For Social Security, it’s print as you go

Sep 23, 2011 16:24 UTC

“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





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

Time to end the Keynesian pretense about fiscal stimulus

Sep 19, 2011 17:06 UTC

“The U.S. can pay any debt because we can always print more money.”

–Alan Greenspan
Meet the Press

August 7, 2011

Last week, Nouriel Roubini released a paper, “A Radical Policy Response to the Rising Risks of a Depression and Financial Crisis.” He writes: “Data suggest that developed and emerging markets alike are heading for a massive slowdown in growth, with advanced economies already slumping to stall speed.” Roubini is right, but for the wrong reasons.

Government intervention is the root cause of the financial crisis and the maladies identified by Roubini. Many of his proposals, such as debt restructuring and maintaining liquidity to solvent borrowers, are common sense initiatives that ought to be followed immediately. But the proposals by Roubini and others that governments should borrow and print even more fiat currency to fuel further fiscal stimulus are badly considered. Economists from Paul Krugman in the US to Adam Posen in the UK all call for more stimuli. They are all wrong.

First, when Roubini, Posen et al call for additional fiscal stimulus, we need to ask them why. The vast fiscal stimulus already attempted in the US failed miserably in terms of creating permanent jobs. More fiscal stimulus funded with debt will not generate real growth. Remember the idea of public deficits “crowding out” private investment? Huge public deficits actually kill private investment and increase inflation, but you will never hear the neo-Keynesians admit to it.

Second, when Roubini and Posen call for the Fed and the ECB to run the monetary printing presses, what they are saying implicitly is that the excessive debt currently killing growth in the industrial nations cannot be repudiated. To the point made in my earlier post on Roubini, we should no longer speak of “capitalism,” but instead of the tyranny of the fascist creditor-technocrats and their captive economists. While Greece faces seemingly inevitable default, many economists continue to believe that avoiding deflation in the larger industrial nations is the chief policy goal. Here again they are wrong.

Years ago, as an earnest young staffer for Congressman Jack Kemp, I expressed worry to my father Richard J. Whalen over the mounting federal debt. An adviser to several presidents and Fed chairman, he looked at me and smiled. “The duty of this generation is to pass the bubble onto the next generation, intact,” he quipped, reflecting the mainstream view in the US today. But as the quote from Alan Greenspan suggests, inflation is the sure result of this strategy. And deflation is the cure.

Deflation does hurt debtors and lenders, but it also advantages savers and institutions with cash to buy assets cheaply. The buyers of dead banks and bad assets generate real growth and jobs. When Roubini, Posen and other mainstream economists call for measures to avoid deflation, they actually cut off one of the few ways that consumers and private business have to offset the ill-effects of secular inflation — the real culprit behind the financial crisis.

But for the inflationary policies of the Fed and the ECB to stimulate pseudo “growth” over the past several decades, there would have been no financial bubble and no mountain of housing-related debt. Why do economists like Roubini and Krugman say we need more of this medicine? Such pathetic proposals for more-debt-driven government intervention are what pass for mainstream economic thinking today in the G-20 nations.

Keep in mind that there are still hundreds of billions in bad debts in the US and EU tied to real estate and other speculative endeavors — debt which must eventually default. Until the global financial system is cleansed of these bad debts, market volatility and uncertainty will remain high. Unless we bite the bullet and write down debts to levels that will allow private growth and employment, there will be no recovery.

Printing money and deficit spending hampers private credit creation. Higher inflation scares private investors and business leaders who refuse to hire new employees and invest in new capital stock. Fear of inflation is driving private capital flight into gold and other non-dollar assets. If the Fed wants to boost the US economy, then it should swear-off further monetary ease, raise interest rates gently, and provide ample volumes of credit to solvent banks.

Roubini is entirely right to focus on providing capital and liquidity to solvent banks, but he does not go far enough. Try this instead: restructure Bank of America and other insolvent US and EU banks and government agencies; Sell bad assets to solvent banks and private investors; Raise new private and public capital to create new, private financial vehicles to support leverage and new credit creation. Think of US Bancorp becoming the largest lender in the US as the zombie banks wither away.

The citizens of the US and EU states need to reject the siren songs of economists who wrongly advocate more debt-funded spending and inflationary monetary expansion. Only by restructuring bad debt, cutting public deficits and limiting the monetary policy caprice of the Fed and ECB can we create a sustainable environment for economic growth. Indeed, the one sure way to ensure the collapse of the fiat dollar system and the return of the gold standard is to follow the advice of Roubini, Posen and Krugman when it comes to monetary and fiscal policy.


Knowing and speaking the truth is only the first step in acting upon that truth . . . which WILL set you free.

Posted by rbblum | Report as abusive