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Truth, BS, SS And Ponzi Schemes

“It is a Ponzi scheme for these young people. The idea that they’re working and paying into Social Security today, that the current program is going to be there for them, is a lie,” Perry said. “It is a monstrous lie on this generation, and we can’t do that to them.”

(HT: Houston Chronicle)

Governor Rick Perry has been known to unleash some fairly flamboyant rhetoric at times. If you like a guy who puts the teleprompter away and actual says what he believes in non-calibrated English, Governor Perry offers us excitement. If people don’t like what he’s saying, he scares the BahhhJeebus out of them. Calling Social Security a Ponzi Scheme is just the sort of thing that fulfills both of the two sentences written above. Thus, we should approach Governor Perry’s rhetorical flourish with the care and perspicacity of a good EOD team. Let’s find out if calling Social Security a Ponzi Scheme is really all that germane.

We begin by actually defining what constitutes a Ponzi Scheme. The SEC offers the following legal definition which it uses for regulatory compliance enforcement.

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

So Perry claims SS is a Ponzi Scheme. The program depends on new revenues to pay current investors. Check. The investment activity consists of the government writing itself IOME’s, as the revenues from the payroll taxes supporting Social Security go directly The US Treasury’s General Fund. Once this money goes there, it is then fungible. It could just as easily be spent on new Tomahawk Missiles or highway construction. The mythical Social Security Lock-Box, of Al Gore fame; exists in the same room as Puff the Magic Dragon.

Social Security is also significantly different form Ponzi Schemes in several ways. The government makes people pay into it. They recruit you in the same way British press gangs recruited sailors for Her Majesty’s Royal Navy. At least with Social Security, they limit themselves to shanghaiing a portion of your paycheck. So unlike Bernie Madoff’s iniquitous scheme, there really is another sucker born every minute. Once any US citizen or worker employed legally in the US gets to payday; they will enjoy their dhimmitude.

The IOME’s supporting the mythical Social Security Puff the Magic Dragon Trust Fund, are government debt obligations that must be redeemed before other bills can be paid. In 2005, President George W. Bush described the Social Security Trust Fund as he saw it.

The money — payroll taxes going into the Social Security are spent. They’re spent on benefits and they’re spent on government programs. There is no trust. We’re on the ultimate pay-as-you-go system — what goes in comes out. And so, starting in 2018, what’s going in — what’s coming out is greater than what’s going in.

(HT: Washington Post).

So why was George W. Bush saying such mean and controversial things about the 3rd Rail of American Politics? Well, according to a joint report filed by The Bureau of Labor Statistics and The Social Secuirty Board of Trustees, there were only 1.75 payers per payee for Social Security benefits last year. Going back to The SEC discussion of Ponzi Schemes, we get a rather scary similarity.

With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

However, unlike Bernie Madoff’s Ponzi Scheme, the government can control who gets what by legislative fiat. According to the current letter of the law, reductions to benefits will kick in by 2036 that will make the nominal value of a benefit check 75% the present amount.

Another possibility, which I suggested back when we were scrambling to find make-believe cuts to avoid a government shutdown, is to just call socialism socialistic. I suggested a means test for the program so that lower income retirees still get the whole check, while the wealthy get stiffed. We could call the revenue shakedown a poor tax “and (let) society inscribe on its banners: From each according to his ability, to each according to his needs!”*

The less honest method of solving the 2036 problem is to simply jack up the eligible age for Social Security benefits. That way, a significant population of retiring senior citizens fails an actuarial test instead of a means test. To the survivors can then go the benefits?

So Social Security has become parlous and meta-stable with regards to its ability to continue paying beneficiaries a steady, guaranteed return. It requires payments from new “investors” to offer up payments to older participants. Everyone was promised a stable, rate of return that is now jeopardized by demographics and societal economic weakness. This caused Governor Perry to describe the program as a Ponzi Scheme.

The characterization is inaccurate because the government can make people pay more and accept less in a way Bernie Madoff eventually got sent to the slammer for. It is also inaccurate because there will be a profound willingness for the government to prop Social Security up for intangible reasons unrelated to the fiscal straights of the Social Security Trust Fund. If the “Full Faith and Credit” of the US Government doesn’t include it’s safety net for the elderly, that full faith and credit is pretty much the sworn word of a harlot.

In conclusion, I agree with Governor Perry that Social Security is a poor deal for 41 year old working stiffs like moi. The scheduled 25% haircut under current applicable law hits three years after I start to nibble the Gubbermint Cheese. However, his statement is also exaggerated and problematic. There is no way the USG CAN let Social Security go full-metal Madoff on an entire generation of recipients. They will find somebody’s rectal orifice to use as an ATM before that is allowed to transpire.

Governor Perry has made a statement that has a kernel of truth and a coating of bravo-sierra. It will fire up his supporters and opponents alike. He will get to discuss said statement just about every time he sets foot behind a debate podium. Perhaps he should speak more wisely less metaphorically in the future. It can hurt one’s dentistry to jam your foot in your mouth while wearing a pair of size 14 (Beep)-kickers.

* – HT: Karl Marx from “A Critique of The Gotha Program.”

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