Social Security

ULTRACON: meaner than a junkyard dog.

Inauguration Day

Ultracon is pleased that STAR BUSINESS WEEKLY, an organ of The Kansas City Star, is running his commentary today, which can be found HERE. But the article appears below, too, as the shelf life of The Star’s online side isn’t all that long. This may be the case with all but the biggest of newspapers, like The Wall Street Journal. That’s because newspapers make a tidy sum by selling their content to Lexis-Nexis. So they’re obliged to take it down from their websites. Or so I’m told. As usual, my title got changed. But this title probably needed to be changed. I was thinking of The Fonz, i.e. Fonzi.

(Don Porter (to whom I refer in my article) also states in his letter to the editor that Social Security “is social insurance”. The Star ran my treatment of that issue about 4 years ago, and it’s still up at the Public Program Testing Organization: But is it Really Insurance?)

Yo, Ponzi
By Jon N. Hall
January 20, 2009

In the wake of the Bernard Madoff scandal, folks have chimed in that the Mother of All Ponzi Schemes is none other than Social Security.

Inasmuch as Ponzi schemes are illegal and Social Security is a government program, that claim might not hold up in court.

In “Social Security is not Ponzi scheme” (12/31, Letters, THE KANSAS CITY STAR), Don Porter and Lloyd Hellman have their say. Porter claims: “From the beginning it has been a pay-as-you-go government system and never an “investment””. (One doubts that investors in Mr. Madoff’s hedge fund think it’s much of an investment, either.)

The issue here is whether Social Security operates like a Ponzi scheme.

In a Ponzi, income from new investors is used to pay off old investors. In this respect, a Ponzi is identical to the “pay-as-you-go” aspect of Social Security, where the payroll taxes (FICA) of current workers pay for the benefits of retired workers.

The reason a Ponzi is financed like this is because the dollar difference between income and outgo isn’t fully invested, so there aren’t adequate profits to meet the demands of investors. Here, too, Social Security is identical to a Ponzi – except that Social Security is purer.

Whereas a Ponzi, like Mr. Madoff’s hedge fund, must at least make some investments – if for no other reason than to escape notice from the Securities and Exchange Commission – the Social Security Administration invests none of its surplus. Yes, Social Security does have a so-called trust fund, said to contain more than $2 Trillion. But the treasuries in the “trust fund” differ from “regular” treasuries in that they are not marketable; they’re IOUs. In reality, there is no Social Security trust fund – the government spent the surplus.

Also, the “pay-as-you-go” aspect of Social Security will end – in 2017, it is estimated – when payroll taxes are no longer adequate to pay benefits. At that point, the treasuries in the “trust fund” will be “redeemed” to continue paying benefits at the same pace. And where will the money for those redemptions come? Why, from the general fund of the U.S. treasury. Which means: Social Security benefits paid for out of the trust fund are paid for twice, first by payroll taxes and second by other taxes that go into the general fund.

If the federal government wants Social Security to escape the stigma of being a Ponzi, then it must either limit payroll taxes to being no more than benefits or it must invest the surplus in real income-producing investments, not U.S. treasuries or securities. It should also do away with the accounting fiction known as the “unified budget”.

So, Ponzis and Social Security are operationally identical. The difference between the two is in how their surpluses are used.

In a Ponzi, we’re talking simple grand larceny. But in Social Security, the surplus goes into the U.S. treasury’s general fund. And since money is fungible, the Social Security surplus is used to pay for everything in the federal budget. Which includes the pork and earmarks incumbent Congressmen use to bribe the electorate into re-electing them.

So, dear reader, if you benefit from pork or earmarks and you re-elect these guys, are you a party to a Ponzi scheme?

In Mr. Hellman’s letter to the editor, he asserts: “Social Security is not and never was a Ponzi scheme…I am not only entitled to the return of the money I paid in, but the interest I earned for 64 years”.

Not so fast. We’ve already been here.

In Flemming v. Nestor (1960), the Supreme Court “established the principle that entitlement to Social Security benefits is not contractual right”. In other words, taxpayers have no property rights to Social Security benefits whatsoever.

Moreover, in Section 1104 of the 1935 Act: “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” Which means: Congress can end Social Security whenever it so chooses.

Folks might comfort themselves by thinking: Congress isn’t going to kill Social Security. And they’d be right – it would be political suicide.

But America is entering uncharted waters. The population is aging. The deficit is skyrocketing. We’re at war. And Congress is on a spending spree like no other and wants to “give” health-care and Lord knows what else to every last one of us including illegal aliens. The question isn’t just whether Social Security will be there for you, but whether the good ole U.S. dollar will still be worth anything.

So as you survey your family’s future security, social or otherwise, think about how the government finances things.

Jon N. Hall is a programmer/analyst from Kansas City.