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The Simple Math of Obama’s Ponzi Scheme

By: Daniel Horowitz (Diary)  |  September 20th, 2011 at 12:54 PM  | 

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Well, 32 months into his presidency, Obama has finally released his jobs and deficit reduction plans.  Surprisingly, he is not attempting to obfuscate his true motivation this time.  As Obama said yesterday, it is “simple math.”

It’s $1.57 trillion in comprehensive tax hikes + $1.08 trillion in non-existent war spending + $430 billion in phantom savings on interest payments + $320 billion in savings from cuts to healthcare providers (the inevitable sequestration will already cut DocFix), throwing granny off the cliff with tighter rules from the death panel, and a magical willingness to cut waste and fraud + $250 billion in other mandatory savings, most of which will never materialize – the $447 billion stimulus 2.0 = $3.2 trillion.

OK, simple enough; however, there is one important detail of the ‘Obamaian formula’ that has not been advertised.  As part of the Stimulus half of the plan, Obama will cut payroll tax revenues by $240 billion, or 36%, of the entire annual revenue (projected at $685 billion) of the so-called Social Security trust fund.   Where is that money going to come from?  How will they fill the SS shortfall, which is already projected to be $50 billion?

You guessed it: general fund revenues.

Tucked inside this 155-page behemoth is a provision to transfer funds from the general Treasury to the Social Security Trust Fund.”  Here is the relevant provision (page 8 ) in section 101(e) and 102(e) of S. 1549:

(e) TRANSFERS OF FUNDS.–(1) Transfers to federal old-age and survivors insurance trust fund.—There are hereby appropriated to the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund established under section 201 of the Social Security Act (42 U.S.C. 401) amounts equal to the reduction in revenues to the Treasury by reason of the application of subsections (a) and (b) to employers other than those described in (e)(2). Amounts appropriated by the preceding sentence shall be transferred from the general fund at such times and in such manner as to replicate to the extent possible the transfers which would have occurred to such Trust Fund had such amendments not been enacted. (emphasis added)

So on top of the annual $50 billion transfer to compensate for the inherent shortfall in payroll taxes, we will now be transferring an additional $240 billion in 2012.  Remember that we have already raided the general fund to pay for this year’s payroll tax cut.  According to the Social Security Administration, $105.4 billion from the general fund was transferred to the non-existent SS trust fund.

Consequently, not only are we funding current retirees with current payroll taxes of workers, we are supplementing the shortfall with other taxes and/or more debt.

This might be a good time to review the differences between a Ponzi scheme and what has become of Social Security:

1)      A Ponzi scheme is voluntary; SS is mandatory

2)      Payouts from a Ponzi scheme are funded from the monies of current investors, but lack the ability to raise taxes or service debt.  Government can do all those things to sustain Social Security.

3)      The payouts from Ponzi schemes may be collected by the investor’s heirs.  Social Security, for the most part, is not passed down in inheritance.

4)      The trustees of Ponzi schemes cannot tax the payouts to investors; government can.

5)      When Ponzi schemes fail, the perpetrators go to jail.  Those who destroyed Social Security can force us to contribute more, receive less, and/or receive it later.

6)      Ponzi schemers purposely defraud their investors by promising invisible investments.  Government-run Social Security schemers purposely defraud their victims by promising a non-existent trust fund (as proven by the general fund transfers).

You can call it a super-charged Ponzi scheme or a big-government scheme, but dare not offend anyone by calling it a plain old Ponzi scheme.  Either way, Republicans must not support the Obama scheme to transfer funds from the general fund for the purpose of his reelection bill.

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  • http://www.ArchitecturalShots.com mdyou

    Several apologists have claimed that SS is similar to an insurance policy. What a joke. Everyone knows, or rather hopes, they won’t need the insurance payout.

    Oh wait – liberals anticipate living off of bogus settlements. You seldom see a conservative walking around with one of those neck braces.

    • wonkish1

      With huge general funds. Their is no way a company could survive more than a few years(even if regulators didn’t close it down in a week) if they paid out claims from current premiums.

      • http://redmeatconservative.blogspot.com/ Daniel Horowitz

        That’s exactly why the Democrats lie to us and claim that there is $2.6 trillion in Al Gore’s lock box.

        • rightwingmom52

          that the Democrats claim holds the solution to Social Security, all we’ll find is a black, empty hole through which their promises have drained out – much like Algore himself.

      • actuarius

        When a policyholder purchases one year coverage, like in most property, casualty, and health insurance policies, this year’s premium is meant to pay this year’s claims. The “huge general funds” you reference are surplus funds, some of which are required by law, some by prudence of the insurance company. They are meant to protect the policyholders in case there are events that produce claims much higher than were expected.

        Long-term policies like pension plans or permanent life insurance policies are paid for by building up a fund for each participant from which to pay when the claims start after years of paying into the fund. A lot of cash is built up, but it belongs to the policyholder; it is not part of the general funds of the insurance company.

        SS uses an outdated insurance funding scheme first used by mutual aid societies, wherein each participant was assessed dues. Those dues were calculated to be the pro-rata portion of the benefits to be paid out in this year. Long ago, insurance companies switched to the legal reserve method of funding for long term policies. Each policyholder pays for his expected long-term costs smoothed out over his lifetime, not pro-rata costs for this year of everyone else.

        SS is insurance in the classic sense, but its funding mechanism is inadequate and inequitable.

        • wonkish1

          But property casualty has to have large reserves or a decent sized national disaster bankrupts the firm. That of course is regulated, but even if it wasn’t no pc firm would issue policies without huge reserves.

          Long term life policies aren’t segregated on behalf of specific policy holders unless its VUL(technically a security that falls under FINRA). They are held in the insurance general fund. The general fund needs to be able to keep up with the liabilities and risks of future claims, loans, and surrenders of policy holders. The cash value on a life policy is accounted for as a liability owed by the insurance company to the insured. When that liability comes due it is paid from the general fund. The carrier certainly does not segregate funds to each policy.

          SS does not operate on a pro-rata basis. If it did, payroll tax rates would be spiraling out of control right now. Example 20 people paying $1 to 10 people equals $2 each. If the population of payers dropped to 15 and population of takers raised to 15 under a pro-rata basis the tax would be increased from $1 to $2 to continue the benefit. That is not what is happening.

          As cliche as its becoming there is no better way to put it than SS is a ponzi scheme. SS is not insurance. Its a defined benefit pension with no money set aside to meet future liabilities. Underfunded pensions around the country are being transferred to the PBGC and destroying the retirement ambitions of its victims. Those pensions are maybe 50-70% funded when they collapsed. SS is maybe 5% funded. And it will reek havoc on retirees when liabilities grow too large to continue to ignore.

          • wonkish1

            SS is a COLA adjusted annuity which is sometimes labeled longevity insurance, but in actuality its more of a financial product than insurance. Its a financial contract that is accounted for just the same way as a Defined Benefit Pension is.

          • actuarius

            Variable products (not just VUL) are segregated, and there is an individual account for each policyholder.

            The general “account” of a life and annuity company is made up of the investments from the sum of an amount equal to the liability from each policy (not just the cash value, by the way).

            By general funds, I thought you were making reference to surplus (required or not). The fact that it is segregated or not is irrelevant for my purposes. In each case, the insurance company has to have on hand in cash and securities an amount equal to the individual present value of obligations less the present value of premiums in the future. That amount is held as a liability to the company. Also, state insurance departments require the company to hold additional cash and securities so that the insurance company can address additional investment and mortality type risks. The segregation of the individual account is to pass on the risk and reward of the investment results to the individual policyholder. In general account products, the policyholder gets the declared interest rate from the company, which they determine from the total results of the general account.

            Most of this is inside baseball stuff. The main point here is that if you mean that claims are paid out of surplus for a life and annuity company, in general you are wrong. If you mean that the insurance company gets the money from the general account, and the liability for that individual account is reduced accordingly, that is correct. The general account of these companies cannot be used for just anything. They back the specific liabilities of specific policies.

            You are right, since 1983, SS has operated on a combination of partially pre-funding benefits, and pay as you go basis. The people who paid between then and now have paid $2.5 trillion more in premiums than was paid out in benefits. If SS and Congress had done what a life and annuity insurance company is required to do, that money would be available now to pay the excess costs of the increase in beneficiaries for the next 20 or 30 years.

            Do you have info on the 50% to 70% funding of db pension plans? Is that both private and public sector? The government accounting standards are much less stringent than the private sector. The public sector seems to be underfunded by somewhere between $1 trillion and $3 trillion. Do you know about the size of the unfunded liabilities for the private sector. I’d suspect that it is much smaller, since most employers have gone to defined contribution plans.

            We can all agree, that no matter whether you call it a Ponzi scheme or insurance with inadequate and inequitable funding mechanism, it needs reformed, and it has needed reforming for many years.

    • actuarius

      I’m no apologist, but SS is insurance. The risk of living too long is pooled. Only people who participate can become beneficiaries. The benefit is just like defined benefit pension plan, which also is insurance. The only real difference is that the typical private defined benefit pension plan is funded in a way that is more adequate and equitable.

      “Everyone knows, or rather hopes, they won?t need the insurance payout.” Not true. Everyone who buys a pension plan (which is what SS mostly is) hopes to get many payouts.

      • skorrent1

        Rewrite the terms of your annuity/insurance (changing benefits, fees, and retirement age) anytime they want to? If so, then I suggest you change companies.

        SocSec is, and has been, a wealth redistribution system — from the young poor to the old richer — since its inception. As soon as it is modified to increase taxes on higher salaries with no adjustment in benefits, and to further modify benefits to “means test” recipients, it will be fully exposed as a welfare program. Boosting the uniform retirement age will make it even clearer that “payroll taxes” are just another revenue stream to support government spending.

        • actuarius

          An annuity purchased from an insurance company does not become a pension until you make a claim. They convert the accumulated amount to a pension by applying settlement options, which are functions of retirement age, perceived future mortality, and interest. The annuity policy offers guaranteed settlement options which are very conservative (based on low interest rates and low mortality rates). The overwhelming majority of claims from the accumulation period to the pay out use current settlement options. The insurance company does not have to decide mortality and interest to use until you declare the retirement age.

          So, you may have planned to get a certain pension at a certain age based upon projections of accumulated amounts and settlement options, but the company was allowed to accumulate interest at experience and apply current settlement options to purchase the pension. Unless you did your planning with guaranteed accumulation rates and guaranteed settlement option rates (which I’ve never seen done), your pension could be modified by the insurance company right up till the day you decide to retire.

      • http://redmeatconservative.blogspot.com/ Daniel Horowitz

        The Supreme Court ruled in Helvering v. Davis (1937) that it’s not an insurance policy. “The proceeds of both (employee and employer) taxes are to be paid into the Treasury like internal revenue taxes generally, and are not earmarked in any way.”

        link

        • actuarius

          The lawyers for Davis contended that Title II of the Act (the benefits section) with Title VII (the taxes) were meant to go together, thus making an unconstitutional government insurance program. The government contended that it could spend the revenue as it wished (of course, in over 75 years it has spent it exclusively on SS benefits). The response by the court: “We find it unnecessary to make a choice between the arguments, and so leave the question open.” So, the court side-stepped the question of whether SS is an unconstitutional government insurance program. (from a summary of the case here: http://www.lewrockwell.com/orig3/attarian7.html)

          It strikes me that arguing that SS is not insurance because the Supreme Court said so is like arguing that it is not a Ponzi scheme because SS it legal. The fact remains that SS has enough attributes to make it an insurance program. Only people who contribute get benefits. The benefits are linked to the contributions. The contributions, taken alone, would be highly regressive if considered a tax. etc.

  • mb3986

    Is Obama’s “Simple Math” underlying his jobs bill anything the math used to justify the loan guarantees for Solyndra and the oher green energy companies?

    If we believe that, he’ll want to sell us a bridge!

  • renl57

    Depleting the SS trust fund by cutting SS payroll taxes has nothing to do with whether SS was designed as a “Ponzi scheme” or not.

    It could be construed as embezzlement or fraud. And that’s bad enough.

    But unless you can find evidence that the architects of SS (FDR and Harry Hopkins) intended Obama to do that, it’s not part of the original SS scheme.

    FDR did a lot of things wrong. But one thing you can’t blame him for, is failing to predict what economic and political conditions would be like 65 years after his death. No one else has ever succeeded at that either.

    • skorrent1

      To put us on the path to a socialist utopia. It may be that he was not the only one who actually believed that path to be the best one at the time. However, just as the preachers and the bootleggers supported prohibition, each for his own reasons, it is also true that SocSec served to reduce the size of the “labor pool” at a time of high unemployment, thus aiding the (Democrat-supporting) Union Movement. One suspects the altruism of Labor’s support for mandatory schooling for the same reason.

    • wonkish1

      Unfunded pension obligations are ponzi schemes.

      Funded pension obligations are not ponzi schemes.

    • http://redmeatconservative.blogspot.com/ Daniel Horowitz

      the lies were already abound. People were misled into thinking it was more of a conventional retirement account or insurance program that was merely administered by the gov’t. Walter Williams has a great piece out explaining it.

      • http://redmeatconservative.blogspot.com/ Daniel Horowitz

        the legislation was written with subterfuge so that the Supreme’s would be able to rule against people’s property rights – something they would never have acceded to had they know it up front. Don’t forget about FDR’s heavy handed tactics with the Supreme Court either.

        Bottom line: FDR was no piker.

    • http://www.usdebateboard.com usdebateboard

      Once you declare everyone is entitled and nobody is paying enough taxes to support it, it’s all over. He had to know that.

      In fact, I remember some quote attributed to him about reaching a point where there were so many benefits, nobody would want to work anymore.

      I take that as him taunting those us 65 years after his death.

      • lastgopinillinois

        Of The Social Security Act during its proposal stage (where it was originally planned to have voluntary contributions and it was originally going to be in a “lock box”), those original features (which were thrown out during debate before the bill was passed) at least would have avoided the mess we have today (had those features been maintained thru the decades).
        There would be tons of cash in the “FUND” today if the original proposal had passed the congress.
        I would like to see all the entitlements phased out completely.

        • wonkish1

          Of 1 massive Pension system ran by the federal government deciding who to invest in and who not to. If you have money set aside to meat SS liabilities you have to invest it, so who gets picked to be invested in?

          A multi trillion dollar SS pension fund ran by bureaucrats is a recipe for rampant corruption.

  • http://www.ArchitecturalShots.com mdyou

    Whoever made the ‘Inside Baseball’ comment was on to something. Remember that those of us in here are not the Ruling Class.

    FACT: 99.9% of insurance policies are purchased by people who HOPE THEY NEVER NEED TO FILE A CLAIM (excluding fraudsters and other common criminals). That’s why you find a product, join a pool, and pay competitive rates depending on your situation.

    Let’s say you buy long-term care insurance. I bet that Kathleen Sebelius can tell you, it will cost more than $7K per year (which is what SS costs if you make the maximum).

    SS is NOT insurance, geniuses. It most certainly IS a Ponzi scheme and that is not even arguable. What it IS is what it was intended to be and will ever be thus: a means for obtaining votes for Democrats.

    • FlyingTigress

      When that first recipient paid into the system for – iirc – a matter of a few months, and drew out for years much more than she ever contributed.

      I don’t know which of the possible motives, or combination of motives, FDR had at the time. I’ve heard/read everything from creating programs to keep us from devolving into an Obamanian/Ayersian/ Moorian wetdream (our nightmare) to creating a dependable dependant class of Americans.

      Certainly, imo, no one could have reasonably expected the boom of (oncoming) retirees being following by 40 million working age individuals worth of missing SS contributions. That would have beenne of those “you’re kidding, right? You want me to design around THAT scenario?”

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