Monday, August 16, 2010

Raising the Social Security Bogeyman

. . . [S]ome Republican leaders in Congress don’t seem to have learned any lessons from the past few years. They’re pushing to make privatizing Social Security a key part of their legislative agenda if they win a majority in Congress this fall. . . .

That agenda is wrong for seniors, it’s wrong for America, and I won’t let it happen. Not while I’m President. I’ll fight with everything I’ve got to stop those who would gamble your Social Security on Wall Street. Because you shouldn’t be worried that a sudden downturn in the stock market will put all you’ve worked so hard for – all you’ve earned – at risk. . . .

President Obama, Weekly Radio Address, 14 August 2010

The left is on a major push to scare the electorate in advance of the midterms with the bogeyman of 2005 - Republicans want to destroy Social Security. One, it is disingenuous to say the least, given how Soc. Security is being run and the problems it faces. Two, can this strategy possibly work in today's environment, when we face mounting deficits that could well destroy our nation?

First off . . . repeat after me . . . Social Security is the World's Biggest Ponzi Scheme.

Let's say that again . . . Social Security is the World's Biggest Ponzi Scheme.

Were anyone in the private sector running an investment the way Congress has run social security, they would be sharing a jail cell with Bernie Madoff.

We pay into Social Security every year of our working lives, but not a one of us has even a dollar of that money invested anywhere.

Every year, taxes are collected for Social Security. The Social Security Administration takes out of those taxes what it needs to pay out benefits that year. The rest goes into the general funds which a profligate Congress then immediately spends. In exchange, Social Security gets IOU's from Treasury in the form of non-negotiable bonds - i.e., they are bonds that the Social Security Administration can't sell on the open market; they can only be redeemed from Treasury. And when they do redeem them, Congress, having already spent the money received for the original bonds, must either take money from the the general funds or have Treasury borrow money from the public by issuing more debt - i.e., new bonds (with interest) on the open market. To top it off, the IOU's are not accounted against the federal budget deficit.

Update: A clearer explanation comes from at Karl Denninger at Market Ticker in the article, Revoke Paul Krugman's PhD:

This is similar to you coming to me with $100,000 and I "promise" to hold on to it for you and keep it "safe." I give you a promissory note to this effect. But I never hold the funds - I immediately go blow them on hookers, coke and limousines. You now have a bunch of IOUs, and I have no money.

Now perhaps I can manage to sell someone else some bonds when you come to redeem those IOUs. Perhaps. But what is unmistakable and true is that the money you allegedly "deposited" with me was immediately dissipated, not invested, saved, held or secured.

This little scheme seems to work just fine provided that each year the Social Security system takes in more than it spends on benefits - that is, so long as the file cabinet full of IOUs continues to get bigger. Treasury gets the appearance of "Free Money", Social Security is able to pay benefits, nobody's the wiser.

But it's a scam, because in point of fact the so-called "Special Bonds" are nothing more than a bare promise to pay and the asset against which they were issued (tax receipts) was instantly dissipated!

So what happens when Social Security starts to eat into that so-called "trust fund"? Immediately, Treasury needs to sell more debt. Ok, that sounds reasonable - but on what terms - that is, at what interest rate - will Treasury have to pay in order to sell that debt?

If you surmise that there's every possibility that we'll face a "Greece" moment long before 2037, you're correct. In fact, we could face that as soon as three or four years from now.

And like all ponzi schemes, Social Security will start to fall apart when the money coming in isn't enough to cover the current money being paid out. And we are there today. Already this year, Social Security is in the red $41 billion. It will soon be permanently and massively in the red as more baby boomers retire. Since all of their contributions to Social Security have already been spent, it means that payouts for Social Security will have to come from our taxes. The projected unfunded liability for Social Security is in excess of $7.7 trillion. (And to make this doubly scary, if you follow the link above, you will note that Social Security is the least of our entitlement problems. It is dwarfed by Medicaid and Medicare. I have no idea how much Obamacare is going to add to that unfunded liability, but if Massachussets is any indication, it will be substantial.)

Social Security is broken. Social Security is corrupt. Social Security and all of our entitlements must be fixed or they will destroy America.

Bush tried to fix Social Security in 2005 by privatizing it. That certainly would have permanently taken care of the unfunded liabilities problem. It would have taken away a large chunk of funds for Congress to blow every year - always a good thing. It would have left people actually owning the money they put into social security - perhaps the best part of it. And it would have made all Americans realize that they have a stake in businesses prospering in America.

Indeed, as to Obama's demagouging about the vagaries of the stock market, the simple truth is that what he is complaining of is the payout stream. That is something seperate and apart from the potential annual growth of each person's involuntary investment in Social Security. And indeed, in the private sector, people have the option of taking their retirement funds at the point of retirement and purchasing an annuity that will guarantee a steady income stream. There is no reason Soc. Security could not be run similarly - beyond the fact that it is, today, a Ponzi scheme.

As to growth during the years of people paying into Social Security, Obama is divorcing the importance of our economic growth from government hand outs. If businesses are prospering, then our economy is growing and Social Security payouts represent a pittance in growth on investment. If businesses and our economy are in the tank, then the only way the government can fund Social Security payouts at their current level is to raise taxes and / or print a lot more money - something which inevitably leads to inflation. Regardles, under each scenario describe above, all of us paying into Social Security are screwed.

Yet Obama demagouges the issue like the left did in 2005. It is easy to see why. One, the left's legislative record going into the midterm elections has America spitting blood. Two, Social Security was a winning issue in 2005 and Obama is hoping and praying for anything to distract from his record to date. Three, and most important by far, the left makes a living out of class warfare and demonizing businesses. The last thing they want is for everyone in America to realize that they have a stake in all businesses in America prospering. Most people are blinded to that today. But give them a stake in those businesses in the form of a dedicated Soc. Security account invested in a DOW Index Fund, for example, and the class warfare cannon fodder of today would soon become a nation of stock ticker reading investors who would not appreciate government interference in the markets.

None of that is acceptable to the left today, nor was it in 2005. They demagogued the issue in 2005, claiming that there was no problem with Social Security and that it would be solvent long into the future. Indeed, they refused to even engage with Bush in a bipartisan dialogue on the issue. They won - and then celebrated:


Paul Ryan, in his Roadmap For America, has put out a number of proposals for Social Security. He has floated the issue of privatizing social security and he has floated the proposal to change the age at which people become eligible for Social Security pay outs. Every Republican should jump on the Ryan bandwagon. It is a disgrace that only a few of our craven Congressional Congresscritters have done so. They are deathly afraid to touch this issue because of the how the left turned this issue nuclear in 2005. I think that our craven Congressional Republicans are not seeing the reality - we aren't in 2005 any more. Indeed, while we may only be five calendar years removed from 2005, given the degree to which our national paradigm has changed, it might as well be a century.

With the left's effort to use the Social Security bogeyman to gain traction on at least one issue going into the midterms, the far left punditry has sprung into action. Paul Krugman addressed the issue in his weekly column at the NYT. In it, he has the unbelievable chutzpah to say that critics of Social Security are acting in "bad faith:"

So where do claims of [a Social Security] crisis come from? To a large extent they rely on bad-faith accounting. In particular, they rely on an exercise in three-card monte in which the surpluses Social Security has been running for a quarter-century don’t count — because hey, the program doesn’t have any independent existence; it’s just part of the general federal budget — while future Social Security deficits are unacceptable — because hey, the program has to stand on its own.

Krugman is either incompetent or lying through his teeth in support of the left - or (my vote) both. Those "years of surpluses" in fact don't count. That is not "bad accounting." Those surplus funds were spent as soon as they were recieved. How do you think Clinton showed a budget surplus in his final years in office? He paid down the national debt with surplus funds from Social Security. Because the IOU's held by Social Security were accounted seperately, it created an illusory budget surplus. That, to every sane person, is bad accounting. No, actually it is worse. It is ENRON accounting.

Krugman is also pretending that Social Security operating massively in the red should not be an issue. This man is an utter charlatan. With deficits at historic levels and poised to go rapidly higher, Krugman's prevarication is criminal. As NRO notes:

Anyone who accuses critics of the Social Security trust-fund shell game of “bad-faith accounting” is running some serious flimflam of his own. The IOUs in the trust fund represent money that the government owes to itself. As long as the program remains as it is currently structured, that money has to come from somewhere: QED, higher taxes, fewer benefits, or some combination of both. To just pretend the problem doesn’t exist, however, is flimflam of the highest order. Only a master such as Krugman could say it with a straight face.

Jonah Goldberg wrote in an essay several weeks ago that the rules are changing. People in this bad economy are not looking for the government to solve their problems, but rather are demanding it get out of the way so that the people of America can solve them. The middle class is supposed to forever hold onto entitlements, but a vast majority of Americans want Obamacare repealed. I would add that unions, once popular in America, are now being seen by a majority as the penultimate leech on taxpayers. It is also becoming obvious that the race card is rapidly losing legitimacy - something that foreshadows disaster for the far left.

In this environment, I think Obama and the left's attempt to raise the spectre of the destruction of Social Security will ring hollow indeed to many Americans. And it only makes matters worse for the left when someone like Krugman comes out with a fire and brimstone missive based on patently false assertions. I have not seen any recent polls on this issue, but with Americans watching their economy fall apart, they are ripe to listen to reality. Thus I believe that if you ask Americans today whether it is time to substantively reform Social Security, seven in ten will say yes, and the majority will demand that it be done without raising taxes. I think Obama has latched onto an anchor issue - an anchor heading to the bottom of the electoral abyss. The rules have changed. Obama and the left just don't want to believe it. I have no problem with that. I only demand that Republicans realize it.

1 comment:

Debbie said...

Just think if we could have invested all that money that was taken out of our checks and supposedly invested in Social Security... wow we could have a good retirement. We could have had control of where it was invested, how it was invested, with no government telling us what we could do with it. The Ponzi Scheme has crashed and burned.

Right Truth