a "mutual" pension plan. As long as people are working, the system can work. The only design element is the amount of payment available to those who retire and I wouldn't doubt that this was miscalculated but even if it was, the "surplus", that is available for the future is still trillions of dollars. the problem [beside possible miscalculations] is that the Treasury "steals" the surplus in the form of investing that surplus in treasury securities. so, you have premiums faithfully paid by hard working americans for their retirement, invested in Treasury Securities [which the government uses to fund the government and the debt} which gather interest. The interest comes from the Treasury, the taxpayer, and when the notes are due, it is the taxpayer who must pay the loans back to the Social Security Fund in order to keep the fund solvent! The taxpayer pays upfront for the fund, then pays himself interest on his own money that is spent on the federal budget and then must pay himself back to repay the loan to the SS fund that he originally funded. It is beyond imagination really. absurd! That is why I mentioned the government is protecting its own solvency above that of the Social Security Fund, it will forgive those notes first, bankrupting the SS fund, and in fact the notes are not even accounted as part of the federal debt!
Posted By: Paul Benedict
Date: 2009-01-23 17:58:00
Ponzi scheme, or pyramid scheme is a slight hyperbole. Pyramid schemes start with just one or two people and then multiply exponentially. Social Security started with a small "wave" of beneficiaries buying in at 40 quarters (? -- I think that was the rule from the outset). They were no problem and the burden was light by virtue of the next generation of workers that so outnumbered them. Many workers paying 1% could offer benefits to the first retirees at the 40% quite easily.
The actual problem is that the benefits must be paid from current worker to retiree rather than from current worker to trust fund to worker upon retirement. The "trust fund" is never owned by any current worker (but at 12% of one's salary why not!). Instead, the group owns the fund. Even considering the imaginary "interest" in the trust fund, the number receiving benefits will match so poorly with the number working that in 2042 the numbers won't crunch. However, in reality, since, as you point out Gene, the government is running deficits, there really is no trust fund. Starting very shortly, as of 2017, Social Security will cause increased taxes or increased deficits.
There have been some suggestions about how invested payroll taxes can produce enough wealth that benefits can be given to each worker based on each workers productivity. It may be that there must be pain first, however. Bernie Madoff style pain... perhaps in terms of short term increases in the already unspeakable national debt. Who knows maybe we'll get that cool trillion back from the banks and be able to pay for the transition.
Very true! and inflation, which is created by these very same types of government actions only makes the fund smaller and smaller just when it is needed to be larger! I always thought the whole thing was a hairbrain idea from the start. If people need food or shelter when they are older, why not just pay it out of welfare. the whole huge network is already there, so why not use it? and the extra 14% kept would help a lot of people sustain and not need these public services.
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