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Thursday, November 6, 2008

The Social Security Ponzi Scam

Social Security is one big Ponzi scam. Current workers are taxed to pay for benefits for current retirees. If a private insurance company operated the same way as Social Security, then they would be shut down for fraud.

There are no tangible assets in the Social Security Trust Fund. There is merely a stack of IOUs, to be paid by future inflation or future taxation.

The Social Security tax runs a surplus, but the profits are stored in Treasury Bonds. A government can't store value in the currency it issues. If there's a budget surplus, that is deflationary. If there's a budget deficit, that is inflationary. Social Security is operating at a surplus. This surplus means that inflation can occur elsewhere without people noticing.

Suppose the USA were on a gold standard, and suppose the Social Security Trust Fund were invested in gold. In that case, there would be tangible assets in the trust fund.

Similarly, suppose that the Social Security Trust Fund were invested in the stock market. That would also represent tangible assets. However, when the Treasury Bonds are redeemed and the money spent in the stock market, there would be massive inflation. There's a valid criticism that "investing the Social Security Trust Fund in the stock market is subsidizing the stock market". However, many state government pension funds invest their assets in the stock market.

Current retirees earn a return of 2%-3% on their "investment" in Social Security. That takes into account the Ponzi structure. A return of 2%-3% is far less than a current retiree could have earned elsewhere.

There is no legally guaranteed right to a Social Security benefit. At any time, the benefit could be cut or eliminated. Inflation will erode the value of the benefit. Social Security should be viewed purely as a tax.

Why is Social Security politically untouchable? It isn't because current retirees have such a strong lobby. If both political parties strongly said "Social Security must be overhauled!", then voters would be SOL as usual. Retirees couldn't effectively form a "save Social Security party" any more than any other third party movement could succeed. If the mainstream media honestly reported the nature of the scam, then reform would be guaranteed.

The real reason Social Security is politically untouchable is that it's a massive loot and pillage operation. The surplus Social Security tax isn't saved; it's spent. The Social Security tax allows inflation to occur elsewhere without people noticing.

The reason the bad guys don't want to cut back on Social Security benefits is that current workers would get wise to the scam. Current workers would say "Why am I paying this huge tax in exchange for nothing?" Social Security must appear to be politically untouchable so that the workers/cattle will continue paying the tax.

Some economists say that the Social Security crisis will occur 20-30 years from now, when the Social Security Trust Fund is exhausted. That is false. The true crisis will occur in a few years, when Social Security benefits paid exceed Social Security taxes collected. At that time, taxes or inflation must sharply increase.

There is no way that Social Security promises can be kept. A partial default on Social Security is guaranteed. There will be tax hikes, benefit cuts, massive inflation, or a combination of all three.

If taxes or inflation get too high, then there is a strong incentive for people to work off-the-books and use sound money instead. These "unfunded State obligations" for Social Security and Medicare are one of many reasons why I predict the State will collapse during the next 20 years. As taxes get higher and higher, the incentive for dodging them increases.


Anonymous said...

social security is influenced almost entirely by demographics (as is more economics and business). It is true that it can be taken away at any time. it is true that at present each year that passes put more burden on each tax payer. it is true this has been know about for decades (while researching a similar topic i found a reference to the issues we now face crisply mooted in 1952... nb we knew about asbestos in 1904... old books are a wealth of knowledge for the future).

however, the prescription of hard assets (gold etc) is unlikely to work for this case as you would like. social security is a product of current labour, storing wealth of that level in asset pools creates huge distortions. its a relative concept. hard assets dont help... as they can be depleted when you least want them to be... whilst this does give you some 'discipline' it also would lead to social collapse from hunger and riots as the sop cheques would end... you cant fight demographics on this scale.

if the public knew... they do know. my mother knows. she understands that she has some form of 'right' (but not one she can protect) and the money comes from me as a tax payer. however, she is not feeling too bad for me as she sees lots of big shiny offices and such like, which werent about in her day. fact that i dont own them is a nagging point. the wealth 'delusion' is the key to the problem. power has shifted to capital owners from workers (as global workforce has grown faster than economy, so capital wins), but people feel rich, even though that is a product of debt (as we are now finding out... but we have short memories as we have learnt this lesson many times before).

boomers want the good life. as a group the top section of them control the assets, the bottom section live in horrible poverty and lonely social abandonment. As a group they were taught to vote. They understand the 'scam' but they vote, and they'll be dammed if they're giving it up.

a fair number of people have read Christopher Buckley's Boomsday - not a bad overview of the problem, and its a fun novel to boot.

in large and complex countries where social cohesion and intergenerational support has collapsed only the smoke and mirrors and tax keep them running... but they wont collapse... why?... because the demographics are still favourable. There is a period of pain comming up, but this is likely to be patched over... just intime to be picked up by the 2Bn teenagers on the planet... yep... the biggest thing you should be worried about in your life times is not boomers... its a global explosion of kids... but not in the West... all that will happen is a power transfer to other countries... and the world moves on. the state will persist as the interests of those it supports and their demographics favour it on balance.

there are other places in the world where this is not so. but for most western countries it is (with the exception of the spill over from Russia/eastern block collapse into western europe etc). now, that is a candidate for state destabilisation - demographics, black markets, little respect for law, fragmented or no national allegiance... and a reason to move westwards.

Anonymous said...

You didn't even touch on medicare or welfare. Welfare is even a bigger ponzi scheme than Social Security.

Taxpayers pay nearly the same ammount in regular tax dollars to fund welfare as they do for Social Security.

The State has done a very good job stealing money. they have perfected the art of it. So much so that people do not want to protest by not filing a tax return because they will lose the ability to get a tax refund.

The government overtaxes you every year on purpose in order for you to file a return to get a refund for money that never should have been taken in the first place. The only way to ensure that the correct money is taken out of a corporate check is to lie about your witholdings. You actually have to claim 4 dependants as a single person to net a tax refund of zero.

The want and desire to resist taxation is there. The ability to resist is what was taken away. FDR did a very good job at implementing a true dictatorship. He established a central bank that issues its own money and a taxation system that would forever enslave the majority of citizens to the IRS. He even implemented a progressive tax that punishes workers with the promise that they will get paid back in the future if they reach a certain age.

FDR was a great dictator. More successful than Stalin and longer lasting. He gave us the USSA and we never looked back.

Anonymous said...

There is a solution:
Start a web-page where young people can sign-up for their resolve to vote only for a candidate that promises a solid plan to make social security voluntary, as it was initially.

Signed would indicate that they promise to vote only on a solid plan, with promised dates of actions, one that which is approved by majority voting on that site.

They also indicate that they will do whatever possible to propagate this idea to others they know.

Once say a million persons sign-up, this will be a chunk of votes no candidate would like to miss, since today elections are close calls.

Of course the candidate can lie. If he does, he will not receive their vote on reelection.

Once made voluntary, majority will opt-out, meaning those who have a long way to pay. This will severely cripple and eventually bankrupt the system. Communism isn't sustainable on a voluntary basis.

You've got to throw your weight around, not just sit quiet. If this is a success, what better story there would be to tell your children, then the one where you refused and made it known.

fritz said...

I never understood why people went for social security in the first place,,If the government took money from me during my working days,Invested it and used it for there own good,than paid me back what I put in with interest later,,almost like forced retirement savings with interest,,that would be fair. but taking from me by force, to pay some old person because they were so unwise to realize to save for their own future just baffles me,,

I guess I just don't understand why people supported the cause at its conception and didn't channel social security towards a get out later what you put in now situation

I'm sure it was all smoke and mirrors at the time,and just another way the powers to be could steel money from all the working minions ............

Anonymous said...

As an aside in basic economics... workers get paid the minimum that is required to encourage them to work (set against other issues like job enjoyment etc). This transaction is carried out in money, which both parties know will be taxed at source and them in transit etc. the rate for jobs is set at the level accounting for tax, making the interesting number most of the time the net figure.

this is not true when taxes are raised, in which case the workers bargin gets worse (until he can get a pay rise or new job).

It is also true that wages are for the person, and not their family, so in the example above the single person and the one with four kids get the same wage, but on has bigger outgoings. As the latter is a bigger economic contributor (more things to buy, raising workers) its not to much of a leap to give him a small break on the 'at source, today' tax, in deferment to the 'indirect and later' taxes. I havent even thought about the calculation, but i suspect that single guy paying full tax is better off in hard cash net terms than parent guy with four kids and a full exemption.

Tax has many flaws, and creates many distortions, and in some areas is hard to justify at all. however, the issue is complex and ranges beyond tax into wider social issues.

i hate tax.

however, to remove it you need to think how to fix the issues that exist when its gone... they tend to be the mood and temper of people, and thats a hard nut to crack.

In Sweeden your tax and earnings are public record - you can just look up your neighbour in a book. They are happier and have a better standard of living than US, UK etc. That of course is not the full picture, but it gives a nice base against which to argue.

Thomas Blair said...

Anon 6:15p,

Welfare isn't a Ponzi scheme. It's morally wrong, but it's not a Ponzi scheme. A Ponzi scheme works wherein today's taxpayers pay for today's recipients with the implication that they'll be paid when they age and require old-age pensions, at which point those pensions will be provided by then-current taxpayers. Welfare is a straight wealth redistribution scheme that takes place today and does not depend on changing demographics. Welfare also follows more directly the rich-to-poor distribution than does Social Security, given that SS taxes are capped at ~$104k. With SS, the rich don't get back what they put in, but they get more than the poor in rough proportion with what they paid.

Welfare and SS are both immoral, to be sure, but they aren't mechanically equivalent.

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