Tuesday, August 28, 2007

Social Security Fraud

Quoting from the Ponzi Scheme prosecution story in a recent edition of the Banner-Herald:

“[Security and Exchange Commission] officials claimed the pair lied about the advertising packages, which never existed, and paid initial investors with money received from subsequent investors.”

But isn’t this precisely how the Social Security program works? Money taxed from current workers is used to pay retirement benefits of current retires, not put aside for the future needs of the workers from whom the money was taken.

Contrary to popular belief, workers are not guaranteed any Social Security benefits upon their retirements by either statute or case law - in fact, the reality of the situation is precisely the opposite. Nor does the often-referenced Social Security "Trust Fund" exist in any meaningful sense; the money supposedly deposited in the fund having been applied to the federal government’s general budget as it came in over the years (with nothing but meaningless IOUs – not bonds – left in its place). The “interest” supposedly generated by the non-existent trust fund is merely an accounting gimmick consisting of IOUs as well.

If anyone other than the federal government ran a financial house of cards like this, they too would be facing jail time.

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Anonymous said...

Why is a dollar worth a dollar? Because the US government says so -- only that and nothing more. Does that make the institution of fiat money a ponzi scheme? I don't see how comparing social security to a Ponzi scheme is fair or illuminating.

You have so many thoughtful and reasonable things to say in regards to local issues that I'm surprised by the alarmist nature of your claim here. A ponzi scheme is usually based on a big lie (i.e. spectacular returns from an investment in golden pigs ears) that can not possibly come to fruition. The persons perpetuating the fraud pay out large sums to early "investors" so they will recruit their friends. This is a far cry from how social security works.

Social security is based on a simple promise of the federal government to provide a modest retirement income, and that promise has been fulfilled decade after decade. Their are no false claims of a get rich quick scheme. Just a simple promise that if you pay in now, you will get a ss retirement check.

And every eligible retired person I know receives a social security check. So while you may be technically correct that the payments are not "guaranteed" they are certainly not being withheld.

I would support more of an Australian style retirement program, but whatever it's flaws, social security is not a ponzi scheme.


james said...

Thanks for the (qualified) compliment, but I do not think that I am being alarmist at all.

Your point about currency having value only because we agree with the government to say that it has value is well taken. However, I would argue that the Social Security system has been run very much like a Ponzi Scheme - perhaps not so much in a strictly technical sense, but certainly in conceptual terms.

Current retirees are being paid off using the money put into the system by current workers for their future benefits. When the time comes for current workers to retire, the system will be bankrupt because the money has already been spent – thus, to my mind it operates like a Ponzi Scheme.

This is because from the very beginning, retirees have been paid through current contributions to the system made by other people, not on the basis of any money they themselves contributed and on which they earned a return. The money supposedly set aside in the “trust fund” to pay future benefits has been spent by the federal government as it came in for decades – the trust fund does not exist and neither does the interest ascribed to it over the years. Thus, when the baby boomers start leaving the work force en masse in the not to distant future, there will be no money to pay their “promised” benefits.

To reiterate, there are no legal promises of repayment, just the non-binding promises made by politicians. Insofar as I can tell, the United States Code includes no legally-binding promise of Social Security benefit payments. At least two federal court decisions have stated unambiguously that workers have no vested claims to retirement payments from the Social Security System, saying that the money belongs to the federal government to do with as it pleases. As a political exercise, doing away with the Social Security system would be quite a feat; from a legal standpoint, though, there is nothing to prevent it.

Based on nothing more that demographics, the Social Security system cannot survive as it currently structured. To stave off fiscal insolvency, either benefits will have to be dramatically curtailed for future retirees or payroll taxes will have to be dramatically increased on future workers (or more likely both). Just because the system has not crashed yet does not mean that it is immune to failure when hordes of baby boomers exit the work force in the near future.

And the Medicare system is going to fail even sooner.

Anonymous said...

The AARP has a rosier view of social secruity's financial status:


What's wrong with their math? I've always assumed we'd need some commonsense reforms (i.e. raise the retirement age since people live longer). Several of the reforms suggested at the linked article seem reasonable, and surely some of them can win enough votes to ensure the future of social security.

Again, I'd prefer a mandatory defined contribution model along the lines of what Australia does, but it doesn't seem to me that we have a real "crisis" though we certainly have some choices if we want to secure the long term future.

james said...

The AARP article referenced above discusses methods proposed to “close the gap” between the Social Security liabilities supposedly covered by the trust fund and expected benefits payable over the next 75 years.

Quoting from it:

“Today the system is taking in more than it spends. If nothing is done in the meantime, that situation will be reversed around 2018—some 10 years after the oldest boomers turn 62 (the age of first eligibility for benefits).

Although estimates vary, Social Security should have sufficient funds to pay full benefits until sometime between 2042 and 2052. But rather than cash in the bonds held by the system’s trust funds—which would require the government to raise taxes, borrow money or cut budgets because lawmakers have been tapping the funds to cover other expenses—many experts agree that it would be better to take steps soon to keep the system solvent.”

The operative date in this passage is 2018. To reiterate, the “bonds” held in the trust fund represent no real financial assets whatsoever – just the federal government’s general ability to raise taxes and/or incur additional debt in the future to cover the existing debt owed by the Treasury to the Social Security Administration. Thus, the solvency projected until 2042-2052 is meaningless. So, doesn’t this passage pretty much validate my “Ponzi Scheme” argument that started this discussion by admitting that the feds have looted the trust fund to pay for current spending without putting in place any concrete means to repay the debt owed to future retirees?

Be that as it may, my comments concerning the nine methods offered in the article to stave off insolvency are noted parenthetically:

1. Raise the cap (class warfare-based tax increase on current workers)

2. Increase the payroll tax rate (tax increase on current workers)

3. Raise taxation of benefits (class warfare-based tax increase on current retirees; of course the federal government promised never to tax Social Security benefits at all and did not do so for almost five decades - right up until the time that it needed the money – an object lesson on how government works if ever there was one)

4. Preserve some of the estate tax and dedicate it to Social Security (class warfare-based tax increase; I think that expanding the reach of Social Security into the federal government’s general fund would be a disaster)

5. Make Social Security universal (drag those who are currently vested in alternative [and better] retirement systems kicking and screaming into Social Security solely for the purpose of propping up the system by taking their money, too – and what about the downside of increasing participation in the system by incurring additional payouts later on)

6. Invest some of the trust fund in indexed funds (this one actually has something going for it [privatization, anyone?]; the trust fund “bonds” are a fraud, so putting that money into real assets makes a lot of sense; the other ideas mentioned in this item, a “small” payroll tax rate increase [yeah, right] in 40 or 50 years, a value-added tax on goods and services, and dipping into general fund revenue are all problematic at best – see #4 above)

7. Adjust the COLA (this one bears exploring as showing some promise)

8. Raise the retirement age (this one is all but inevitable; the full retirement age for anyone born after 1959 is already 67, and is only going to increase)

9. Index benefits to prices, not wages (this one, too, would seem to show promise)

I think that, regardless of whether any or all of these methods are implemented and assuming the projections employed are accurate (about which I have serious doubts), they would only amount to marginal improvements in the system’s long-term fiscal prospects.

Quoting again from the article:

“Social Security actuaries and Congressional Budget Office analysts agree that the system could be kept solvent for the next 75 years—longer-range forecasting is meaningless—if two changes were made immediately: raise the combined employer-employee payroll tax rate from the present 12.4 percent to about 14.3 percent—that’s a 15 percent hike. Or cut benefits by about 13 percent.

No one, of course, is suggesting such changes.”

I’ll wager that these projections are optimistic in the extreme as well. But without just such hard policy choices, I remain convinced that the Social Security system is consigned to both demographic and fiscal oblivion.

Xon said...

I'm sorry I've just now started looking at your blog, James. I've appreciated the comments I've read from you over at JMac's blog, and it did make me feel better knowing that you were there representing the "other" Athens, even if you didn't end up winning election to Council.

Your points about SS are, naturally, right on. The only thing I wish is that you hadn't given in to anonymous' reductio so easily. I say that fiat money IS a ponzi scheme, indeed! While we're fixing the looming SS mess, let's go ahead and kill the Federal Reserve, too!

In any case, though, keep up the good work.