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Truth, BS, SS And Ponzi Schemes

By: Repair_Man_Jack (Diary)  |  September 13th, 2011 at 11:07 AM  | 

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“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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  • jimbain

    great article. However, when talking about social security (actually, all the “entitlements”), the data are usually presented in a facts-based list. Facts are important, but I think lots of folks, and, most importantly, the “other side”, don’t understand the real issues being discussed.
    You correctly quoted the The Bureau of Labor Statistics and The Social Secuirty Board of Trustees report that only 1.75 current payers are supporting a single current payee.

    If I were going to retire today and go on SS, I’d receive over $1,300 in monthly benefits(this, according to the Social Security web site. This amount is today’s dollars and doesn’t reflect any COLAs).
    So, the missing focus is this: Since the SS system should be self-sustaining, each payer would need to pay an average of $650 per month in FICA taxes to pay my benefits. As more boomers retire, the amount of taxes, collected from each payer, must be increased.
    It’s easy to see why something must be done.

    When talking about SS and trying to reform it, the discussion is missing the “sales pitch”. Tell younger workers that SS is a “bad” investment and doing some sort of private retirement program would yield MUCH better returns. An added benefit is getting the government out of telling you what you can earn when you’re retired! Naturally, we’d have to transition from the government SS system to a private one, but we’re missing an opportunity to educate the folks from 16 to 50 about having better, richer retirement vs SS.

    • The_Gadfly

      The problem isn’t selling it to young people. If we could have a national referendum about SS and only those under age 50 could vote, it would be a landslide to abolish the program in favor of privatized accounts.

      The problem is that for 70 years, most of the 535 shysters in Congress and the big shysters in the White House have successfully lied to the American people about SS. And now the bulk of retirees are dependent on it, so they refuse to engage in a logical discussion about the merits of the system. If it was simply about the merits, you layout a program that guarantees those over 50 retirement benefits from the general fund to match current benefits, abolish the program for those under 40 while converting them to private accounts, and give those between 40 and 50 a choice about whether they want SS or privatized benefits. Then, when the last SS recipient dies, the program is done. But there is an emotional attachment to the program. Romney et al believe you finesse that emotional attachment while changing the program. Perry et al believe the only way to change the program is to confront grandma and grandpa that they’ve been cleaned out by thieves. Only after they deal with that reality and go through the stages of grief will they at last be able to face reality and save the country.

      Count me with the Perry crew.

      • actuarius

        It thoughtfully reflects the nature of the problem and allows for a transition. Something still has to replace the FICA to pay for those benefits to current beneficiaries. This won’t free up the full 13% of salary to go to the pensions of young folks. Unfortunately, they’ll still have to pay.

        It should have been the Boomers to have to pay for the transition. We tried paying extra, but the 535 shysters spent the money.

        • lineholder

          I take it you’re in a younger generation, and if so, good to have you here.

          Sorry about the shysters. If we, the Boomers, can find a way to set this straight, so that your generation doesn’t have to face that same shyster reality, we will do it. Or at least, from this Boomer, I will.

          • actuarius

            I am 62 and collecting SS.

            My comment was meant to be one wishing we had solved it. We are the biggest generation around. The problems of this funding mechanism surface because of that dynamic. My wish is that we had done something more effective. We are a larger group over which to spread the costs.

            We paid an extra $2.5 trillion to try to make it right. But we were too timid with the changes. Turns out, we can’t fix it by what we did. One has to make it so that each beneficiary contributes to his own pension.

            As an actuary, I tried diligently to lobby with the SS actuaries within the profession. But, of course, they have no power to change the system either. Now, I try to bring facts to a highly emotional debate, especially here where people often forget that, even if the money is not there, it was paid by the people who are now old enough to be beneficiaries.

      • jimbain

        Thanks for the reply. I agree with what you said. I was trying to say SS should be abolished too and what’s missing from the discussion is to focus on why it won’t ever work and there’s a better system by making it private. When Perry got the discussion started, the media goes crazy. If R’s would respond, almost using “talking points” to repeatedly pound on the simple facts (you know, like the Demos do). Keep SS for folk close to retiring and those currently on it. Move everyone else to something else.

        I’m also “with Perry” too! I’m in TX and have voted for him several times. I hope he’s the Republican candidate. Is he perfect? No, who is? I didn’t agree with the in-state tuition for illegals or the Gardasil EO. The legislature killed Gardasil thing quickly and he’s admitted it was a mistake. All the stuff in the news about him has been discussed over and over in TX for years! I will say at the end of the last Texas Legislative session, he vetoed a bunch of “feel good” nonsense bills due to freedom and limited government reasons. I think he’s a true conservative vs. Romney who’s a RINO.
        Anyway, thanks for the comment
        PS: I think Herman would be a great VP. I don’t think he’ll make it through the primaries.

  • whiskeyjim

    Interesting article. The writer is principally describing why SS is worse than a Ponzi scheme.

    Taking 14-18% of a life time of wages with no commensurate investment or ROI structurally precludes most citizens from the principal vehicle by which the rich get richer.

    Gutting the Ponzi nature of new entrants paying for earlier entrants by using the ‘fund’ to pay for generally larger government, is not just fraud and immoral. It reduces SS to an outright tax, and any attempt to call it ‘insurance’ or ‘security’ is a fraudulent misrepresentation. All analyses of government tax rates should include SS taxes.

    If things could not get worse, SS is regressive. Poor working black men go to work earliest (they don’t go to college), pay in first, and have the shortest life spans. They can not even leave their descendents the product of their labor, since it principally goes to paying the rich white woman in her dotage (who lives the longest).

    Imagine the difference to our society if even 30 years ago, SS had instituted insurance level risk premiums and investments into the SS fund. I submit our citizenry’s conception of government and Medicare and other government ‘programs’ would be substantially different. Google Galveston Social Security

    • actuarius

      Black men have a life expectancy at birth that is significantly lower than white men, but it gets much closer when you look at life expectancy beyond age 25 or so when the trauma associated deaths are behind both races. At birth the difference is about 5 years. At age 65, the difference is about 1.5 years. The lack of vesting is a travesty for both genders and all races.

      The poor, if they make it to 65, get a much better deal economically. Someone retiring at full SS retirement age today having earned the average salary equivalent to today’s minimum wage has a benefit about 67% of his working salary. Someone with an average salary equal to today’s median ($50,000 per year) gets about 40% of his average salary. Someone retiring with the max SS income gets less than 30%. This is hardly regressive. As a matter of fact, it is exactly the means testing that many are so anxious to see.

      I agree that funding SS like a private enterprise defined benefit pension plan would have made a huge difference. But that would have appeared too expensive. They needed to transfer to a defined contribution approach for both pensions and health care. That would have made a huge difference and solved all the unfunded liability issues.

  • http://impudent.edublogs.org/ kyle8

    Ponzi only lied, and played upon people’s greed. Social Security uses coercion and plays upon people’s fear.

    It is bad for many reasons, It is bankrupt and unsustainable, it is a very very poor investment, it is coercive, you cannot leave it to your heirs. It was sold and defended in order to buy votes.

    It is just a rip off all the way around.

    • Locked and Loaded

      Hmmm, what do they call that?

      • Repair_Man_Jack

        Since were into PC euphemisms these days,….

  • The_Gadfly

    is an insult to all the grifters who work hard on their own Ponzi schemes.

  • gregorysstewart

    Love the use of that word.

  • ajdx3

    instead of jobs, jobs, jobs, Obama wins. While SS is an important issue, if that is what the election of 2012 is about instead of jobs, jobs, jobs, we are playing right into Obama’s hands.

  • http://jhpruitt.blogtownhall.com/ kipling

    Essentially your argument is that SS is not a ponzi scheme because the federal program will not suffer the natural end to all ponzi schemes because the federal government will strong-arm people into continuing to invest in a failed pyramid scheme.

    • Repair_Man_Jack

      Fascism as an investment strategy. It’s not pretty, but it will keep the program from croaking until a large enough majority demands that it take a dirt nap. Good luck making that happen between now and 2050.

      • actuarius

        So you know where I sit, affecting where I stand: I am 62 and collecting SS. I am an actuary by training. I grew up professionally being force fed the details of SS. I’ve never liked it. I have lobbied with the chief actuary for SS to instigate changes back to the 70s. That included paying off the preceding generations and taking our generation out of SS.

        I agree that it may take significant time to put SS to rest. If you think that it is because of greedy recalcitrant SS beneficiaries, I disagree. I think that we are more than willing to talk about the problems and work on a solution. What gets us jumpy is the aggressive style of some who imply that it is the fault of those who are on SS now. I’m happy to talk about the issues and work on a solution. Let’s make sure that we get the issues straight, however. SS is not regressive, it has a means test already, the unfunded liabilities are driven by benefit levels of coming generations, not Boomers, saying that there is no trust fund conveniently ignores the fact that workers paid $2.5 trillion more into SS than was required to pay benefits, the vast majority of us paid (including lost interest at after tax rates) much more into SS than we’ll get back, etc.

        The country made a huge effort at reform in 1983 by reducing future benefits (increased retirement age) and increasing funding levels. It went from pay as you go to pay partially for the future. Problem is Congress spent the extra money we paid. The political environment seems more polarized today than back then. I get the impression that we all wanted America to succeed back then; we just had different ideas of how to do it. Progressives seem to want a different America.

        I’m up for the debate as long as it is not a pile on.

  • jaykali

    I would say that the Democrats will beat him over the head with it, altho then it does draw you into say, well Democrats what exactly is your plan for saving Social Security? Obama’s plan is to every once in a while say it needs to be reformed and then do nothing.

    But I can’t help but think a lot of people like myself say, ya this is a scam. That is bc I am 30 and I can promise you no financial planner that isn’t on crack would tell me or anybody to ‘rely’ on social security. Social security is an oxymoron bc it’s not secure at all. It’s a nice to ‘have’ if it’s there as Dave Ramsey says. Well I’m glad I’m paying into a system for 40 years that will be ‘nice to have’ maybe sorta when I retire. Thanks government!

    Oh and it’s wonderful that the government will eventually ‘fix’ the program by raising taxes and reducing benefits. Swell!

    I’d much rather take my chances with the up and down market. That being said I hope the next Republican president doesn’t spend a lot of political capital on privatizing social security. Bush just tried it and failed and that was kind of the end of his domestic agenda. I would try to reform it by raising the retirement age and adjustments to shore it up.

    We have bigger fish to fry. I think you can’t get a homerun on everything.