President Obama has recently begun campaigning against Republicans on the basis that they want to get rid of Social Security. This is, of course, completely false: Not even Congressman Ron Paul advocates a complete, immediate abolition of SS. Some Republicans, however, do advocate a “partial privatization”. I, however, do advocate outright abolition as the only viable solution to the looming entitlement
crisis. Here’s why.
At current rates, by the year 2040, the US federal government will be able to pay for Social Security, Medicare, and Medicaid. But nothing else. No military, no road funds, no education funds, nothing. If we had wanted to put our entitlement spending on sound footing back in 2008, then we could have raised federal income taxes by 73%, or we could have increased payroll taxes by 103%, or we could have cut federal spending by 115%, or we could have cut Social Security and Medicare benefits by 47%. Any of those options would have been painful two years ago, even if a some-of-each approach had been taken.
However, we did nothing in 2008, or 2009, and now one would have to add a few more percentage points to each of those numbers to represent our current situation.
The bottom line is that Social Security is fiscally unsustainable. Even a pro-Social Security website laughably titled “ThereIsNoCrisis.com“, which was created a few years ago, could only make the statement, “economists agree it [Social Security] will remain solvent for decades” (emphasis mine). Indeed, a few “decades” is—at very, very best–all that the program has left.
Politicians like George W. Bush and Paul Ryan have to be commended for at least addressing this sacred cow. Yet, their proposals have fallen woefully short of providing a real solution. At this point, the only real solution is to simply scrap the program in its entirety.
For starters, Social Security is unconstitutional. Congress was simply not authorized by Article I Section 8 to create such a program. Unfortunately, this fact makes virtually no difference to the political debate today, because the vast majority of people just don’t care about the original intent of the Constitution. So perhaps a case can be made from a pragmatic approach.
That case lies in the fact that Social Security is a Ponzi scheme. The term “Ponzi scheme” is thrown around a lot, and a lot of times people correctly label SS a Ponzi scheme, but don’t really understand why, or what that means. The SEC itself defines a Ponzi scheme as, ”. . .an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity. With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.”
To put all that into layman’s terms, a Ponzi scheme takes your money, tells you that it will invest your money wisely and that it will give you lots of earnings back. The Ponzi scam artist doesn’t actually invest your money. Rather, he finds more suckers, telling the new suckers the same story he told you, and then uses the money from the new suckers to pay you. The scheme can continue only as long as the scam artist can find enough new participants to pay earlier participants. When the scammer runs out of suckers, the Ponzi scheme implodes, and all those who payed into the scheme but have not yet gotten repayed lose a lot of money.
The Social Security Administration, however, chooses the term “pay-as-you-go system,” rather than “Ponzi scheme”. The SSA claims that its scheme is absolved from the economic forces working against other Ponzi schemes, since the government can always guarantee future participants (because it forces all workers to pay into the system). This might be true, if it weren’t for the facts that: A) As medicine and technology improve, citizens will live longer and will have claim to more and more benefits; B) A large population bump followed by a population slowdown (such as the Baby Boom) could mean there will come a day when a lot of retirees will want benefits from a relatively small number of paying workers; and C) Increasingly restrictive labor laws (like the minimum wage) reduce the tax base from which to pay retirees.
The main culprit of the impending crisis is, of course, fact B): the demographics issue. The SSA however, sees the Baby Boom as merely a speedbump in an eternally-sustainable road. Population growth goes up and it goes down. So, Social Security might have to run deficits for a while, but once the Baby Boomers have passed, SS can run surpluses again. Again, this reasoning might be legitimate, were it not for the fact that some “speedbumps” can be big enough to destroy the car. And any “speedbump” in the population that would cause entitlement spending to consume 100% of the entire federal budget, is such a speedbump. The fact is that, just like all other Ponzi schemes, SS is approaching the day when the government will not be able to find enough new payers to pay for older retirees.
The longer such Ponzi schemes continue, the more damage they wreck. Everyone has no problem with calling for the immediate and complete dismantling of all other Ponzi schemes, but–for some reason–we are afraid to do anything about the biggest one in existence. The ratio of taxpayers to benefit-receivers is probably not ever going to get any smaller, therefore the amount of suffering we are dooming our taxpayers to (when the inevitable day of reckoning comes) only increases with every second that we do not end the scheme.
I had a flicker of hope when I heard that Rep. Paul Ryan had introduced legislation to “privatize” Social Security, but after reading the proposal, I was quickly brought back down to earth. As usual in the lexicon of politics, “privatize” merely means corporatism, i.e. crony (fake) capitalism.
Rep. Ryan’s proposal is (and, for the most part, President Bush’s proposal was) basically to give workers the option of investing part of their Social Security taxes into a fund, managed by the US government, consisting of various equities and securities (some of which would be in private companies, some of which would be in government securities). Importantly, the government would also guarantee a specified return on the investments, so that if the companies investing your funds lost a lot of money, the government would make up the difference (even counting inflation). The similarities to the government’s encouragement of moral hazard in the housing market via its implicit guarantees of Fannie and Freddie are, of course, glaring. As long as the government guarantees your investment return, the companies with whom your money is invested can afford to take all sorts of wild risks with it. Rep. Ryan’s scheme would likely create yet another huge speculative bubble. Furthermore, the folks charged with deciding where your money gets invested will consist of five people, appointed by the President. If you think those appointments won’t be political, and that those planners won’t be inclined to invest your money in accordance with the whims of the special interests who got them there, then you haven’t been paying attention for the past several years.
The real kicker against a plan that involves investing part of workers’ money in the stock market and in government bonds is the fact that, unless the government radically alters in favor of sound monetary policy, austere fiscal policy, and business-friendly regulatory policy, the stock market is set for a painful decline for the foreseeable future. As long as the government keeps encouraging policies that promote consuming over saving, there will be no resources to invest in capital. And as capital is consumed rather than built up, American businesses will become less and less productive, and investing in them will be like throwing money into a black hole.
So, while Rep. Ryan’s SS proposal could possibly be a very minor improvement over the current situation, it would mainly be a rearrangement of deck chairs on the Titanic. Moreover, his proposal for SS suffers from many of the same flaws as the Democrats’ proposal for the health care system. It involves mandating that individuals purchase the services of certain (politically well-connected, no doubt) providers. By denying citizens a truly voluntary choice over what happens to the fruit of their labor, resources are diverted into less productive or unproductive lines, and the economy is distorted and hampered. Other countries, such as Chile, have already “privatized” their social security systems in similar ways, with some success. But the United States faces a unique and far more dire predicament, which necessitates a far more drastic solution.
The question on everyone’s mind, however, is: What happens to all the retirees if Social Security is completely abolished? Bam — no more Social Security taxes, no more Social Security benefits. Well, hopefully the government would be decent enough to make some nice big spending cuts elsewhere in the budget with which to pay compensation to those who may have already become rather dependent on the system. That is, after all, what private businesses are forced to do when their Ponzi schemes are uncovered. But even in the deaths of private Ponzi schemes, people lose a lot of money and feel a lot of pain. This would be no different in the death of the government’s Ponzi scheme.
Yet, the first thing that happens after the abolition of SS is that the working children and grandchildren of retirees instantly get a raise of about 12.4% in their paychecks. This means that if you’re making $30,000, you get to keep about $3720 more than before; if you’re making $100,000, you get to keep about $12,400 more than before, etc. That’s an extra three or twelve thousand dollars a year to take care of grandma. And if grandmas and grandpas have a good handful of productive progeny, they might be able to live out their retirements quite comfortably with help from their caring kids. For those retirees who might not be able to live that way, there will undoubtedly be a surge of private charity to fill the vacuum left by the abolition of SS. Before the existence of Social Security in America, we survived and thrived like no other nation before us. It really wasn’t that bad. Old people unable to work weren’t starving and dying in American streets 100 years ago. Granted, people didn’t live as long back then, but they also didn’t have the abundant medical care and technology that we have today.
Would people adequately prepare for their retirement, in the absence of Social Security? Well, people might have to retire a bit later without a SS guarantee, but in many instances, the question must be asked: why shouldn’t they? But, really, the fear of undersaving for retirement is quite bogus. Economists Paul Smith, Lucy McNair, and David Love have found that 88% of households have already saved enough money on their own to avoid poverty in retirement. The real crisis isn’t so much that retirees won’t have enough savings, but rather that the productive base of the economy won’t have enough money — after taxes and inflation — to help out those retirees who can’t get help from their family and community. It’s the younger, working people who may feel the bite the hardest when the SS Ponzi scheme pops (and it is for this reason, among others, that many young people will soon begin attempting to escape this country, making the burden that much heavier for those that remain).
It’s important to keep in mind that whether the Social Security Ponzi scheme is abolished or runs out of steam on its own, it will be very painful and lots of people will suffer big losses–just like in the ending of any other Ponzi scheme. Already, the SS Ponzi scheme is set to do catastrophic damage to our nation, but the longer we wait to end a Ponzi scheme, the more damage it will do. Unless we’re okay with paying suffocatingly high taxes or seeing vast swaths of our favorite government spending programs disappear, then the Social Security system needs to end. Simply transforming it into a mandatory national savings program is not a realistic solution, anymore than it would be a solution for other Ponzi schemes. The government must fess up, shut down the scam, and liquidate as many of its assets as possible in order to try to compensate the victims of the charade.
But let’s face it — not even Karl Rove and Frank Luntz combined could make the total abolition of Social Security sound politically palatable enough to swallow. The only way that Social Security gets abolished is if voters, including senior citizens, wake up to the reality of the situation and call for an end to the program. That will only happen if citizens choose to educate themselves and others. Granted, the odds are that that won’t happen, that nothing will prevent the disaster, and that this whole essay will have merely been a futile exercise in logic. But if we as Americans somehow defy the odds, and choose to make the tough and prudent decisions that need to be made, the outcome will be immeasurably better than if we had sat back and done nothing.
Josiah Schmidt is a Liberty Features Syndicate contributor.
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