For Social Security, it’s print as you go

September 23, 2011

“Americans are more and more aware that Social Security contributions are not “invested” to finance future benefits; instead, they are used to disguise the true amount of borrowing necessary to fund the Administration’s unprecedented spending spree. As the General Accounting Office stated last September: ‘The present situation, in which trust fund surpluses are combined with and partially offset a deficit in the general fund, means that the payroll tax is being used, not to make provision for future retirement benefits, but to pay for today’s general operations of government.’”

–R.C. Whalen
“Mess With Social Security — Change It From Ponzi Scheme To Private Pension Fund”

Barron’s, March 4, 1991

 

One of the dangers of using your Dad as a prop in a commentary is that he may call you out on it:

I am not as much of a cynic as you make out to your readers. I want you to write about solutions, how to create new credit. There are not many people alive today who remember the deflation of the 1930s, when I was born. Be careful what you wish for. We need to avoid severe deflation. This young, spoiled country of ours is still trying to figure out its politics. We must avoid extreme economic swings to avoid extreme political outcomes.

The desire to avoid extreme swings in US economic life is ingrained in my dad’s generation. They still feel the fear and uncertainty of past years of deflation and unemployment, one of the reasons that debates over things like Social Security generate such visceral reactions. Yet whether we talk about the federal safety net or how we purport to “manage” the US economy, Americans talk like “capitalists” — whatever that is (please send comments below) — but behave very much like socialists.

Take the comment by GOP presidential contender Rick Perry that Social Security is a “Ponzi” scheme. See James Kwak’s “Ponzi Schemes for Beginners” for a “it’s not a Ponzi scheme” perspective on Social Security.

I differ with Kwak, but he and I seem to agree that Social Security is not a funded retirement scheme. But there is no shoe box — no assets separate from the finances of the republic — to make Social Security payments. Ponzi himself could not help but smile.

Since the 1930s, the youthful population of the US allowed Washington to pay current beneficiaries in what is known as a “pay-as-you-go” system, dreamed up by Franklin Delano Roosevelt. Social Security built up a substantial cash surplus because 80 years ago there were more than 10 workers for every retiree. The government spent the cash on other activities and the Social Security Administration (SSA) got a piece of paper from Uncle Sam, promising to pay on demand with interest, etc., etc.

Wind the clock forward. The US population is aging. The SSA is in deficit, meaning that Treasury must start to raise cash to redeem the bonds given to the SSA. This will represent a growing part of overall Treasury financing operations as time goes on. Too few observers have thought about what the scale of the cash funding requirements of Treasury will be in future years to make good on the debt to the SSA.

Now people like Kwak argue that “there’s nothing wrong in principle with a pay-as-you-go system, as long as the future revenue stream is secure.” Indeed. The future revenue stream in the US is not secure. The dependency ratio, which Kwak discusses in his article, is basically the way to look at the number of workers vs. retirees in the long term to see if the pay-as-ya-run scheme still works.

But at the end of the day, Kwak and other supporters of Social Security always fall back upon tax increases to support benefits to approximately the year 2035, when the demographic effects of the Baby Boom will have run through the system and your faithful blogger will likely be feeding the shrubs. Says Kwak:

As all informed observers realize, you could close the seventy-five-year Social Security budget gap simply by raising the payroll tax rate by two percentage points (or by other means that have a similar financial impact, such as eliminating the cap on taxable income). This in itself should make clear that it isn’t a Ponzi scheme.

No, James, you save your worst argument for last. Rick Perry is right: Social Security is a Ponzi scheme. The nature of the pay-as-you-go system and the high budget deficits being run by the federal government for other services makes it a precise parallel with the work of Carlo Ponzi. The US fiscal mess makes it increasingly unlikely that the federal government will be able to make good on the Social Security payments without resorting to hyperinflation. All of the cash collected from past recipients is gone with no assets to show for it but Treasury debt.

As former Fed Chairman Alan Greenspan famously said in his 2005 Congressional testimony on Social Security from The Daily Bail:

I believe that we should maintain the principles of Social Security, but I think the existing structure is not working. Until we construct a system that creates the savings that are required to build the REAL assets, so that the retirees have REAL goods and services. We don’t have a system that is working. We have one that basically moves cash around and we can guarantee cash benefits as far out and whatever size you like, but we cannot guarantee their purchasing power. Do we have the material goods and services that people will need to consume, not whether or not we pass some hurdle with respect to how legal financing occurs. Financing is a secondary issue and it is a means to create the REAL wealth, not an end into itself.

Photo: Gail Sredanovic (L) and Ellyn O’Toole join the California Alliance for Retired Americans at a demonstration outside the office of U.S. Senator Dianne Feinstein (D-CA) in San Francisco, California August 17, 2011. The group was urging Feinstein to protect social security benefits. REUTERS/Robert Galbraith

 

 

 

Comments

on talking like ‘capitalists’ i’d refer you to the following comment:

“.. we should no longer speak of “capitalism,” but instead of the tyranny of the fascist creditor-technocrats and their captive economists.”

As Milton Friedman pointed out some time ago, every economic plank of the socialist party platform of 1928 has become law, without the socialist party ever fielding an actual president.

Posted by jagould | Report as abusive
 

I agree with you. it is definitely a Ponzi scheme. SS should continue but needs some real assets to back it up.

Posted by zotdoc | Report as abusive
 

To fully appreciate what a Ponzi Scheme Social Security really is then try the calculation I did and be shocked. What I did was consider it as though it were an IRA (individual retirement account) that was funded by contributions made oer the years, and then assume that interest earned has been neutralized by inflation oveer the 40 years (which it has). To do this calculation I took my last SSI annual statement received at age 65 and added up all the under-cap earnings I had over my working lifetime (middle column) and multiplied this by 0.1 (total of employee + employer contribution on average)(ie 5% + 5% = 10%). This yielded a total of $120K in my pseudo-IRA. I then divided this by the monthly payout that SS says they will (and have) pay(ed) me ($20K/yr) and this yielded a 6 year payout till the fund was exhausted (which is what it is effectively). Thank you all you Ponzi suckers for continuing to pay in while I go on to my 72nd year and beyond. And what is more frightening is to think about all those cops and other municipal employees who think that they are ‘owed’ a 90% retirement payout. Are they nuts??? If SSI can only pay out around 16% after contributing at a 10% rate then how much should those ‘robbers’ have had to pay in to get a 90% payout?? Stand by folks, that swooshing sound you hear will be a whole lot of states and municipalities going down the drain. Couldn’t any of these geniuses do basic math?? I woould guess not.

Posted by Eric93 | Report as abusive
 

In order for the system to work, there will be higher Federal taxes and higher inflation rates into the future. This is better than widespread social unrest. I would argue for tariffs instead of taxing income. In a globalized world, the country that least depends on the globe is the strongest.

Posted by M.C.McBride | Report as abusive
 

There is no difference between the obligation of a ten year Treasury Bond and Social Security. Period. Default on one, default on both. There is simply no reason the wage earners of the USA alone should be shorted when other creditors of the USA are not. Cut both equally and we may have a deal.

Cutting FICA taxes is a bad idea unless you are phasing out Government retirement programs altogether. That should include all Government pension-like payments, including Civil Service, military, and elected official post-service payments.

Every other major industrial country has a Government public retirement plan. Why think we are different? Because we might have to stop our stupid, unpopular anti-Islamic war? How sad that Israel might have to fight its own battles, or, worse, pay for them.

Posted by txgadfly | Report as abusive
 

Social Security needs to be modified – that much is clear. It is a shame that the Fed has spent the surplus just as fast as it has come in, but at this point that the unchangeable past. Introducing a needs test and removing the salary cutoff would be two simple ways of improving the financial future of the program. I have been paying in for years and do not expect to collect. I am ok with it. It is better than watching my less fortunate peers eating cat food…

Posted by jeffsimpson | Report as abusive
 

Mr. Whalen,

My understanding is that the Social Security Fund holds 2.8 trillion dollars in U.S. Government bonds, and yet people keep saying that the fund is “broke.”

If we call these bonds “worthless paper,” as some have done, aren’t we saying that the U.S. Government has no obligation to pay any of its debts?

All financial instruments are promises. Are you suggesting that we should begin selective defaulting? And who selects?

Posted by dan_tucson | Report as abusive
 

Somehow or another you must try and convince me that Social Security is an upfront scam to purposefully defraud its investors? A Ponzy Scheme is just rhetoric. It’s a way for someone to be intellectually lazy with the facts. Just say all of the fancy words that make people take notice. This is how Rush Limbaugh can be on the radio all of these years.

Chris- I agree with you on the BASEL III rules and almost all of your other statements on the banking sector but on this I just can’t get to the point you are trying to lead me too.

Posted by JayTrader | Report as abusive
 

You didn’t even put any effort into this conservative smear against a vital government program. Shame on you. Given the nature of your business, which seems as much a ponzi scheme as any hedge fund, this article is nothing less than printing a lie for which you should be fired. This is the one paragraph of argument and it’s horribly written.

No, James, you save your worst argument for last. Rick Perry is right: Social Security is a Ponzi scheme. The nature of the pay-as-you-go system and the high budget deficits being run by the federal government for other services makes it a precise parallel with the work of Carlo Ponzi. The US fiscal mess makes it increasingly unlikely that the federal government will be able to make good on the Social Security payments without resorting to hyperinflation. All of the cash collected from past recipients is gone with no assets to show for it but Treasury debt.

Social Security is a federal insurance program that provides the positve externalities of increased employment along with job security and longer employment overall. Your argument is against the federal government running such a scheme, but not against such a scheme itself. For example, of the many massive state pension plans operated by california, NY, Illinois, etc., were they to be operated by a pan-state official, as is similar to what is done in canada, you would probably be in favor of it. It would be a non-federal pension fund, which could invest heavily in equities, as Canada’s does, and as Mr. El-Erian did at Harvard with their massive endowment, and generate a handsome return on investment.

However, as long as the federal government runs a national deficit, which has admittedly continued to happen for far too long, the SSA’s money is best spent covering federal debts, and buying treasuries to ensure that Americans own a part of their own country’s future, as the SSA currently does, and so that this country owns a greater stake in its future than foreign investors.

You are nothing less than a conservative hack.

Posted by theinfamoush6 | Report as abusive
 

What is missed here is that why in the world does SS need to be backed up by anything other than US Treasuries? What real assets are you referring to? If you don’t think UST are real assets than hand them over to me. If you dont think that USD are viable then I will send over a wheel barrow for you to load your worthless dollars unto. SS will never run out of money. Its impossible in a MMT world. Its these scare tactics similar to TARP that made Americans more sheepish. Why are we not having a discussion on Medicare/Medicaid which is really the Gov Program that is completely out of control.

Posted by JayTrader | Report as abusive
 

theinfamoush6….
Whalen is not a Conservative and is not a hack. He is a staunch libertarian from the Austrian Mises School of Economic Thought. The problem I have with him as well as all other Austrians/Libertarians is that they seem to think they have all of the answers but rarely will confront the social problems and dislocations from their policies. This is why Libertarians always fall on their faces. There are no aetheists in a fox hole. They will be the first ones to run to governemnt for a bailout when the feces hits the fence.

Posted by JayTrader | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •