Tuesday, September 6, 2011

The Truth about Social Security

Everyone knows that Social Security is a Ponzi scheme, correct? The system takes in current FICA ("Federal Insurance Contribution Act") taxes from workers and their employers and uses those proceeds to make the current pension payments to retirees. When those who are paying in FICA tax eventually retire, they will be paid their pensions only if there continues to be enough FICA income at that time from people then working. If the FICA income in the future is insufficient, the Government's only alternatives will be to (a) borrow the shortfall in the private market; (b) raise the FICA tax on all workers, and/or raise the retirement age at which pensions will begin, in order to make the FICA money go farther; (c) print the money and risk inflation, which would make the pensions worthless; or (d) simply default, and pay retirees only a certain fraction of what they are owed, such as thirty cents on the dollar.

Although in the back of our minds we all know these facts, we tend to ignore them, as they are inconvenient facts we would rather not deal with right now. The system -- for now, at least -- is functioning, right? Social Security is taking in more than what it has to pay out, and is investing the difference in government bonds (IOUs), so what could go wrong? Well, the fact is that since last year (2010), the system has been paying out more than it takes in.

How is it able to do this? Please read Dean Kalahar's brutally frank and honest description of the Social Security system for the straight scoop. Here is an excerpt:
When the bonds mature, they are rolled over into new bonds that include both the original value and any interest due. In short, the government confiscates the public's hard earned money, writes an IOU from one branch of government to another, then - and this is important - pays off worthless IOU's that have interest attached with newer worthless IOU's so as to make it appear as if the trust fund is solvent. It's accounting magic!

The real wealth earned from hard working Americans, exchanged for worthless bonds, goes into the general fund of the Treasury where it is spent as fast as it is confiscated by politicians. Sadly, as everyone knows, you cannot spend and save the same money.

In fact, the Social Security trust fund is actually a white metal file cabinet at the Parkersburg offices of the Treasury Department's Bureau of the Public Debt in Martinsburg, WV. When the federal government takes the cash coming into Social Security, it writes the trust fund a bond on a laser printer located at the bureau. It is then stored in a three-ring binder and locked in the bottom drawer of a fireproof filing cabinet.

The entire retirement future of America is in that drawer. One bond is for $15.1 billion and another is just under $10.7 billion. In all, the agency has about $2.5 trillion in bonds sitting in the binder. . .
Now do you see what is happening? Starting this year, in 2011, the SSA is taking some of those bonds out of its binder in the fireproof filing cabinet, and presenting them to the United States Treasury for redemption in dollars of the realm, in order to send them out as checks to retirees. And where will the Treasury come up with those dollars? Well, to start with, it will sell more of its own bonds in the private market, giving its IOUs to investors in exchange for their dollars, which it will use to redeem the SSA's bonds.

The demands for SSA payouts, however, will grow larger and larger as more and more of the Baby Boomer generation reaches retirement age. Eventually, they will overwhelm the ability of the Treasury to redeem the SSA's bonds. But even if the Treasury somehow manages to redeem all of SSA's bonds in that filing cabinet, what will happen when the filing cabinet is empty, and the SSA has run out of bonds to redeem?

At that point, the Ponzi scheme will be over, having ended in the same way that all such schemes do. The demands on it for payment will exceed the scheme's ability to take in revenues with which to pay out what is required to keep the scheme going.

So the question is: why do we put up with this masquerade, this huckster show, this flimflam operation? Because the politicians have for all these years denied the fact that Social Security is a Ponzi scheme, and now they are cowards to admit that they have all along been lying to us. Our current politicians are like rats on a sinking ship -- while the ship is now full of holes and taking on water, the rats keep gnawing away, pretending that nothing has changed, and that their gnawing has not really affected anything -- after all, the ship hasn't sunk yet.

It is time to demand of every candidate for national office that they come clean, and say exactly what they will do if elected to fix the Ponzi scheme of Social Security. In 2012, it will not be too late -- the Social Security trustees have suggested a number of changes that would allow the system to function properly, at least for the foreseeable future, and there are many other alternative suggestions out there as well.

The one choice we cannot make is to do nothing. If the current candidates for office refuse to give you a straight answer that is satisfactory, then refuse them your vote. It's that simple.

[UPDATE 09/07/2011: Here is a perfect example of the way that traditional politicians -- in this case, former Gov. Romney of Massachusetts -- try to belittle and demean those who dare to suggest that Social Security needs fixing, and to make them look like wild-eyed radicals who want to see retired folk all starve for want of sacred Government-sourced benefits which are their perpetual "right". It is this sort of attitude toward anyone who tries to bring up the subject for discussion and debate that will guarantee that Social Security goes bankrupt within our lifetimes. But if enough Americans will resist this kind of demagoguery, we can take the courageous steps necessary to phase out Social Security for all future workers, while still letting those who have vested expectations live out their dreams, and at the same time making it possible for those who come after to take charge of their own destinies without depending on the fickleness of politicians.]


  1. It is not a Ponzi scheme. It is an income transfer.

    From the 1940's onward, the taxes collected were sent to the beneficiaries as checks. This went on from, say, 1940 to 1981 or 1982.

    The Nixon Administration, while improving the COLA, accidentally created a double-benefit in a certain year (maybe 1975), and so suddenly there was extra money being paid out.

    By 1980 or so, it became clear that the tax rate on social security would not be enough to guarantee that future retirees (i.e. today's retirees) could continue with the enhanced benefits passed around 1975.

    So the Greenspan Commission suggested that the tax be put at a higher rate than it otherwise should have been in the 1980's, 1990's and 2000's--Ronald Reagan went along with this tax increase. (This was back when Republicans were elected to do something with government besides paying off corporate sponsors. Even Ronald Reagan was into this compromise thing.)

    The important thing to keep in mind is that while this "social security surplus" of extra tax collections was going on, the current worker's taxes were mostly still paying for the then-retirees, just like 1940-1980.

    Now, social security is going back to normal. The current taxes on workers are paying for the current retirees. The only twist is that the regular income tax now has to support the fact that the SSA is not rolling over the interest in the surplus of bonds. The income tax must be used to cover for the fact that the claims are due on that portion where it was "extra money" in the 1990's and 2000's.

    Regular income tax has to go up to cover the shortfall, i.e. the part that was lent out ahead of time.

    In a Ponzi, the money goes from one participant to the other, and there is no taxing power as a "source of revenue" to make up for the fact that the early players are paid off with the later victims' investments.

    In social security, the first generation of workers was taxed to pay the benefits of those great-grandfathers and such, who gave up jobs and took the new, untested program's cash benefit. Each successive generation paid up to support the immediate generation before, in the 1940's, '50's, '60's, '70's, '80's, '90's, 2000's and today.

    A Ponzi does not last 70 years.

    The system can continue indefinitely because the government has taxing power. If anything, it can tax to make up for the fact that the very first generation was given what, in today's parlance, is called a "free ride".

  2. The ponzi scheme that is Social Security does not apply if you live in Louisiana and perhaps another state ( Ohio??). I lived and worked in LA and believe me the difference it makes even in a small paycheck is amazing. Of course, then the question is who will be paying for the retirement of those workers?? States also have retirement systems which are quickly becoming insolvent as well. What really disguists me is that many current retirees in their 70s and 80s are most likely getting much more than they paid in to the fund. My husband and I expect nothing from Social Security. We are in our early 50s.

  3. Hoofin, I can agree with almost everything you say, except for the last paragraph. The taxing power has practical limits, just as does every other governmental power. When payroll taxes start to approach 50% of earnings -- and probably well before that -- a black market in employment will start, and businesses will pay their workers under the table.

    You yourself give the reasons the Ponzi scheme has lasted for 70 years: (1) contributions to it are compelled; and (b) it covers 95% of all people who work for wages. But like any such scheme, when the outgo to keep up appearances greatly exceeds what can be drawn in (by trickery, or by compulsion), it has to collapse.

  4. Alexi, I don't know about Louisiana, but you might find interesting this article about the failure of the pension system in Rhode Island. The dominoes are starting to fall -- Illinois and California will be next.

  5. The real problem began in 1965 when, to pay for the Great Society, the Social Security Trust Fund (which really existed as a viable fund) was raided, and replaced by government bonds. Then the current taxes being paid in were used to pay pensions, with any surplus being used to buy more government bonds. That is a ponzi, and there is no way to define it otherwise.
    Fr Charles Threewit

  6. Mr. Haley, It is true. All states had the option to opt out of the SS/FICA tax when it was offered to the states. Louisiana opted out. I know it is true as I worked in Louisiana. When we talked to a financial planner years ago, he is the one who told us that the states could opt out when SS was first put into place. LA did so and one other state too ( can't remember now which one).

    I will go read the article as well about ILL and CA. They are not the only states with falling retirement systems.

  7. Mr. Haley,

    Except even under the SSA's scenario (mid-range of the three reported), social security will still collect enough money to pay 75% of the projected benefit indefinitely, after 2037. Remember, the projected benefit adjusts for wage inflation to age 62. So, the actual check in that year is still greater than 100% of today's check.

    So it is not a Ponzi. Remember, with the original Charles Ponzi, he was promising a return that simply could never materialize as to all promisees. Social security is set up to solidly guarantee 75% of the projected payment. So, at best, 25% is at risk.

    Call it 1/4 Ponzi, and 3/4 good-as-gold guarantee, but it is not a Ponzi.

  8. GOP needs to refrain from wrapping this up in the ideological language of "limited government," and hit it with brutal honesty about the necessity of solving the problem. I would say, be complimentary: it was a well intended response to the financial upheavals of the time, but it was based on very different life expectancies, birth rates (and earlier ages for parenting), a war economy followed by economic & baby booms (lots of payers to support recipients), etc. etc. etc. In other words, none of the social realities that made it work then are with us now and it is not a viable system. Let's make every effort to maintain the benefits of current recipients but let's also get real about telling everybody else that there's going to be less, if anything coming through this plan in the future.

  9. You may all argue until you are blue in the face over whether Social Security is, or is not, a Ponzi scheme. What is indisputable is that it is a fraud. The member of FDR's Committee on Economic Security in 1934 who is considered the "drafter of the Social Security system," Princeton University Management Professor J. Douglas Brown, was interviewed by the Washington Post for a profile piece on him which was published in that paper in very late December 1985 or very early January 1986. In the article Brown quite freely admitted that it was a fraud and would eventually go bankrupt. Unfortunately, it is not clear whether the article is available online, probably because (a) it wasn't a news article and/or (b) their online archive started sometime in January 1986.

    Nevertheless, as I was then a resident of the DC area, and still a subscriber to the Post, I very explicitly recall reading the specific article and distinctly recall Mr. Brown being quoted as admitting that all of the members of the Committee knew that the system would go bankrupt. Driving home the point of how immoral the committee membership was, he stated that "the only mistake they made" was in underestimating the acceleration in the rate of change of life expectancy. They thought that life expectancy would continue to increase at a similar rate in the future to what they saw in the preceding decades. Had they been correct he observed that they would all have been dead and buried, and "no one would be able to do anything to them."

    Such is the nature of those who wish to be our overlords, declaring what is right and what is wrong, what is just and what is unjust.

    I suspect that a copy of the article still exists in the "morgue" of the WaPo, but to order a one page article via their online system for that period costs about $125.00, a sum which I am not willing to commit, particularly as the only hit I get is for December 27, 1985, which was not a Sunday edition, and I recall that the article was in a Sunday only section, published about two weeks prior to Brown's death on Sunday, January 19, and the Post mentioned in their obituary that the article had appeared two weeks prior to his death.

    Pax et bonum,
    Keith Töpfer

  10. Interesting info from everyone. Whatever you want to call it, the basic facts remain that there are not enough workers paying into the system to pay for the retirees especially the large numbers of up and coming "baby boomer" retirees. I agree totally with TLF+'s last sentence. Those of us who have time before retirement need to realize that SS may/probably will not be there for us and try to plan accordingly. I knew even as a teen when I got SS survivors benefits that was most likely the only SS I would see in my lifetime. NO ONE should think of SS as their only retirement plan.

  11. Hoofin, et al., please note -- when Gov. Perry of Texas tonight in the debate in California claimed that Social Security was a "Ponzi scheme", he was taken to task by all the left-wing media for speaking such a patent falsehood. And there are some on the right who agree: Social Security, they say, is not a Ponzi scheme -- because it is much worse.

  12. To agree with TLF+.

    I would add that when Social Security was set up, I suspect the average worker was not expected to enjoy the benefits of the system (people were expected to die), and therefore the system was designed to put more money into the Federal coffers than would ever be removed. Thus, the Ponzi scheme thesis has some merit too.

    Alas, the Federal dollars spent on Medicare (also designed for fewer recipients) pumped money into the medical/pharmaceutical industrial complex with the end result that now we are faced with far more 65 y.o. and greater persons than either program imagined possible, and they all want "their" money.

    The possible answers seem to indicate that TLF+ and I will have to revert to the way of life that most humans lived before the govt. got involved.

    No retirement for us, we will work until we drop.