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Social Security is a Ponzi scheme (Part 2)

Social Security is a Ponzi scheme (Part 2)

John Stossel – Government’s Ponzi Scheme

Uploaded by on Apr 21, 2010

A look at the Social Security system. By contrast, Bernie Madoff seems like a shoplifter. http://www.LibertyPen.com

Uploaded by on Jan 8, 2009

Professor Williams explains what’s ahead for Social Security


Governor Rick Perry got in trouble for calling Social Security a Ponzi scheme and I totally agree with that. This is a series of articles that look at this issue.

Personal Accounts and the Savings Rate

by Timothy B. Lee

This article appeared on Forbes.com on September 11, 2011.

Rick Perry’s recent comparison of Social Security to a Ponzi scheme has resurrected the long-running debate over the solvency of Social Security. Many libertarians and conservatives advocate shifting from the current pay-as-you-go system — in which taxes on today’s workers finance the Social Security checks of today’s retirees — to a system of personal accounts in which each worker’s retirement funds are set aside for his own retirement. One of the key arguments for such a system is that the stock market’s historically high returns would allow the average worker to retire with more money in his pocket than the meager returns the Social Security system now promises (and projections suggest the system may not even deliver on those promises).

The underlying reason this works is that the money in personal accounts would be invested in private sector businesses, which would use them to create new wealth. In contrast, Social Security taxes are used to finance current government spending. But in a blog post last month, Karl Smith argued that the two situations are more similar than they seem:

I think that sometimes lay people get confused and think that a private retirement system implies that people will only be paying in and thus adding to the capital stock. They forget that on the opposite end people will be extracting and thus depleting the capital stock.

Timothy B. Lee is an adjunct scholar at the Cato Institute. He covers tech policy for Ars Technica and blogs at Forbes.com.

More by Timothy B. Lee

The “investment bonus” is only the time between when the money goes in and when it comes out. I wish I could go into more detail, but you actually get the exact same effect from a Social Security trust fund. Less borrowing by the government — and hence a higher capital stock — when money is going in. More borrowing by the government — and hence a lower capital stock — when money is going out.

To unpack this a bit, the Social Security administration was (until last year) taking in tens of billions of dollars more from payroll taxes than it is sending out in Social Security checks. The difference was lent to the Treasury Department to finance other government programs.

Smith’s point is that if the SSA weren’t running a surplus, then the Treasury Department would have had to go to borrow that money from private bond markets instead, which would have meant less money being invested in private-sector wealth creation. Hence, switching to private accounts doesn’t actually increase the amount of money being invested in the private sector, and hence doesn’t produce any new wealth that can be used to pay future retirees.

In theory, this argument makes sense. But it has a couple of practical problems. First, it assumes that a dollar invested in stocks should have the same wealth-creating effect as a dollar invested in bonds. It’s not obvious that this is true. Stocks have historically generated a higher rate of return than bonds, after all, and it’s not crazy to think this reflects the fact that equity investments generate more wealth per dollar than debt investments.

But the more serious problem with the argument is that it implicitly holds other taxes and government spending constant. That is, it assumes that when the SSA lends a dollar to the Treasury, the result is one less dollar of private-sector borrowing rather than one more dollar of government spending or one more dollar of tax cuts.

But this isn’t a reasonable assumption at all. Consider the late 1990s, the only period in my lifetime the federal government has run a surplus. Bill Clinton began bragging that he’d balanced the budget toward the end of fiscal year 1998. And in that year, the federal governmentdid run a slight surplus of $70 billion dollars. But this surplus is the result of adding a $30 billion “on budget” deficit to Social Security’s $100 billion surplus. If Social Security is ignored, the government didn’t reach a surplus until 1999.

If the US had a system of personal accounts in the 1990s, then elected officials couldn’t have plausibly counted the accumulation of funds in peoples’ accounts as part of a federal budget surplus. And so the deficit would have looked worse than it did. It’s impossible to know how that would have affected the budget debates of the 1990s, but it seems reasonable to assume that politicians would have enacted deeper spending cuts and/or larger tax increases to close what was perceived as a substantially larger deficit.

In other words, one way to think about personal accounts is as a mechanism for Congress to exert self-discipline. As long as Social Security surpluses are saved in a single giant lockbox managed by the government, politicians are going to face irresistable temptations to raid it to finance other programs. It’s simply not credible to think the federal government can “save” money by lending it to itself.

Splitting the lockbox up into millions of individual accounts with peoples’ names on them makes that harder to do, because people are going to be much more sensitive about the government pretending the money in their personal accounts really belongs to the government.

And this means that personal accounts are likely to increase the savings rate. Not because Smith’s technical point is wrong, but because switching to personal accounts changes the political dynamics of the budget process. Without the ability to hide deficits behind Social Security surpluses, politicians in the coming decades would face greater pressure to cut spending and/or raise taxes in order to produce budgets that are actually balanced.

Only difference between Ponzi scheme and Social Security is you can say no to Ponzi Scheme jh2d

Is Social Security  a Ponzi Scheme?

I just started a series on this subject. In this article below you will see where the name “Ponzi scheme” came from and if it should be applied to the Social Security System.

Ponzi! Ponzi! Ponzi!

Ponzi! Ponzi! Ponzi! There, I said it. To the extent people believe there are trust funds with their names on them, Social Security is absolutely a Ponzi scheme. So is Medicare. People need to hear it. 

Many people think that when the government takes payroll tax from their paychecks, it goes to something like a savings account. Seniors who collect Social Security think they’re just getting back money that they put into their “account.” Or they think it’s like an insurance policy — you win if you live long enough to get more than you paid in. Neither is true. Nothing is invested. The money taken from you was spent by government that year. Right away. There’s no trust fund. The plan is unsustainable. Medicare is worse.

Mitt Romney and other Republicans who scoff at Rick Perry shamelessly pander to older voters. They should tell people the truth.

Still, I’m not convinced Perry has more than a sound bite. In his USA Today op-ed this week, the most he says is, “We must consider reforms to make Social Security financially viable.” He doesn’t say what kind of reforms.

Charles Ponzi promised to make money for investors by taking advantage of price differences in coupons for postage stamps. Trouble is, he paid some early “investors” with money wheedled from later “investors.”

What sustains a Ponzi scheme is deception. If people really knew how it worked, they wouldn’t sign on.

Social Security and Medicare are different. You could say no to Ponzi. I wouldn’t advise saying no to the government. Not if you want to stay out of prison.

Social Security is nothing more than a promise from politicians. The next gang can break the promise.

Twice the government has argued before the Supreme Court that Social Security is not insurance. In 1960, Health, Education and Welfare Secretary Arthur Sherwood Flemming submitted a brief to the courts stating: “The contribution exacted under the Social Security plan is a true tax. It is not comparable to a premium promising the payment of an annuity commencing at a designated age.”

In a ruling that denied a man’s property claim to Social Security benefits, the Supreme Court said, “It is apparent that the noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments.”

So anyone who believes Social Security is an investment plan really has only himself to blame.

If you want evidence, listen to how politicians talk about your Social Security “contributions.” They are taxes and nothing more. No one pretends they are premiums. In fact, President Obama and the Republicans want to stimulate the economy by extending a cut in the payroll tax for workers and cutting the employer’s share of the tax — but without reducing Social Security benefits.

Now, I like tax cuts more than the next person, but as Freeman editor Sheldon Richman points out, this one has a complication the politicians don’t seem to care about:

“President Obama’s jobs program calls for cuts in both sides of the payroll tax. That tax finances Social Security and Medicare. Social Security and Medicare are already taking in less money than they need to pay retirees. So they will have to cash in more of the Treasury IOUs left behind when previous surpluses were used to finance general expenditures. But the Treasury is also already running a deficit, a trillion dollars-plus. So it will have to borrow more in the capital markets in order to pay back the Social Security and Medicare funds. Unless Obama makes up the lost revenue by changing the tax code. But then money will be withdrawn from the economy in the form of higher taxes so it can be put back into the economy through the payroll-tax cut. Somehow that’s supposed to stimulate the economy.”

Like all jobs programs, Obama’s latest plan is a scam. The economy would create ample opportunities to earn income — and make it easier for people to look after themselves in retirement — if the government would just slash spending, taxes, regulation and privilege.

Ponzi scheme or not, we wouldn’t need Social Security.

John Stossel

John Stossel

John Stossel is host of “Stossel” on the Fox Business Network. He’s the author of “Give Me a Break” and of “Myth, Lies, and Downright Stupidity.” To find out more about John Stossel, visit his site at johnstossel.com.

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