A post by Maynard
I’m bumping this post of mine from the carefree days of July, 2006. I’m inspired to revive this after reading this Drudge-linked article:
Social Security will run at a deficit this year and keep on running in the red until its trust funds are drained by about 2037, congressional budget experts said Wednesday in bleaker-than-previous estimates.
The massive retirement program has been suffering from the effects of the struggling economy for several years. It first went into deficit last year but had been projected to post surpluses for a few more years before permanently slipping into the red in 2016…
This has all been projected years in advance. But the politicians did nothing, and now judgment day is upon us.
Social Security has built up a $2.5 trillion surplus since the retirement program was last overhauled in the 1980s. Benefits will be safe until that money runs out. That is projected to happen in 2037 – unless Congress acts in the meantime.
That “$2.5 trillion surplus” is a file cabinet filled with IOUs which the government has promised to pay to itself. The money was all spent, and the IOUs can only be paid back by raising taxes or more borrowing.
Social Security supporters are adamant that the program will be repaid, just as the U.S. government repays others who invest in U.S. Treasury bonds.
“Its’ an IOU that is backed by Treasury bonds and the faith and credit of the United States government,” said Sen. Bernie Sanders, I-Vt. “It is the same faith and credit that enables us to borrow from rich people and from China and from other countries. As you well know, in the history of this country, the United States has never defaulted on one penny owed to a creditor.”
Liars! Damned liars! Yes, as a technical point, the government has never defaulted. What it has done is debase the currency. A dollar today is worth less than a nickel in the real currency of a hundred years ago. You keep your dollars but you lose the purchasing power. In effect, money is robbed right out of your pocket by toxic monetary policy, and the Feds get away with it because nobody understands what happened.
Anyway, here’s my earlier post.
Maynard explains why those responsible for Social Security should be jailed
Social Security is one of those topics that I can’t talk about without raving like a lunatic. It’s a program founded upon lies and kookiness, and every time it threatens to collapse under its own weight, the politicians get together and serve up more lies and kookiness. Anyone who attempts to speak the truth or warn of danger is immediately branded as a heartless greedy dirtbag who wants to run down the elderly in his golf cart while they’re sitting in their cardboard-box homes eating dogfood.
The biggest argument in favor of some form of Social Security is the moral obligation of the society as a whole to care for its elderly. We owe something to those who have put in a lifetime of work and are slowing down. But, as always, the devil is in the details. How much do we owe, and to whom do we owe it? How much should be attended to by the individual (or by his relatives), and how much obligation should fall upon the government?
Naturally, when the state got involved, it did so in a big way. In the depths of the Great Depression, Roosevelt’s New Deal gave us a universal state-run pension plan. The Depression caused a lot of desperate people to rally behind crazy economic theories, and Social Security gained momentum from the times. For example, an old kook named Francis Townsend rose to great fame with his crank plan to tax young people and give the money to old people. The old people would be required to spend the money within a month, which would cause the factories to expand and hire more young people. This would, the theory went, bring an end to unemployment and raise the living standards of young and old alike. Who could possibly object to that? A few astute workers might have realized that stealing their wages and giving the money to someone else wasn’t going to save the world, but what did they know? The Townsend Plan developed a national following and many advocates in Congress, and this, plus other such thinking, led to Social Security.
In order to sell Social Security, the government lied to us. You see their lies posted on the history section of the Social Security website. Here’s what they told you Social Security was going to cost you:
After the first 3 year — that is to say, beginning in 1940 — you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year. This will be the tax for 3 years, and then, beginning in 1943, you will pay 2 cents, and so will your employer, for every dollar you earn for the next 3 years. After that, you and your employer will each pay half a cent more for 3 years, and finally, beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.
Wow, that seems like a sweet deal, doesn’t it? Security in your old age for a pittance (cleverly split between you and your employer, so it appears that you’re only paying half of what you’re really paying). “That is the most you will ever pay.” And once the program started up, it was politically unkillable. If a private company behaved this way, you’d rescind the deal and have the perpetrators jailed. But we’re dealing with the government here. So there are no apologies for the lies. Instead, the “promises must be kept”, and so we’re obligated to undertake an endless series of “reforms”. Each “reform” is of course a tax hike, and yet the cost/benefit ratio of the program continues to slip. The early retirees paid little and collected a lot. But the later you got onto this ride, the worse your deal is. And now we’re watching the system grind towards insolvency in the next generation, and the boys and girls in Washington do nothing but curse anyone who dares observe that the emperor has no clothes.
So as the current generation passes through its years of economic productivity, it is being robbed of the money it should be saving for retirement. That money is going straight into the pockets of the older generation, or perhaps spent as part of the general fund of the Federal Government. This robs the nation of much-needed domestic capital investment (thus forcing us to borrow money from abroad and pushing up interest rates), and assures that, as we retire, many of us will be forced into an artificially-created dependence upon government largesse. And that’s right where the Leftists and Washington bureaucrats want us, unable to survive without them. Shouldn’t it be the other way around, with Washington begging us for money?
The fundamental economic problem with Social Security is that it was set up as a “pay as you go” program, meaning it’s paid out of current revenues. You receive an annual statement of your long-term “contributions”, implying that you’ve got an account full of money. But that account doesn’t exist. Most of your taxes goes straight into someone else’s pocket, and any surplus goes into the Social Security Trust Fund. The politicians all sincerely swear how they’re protecting the SSTF, but the simple truth is that it’s all a colossal fraud. The fund consists of Treasury securities. Stop and think about this for a moment. A Treasury security is an IOU from the government. When the government holds Treasury securities, it means it holds an IOU against itself. What sort of collateral is that? Try writing an IOU to yourself and using it to get a loan, and you’ll get laughed out of town, or maybe arrested. So the Trust Fund does not exist. You remember when Clinton ran a budget surplus? Well, that was a lie as well. His “surplus” was actually a deficit, but if you tossed the Social Security receipts into the general fund, then it became a surplus. The only way the Trust Fund can ever be recovered as cash is through future tax revenues. Do you think the next generation will be willing to raise taxes on itself to pay for your gullibility? Don’t count on it!
So Social Security is an unfunded liability measuring in the trillions of dollars. At present time, the Social Security taxes are adequate to cover the expenses, with the excess going into the Trust Fund (which, as I explained, is immediately looted). But this situation is deteriorating. It is projected that around 2018, the taxes will be inadequate to cover expenses, and it will be necessary to draw from the (non-existent) Trust Fund. This will create a tax crisis, but at least the system will remain technically solvent for a few more years. By 2042, the (accounting fiction known as the) Trust Fund will be exhausted, and Social Security will be financially unable to meet its obligations. The Democrats spin like tops to avoid the word “bankrupt”, but that’s the word that applies to a business that runs out of money and settles its debts for 70 cents on the dollar.
Why is the system, which seemed to work well for a while, going bad? It’s a matter of demographics. We’re living longer and having fewer children. Once upon a time, there were more than 10 people being taxed to pay for one retiree. Now the ratio is 3 to 1, and it’s falling towards 2 to 1.
You can see the advantage of a privatized, or even a partially privatized, retirement system. If you’re saving for yourself, or saving collectively for your generation, then you needn’t worry about changing demographics. It’s not an inter-generational thing. Sure, there’s still the question of increased longevity, but at least the system doesn’t require an exponentially-increasing population to maintain its solvency.
But when George Bush raised the possibility of some degree of privatization, the Democrats stomped him with both feet. Sadly, the public really doesn’t understand the issues, and they’re easily scared. The Democrats seem to have beaten back any possibility of Social Security reform. Their triumph, in combination with George Bush’s reckless spending, has doomed us to economic turbulence as Social Security starts to go under in the coming years.
But, to be fair, I’m not sure that reform is possible at this point. We’re pretty much stuck paying the pensions of people who have paid in, because we stole their savings. Could we possibly come up with the money to pay off the old generation while not following their path to government dependency ourselves? George Bush talked of a possible huge indebtedness to bridge the transitional gap. That’s just like George, ready to borrow money. His “solution” didn’t eliminate the problem of a huge debt; he just proposed transferring that debt from the next generation of taxpayers to the banks. So I wasn’t convinced that his ideas were good, but I’ll give him credit for acknowledging the problem, and inviting an intelligent discussion. But the Democrats figured they’d get more mileage from demagoguery than discourse.
The real problem is that the squeeze is fundamental. You simply can’t run an economy if everybody is retired, even if everybody’s got a fat bank account. If our workers-to-retirees ratio falls too far, somebody is going to be squeezed, and there’s not a thing to be done about it. Somebody’s got to do the work.
So the final truth that no politician will tell us is that the coming pain is unavoidable even under the best of circumstances, and the best thing we can do is try to grow the economy and spread the pain around “fairly”. As a practical matter, this says two things to me: A higher retirement age (a small degree of which is already part of the last round of Social Security “reform”), and a means-test (meaning that people with assets won’t get their government check). I’m not saying this is fair, because it’s not; I’m simply being pragmatic. One way or another, we’ll need more workers and fewer pension expenses.
Since the truth is too painful to admit, maybe the politicians are right in doing nothing. Perhaps we’ll bumble along, one day at a time, and stumble through somehow. It’s a shame, but that’s the way politics is. In the meantime, think of your Social Security tax as the price you pay for not having your parents move in with you. Or if you’re living in your parent’s basement, consider it rent.