or Why There Is A Lot of Talk But Little Action From Either Party
We all have seen the affect of entitlements on the annual budget and deficit. The big items are the entitlement programs – Social Security, Medicare and Medicaid. They are items that are set to take up an ever larger part of the American budget. As can be seen in the above article’s chart, entitlements and interest will absorb all government spending by 2025. Here we examine Social Security ONLY because it is, by far, the largest FY 2012 “mandatory entitlement.”
Social Security has built up a $2.5 trillion surplus since the retirement program was last overhauled in the 1980s. The surplus has been placed in the Social Security Trust Fund, a fund about which we have heard quite a bit lately. But here is the rub (and there is always a rub – there is no “free lunch”). The $2.5 trillion surplus has been “borrowed” over the years by the federal government and spent on other programs. In return, the Treasury Department has issued bonds to Social Security, guaranteeing repayment with interest. As Office of Management and Budget (OMB) director Jack Lew wrote in USA Today, “the Social Security trust fund is solvent until 2037. Therefore, Social Security is now off the table in debt-reduction talks.” As Charles Krauthammer explains, “This claim is a breathtaking fraud. The pretense is that a flush trust fund will pay retirees for the next 26 years. Lovely, except for one thing: The Social Security trust fund is a fiction.” OMB director Jack Lew (the same guy cited above) says that these trust-fund “balances” are nothing more than a “bookkeeping” device. Says Lew, “They do not consist of real economic assets that can be drawn down in the future to fund benefits.” Krauthammer concludes, “In other words, the Social Security trust fund contains – nothing.”
Paul Hsieh likens what has happened to the Social Security Trust Fund to what Homer Simpson does when he runs out of do-nuts. When he opens his emergency do-nut box, it’s empty except for a note that reads: “Dear Homer, IOU one emergency donut. Signed, Homer.” The Obama administration officials acknowledge that the federal government has already spent the Social Security surpluses of the last decades, replacing the borrowed money with so-called “special issue” bonds. But according to the OMB, these “special issue” bonds “do not consist of real economic assets that can be drawn down in the future to fund benefits.” Instead, they are mere promises to repay the borrowed money.
Thomas Sowell says he saw senior citizens carrying signs that read, “Hands off my Social Security.” They want their Social Security to stay the way it is, and their anger is directed against those who want to change the financial arrangements that pay for these benefits. Their anger should be directed instead against those politicians who were irresponsible enough to set up these costly programs without putting aside enough money to pay for the promises that were made, promises that now cannot be kept, regardless of which political party controls the government. Someone needs to say to those who want Social Security to continue on unchanged: “Don’t you understand? The money is not there any more.”
Let’s define a Ponzi scheme. It is a fraudulent investment operation that pays returns to investors by money paid by subsequent investors. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going. So you can now begin to see why Social Security has been likened to a Ponzi scheme.
George L. O’Brien, in his excellent article calling for the end of Social Security, calls it a “Legal Ponzi Scheme.” He continues that there are many reasons to like Social Security. It is the only part of the welfare state which promises benefits to nearly every person. It is also seen to relieve adult children of the responsibility of supporting their elderly parents, and it helps the elderly poor for whom there is a great deal of sympathy. There is only one problem: the system is a fraud.
He also examined the Chilean Model. Minister of Labor José Piñera put in a plan that requires each of the country’s 4.8 million workers to put 10% of his pre-tax income into a private pension fund of his own choosing; there are no employer contributions. There are 13 plans to choose from, and workers can switch their funds between plans to get the best returns at the lowest cost. The benefits to the individual worker of this policy have far exceeded expectations. Because the money that goes into these private pension funds is invested in production, a great supply of investment capital was made available to businesses and entrepreneurs at relatively low interest rates.
O’Brien concludes, “At some point people must realize the futility of trying to save the current bankrupt Social Security system. More tinkering with the status quo won’t help – Social Security is both financially and morally bankrupt – and soon this Ponzi scheme will collapse.
Michael Mandel offers an alternative analysis, but even he still calls Social Security a Ponzi scheme. He suggests that there is one enormous difference between Social Security and a Ponzi scheme: Technological change. This long track record of technology-powered growth has enabled the enormous rise in living standards in the U.S. Assuming that technological progress continues over the next 70 years, and output productivity growth continues over the next 70 years, the finances of Social Security are relatively easy to fix. A fairly minor cut in benefits, combined with a relatively small increase in taxes, will bring the system back into balance again. But here’s the rub. Ultimately our ability to make good on the “Ponzi-like” nature of Social Security depends on the continued march of technological progress – and in particular, innovation which boosts output and living standards. If we leave the younger generation a good legacy – a sound scientific and technological base, combined with an innovative and flexible economy and an educated workforce – then Social Security is not a Ponzi scheme. The economy grows, and there’s more than enough resources for everyone. But if instead we invest in homes, flat-screen televisions and SUVs, then we don’t leave the next generation with the technological “seed corn” they need. If the technological progress slows, then Social Security does turn out to be Ponzi-like – with unfortunate consequences for everyone.
Mandel is correct: just look at what the current economic situation, with its slow growth, has done to Social Security.
There was no clamor for Social Security when FDR signed it into law in 1935. Few Americans were interested in the kind of government-run program that the German politician Otto von Bismarck had introduced in Europe. President Franklin Roosevelt embraced the German idea that there should be government-run “social insurance.” Perhaps because Social Security promoters didn’t have much confidence in it, they insisted that it must be compulsory. There was considerable opposition to the proposed Social Security Act from both Democrats and Republicans. Senator Bennett Clark of Montana proposed an amendment that would have enabled employers to opt out of Social Security if they had pension plans offering more generous benefits than Social Security. That would have meant freedom of choice for employers and employees alike, but advocates of Social Security were adamantly against freedom of choice.
The Financial Planning Association offers a very good, brief history of Social Security. The Social Security Act was signed into law by President Roosevelt on August 14, 1935. In the beginning, most women and minorities were excluded from the benefits of Social Security. Job categories that were not covered by the act included workers in agricultural labor, domestic service, government employees, and many teachers, nurses, hospital employees, librarians, and social workers. In 1940, benefits paid totaled $35 million. These rose to $961 million in 1950, $11.2 billion in 1960, $31.9 billion in 1970, $120.5 billion in 1980, and $247.8 billion in 1990. All figures are in nominal dollars, not adjusted for inflation. In 2009, nearly 51 million Americans received $650 billion in Social Security benefits. So from the benefits progression we can easily see where payouts are headed.
What is social security? The term describes a program that uses public funds to provide a degree of economic security for the public. The specific social security discussed here is the United States government program established in 1935 that provides old age, disability, and survivors insurance, as well as supplemental security income, an income for elderly or disabled people. But nobody has a right to pass on Social Security benefits to heirs, as is done routinely with private annuities, pensions, and life insurance.
Politicians call Social Security the “third rail of American politics.” What does that mean? There are two concepts going on here:
- Many trains that are powered by electricity, such as subways and other rapid transit railway systems, are attached to a third rail that runs alongside the tracks. The third rail provides electricity, which powers the train. But for a person, touching the third rail means instant electrocution, or death by electrical shock.
- In politics, a “third rail” issue is one that is so politically charged and controversial that any politician who dares to touch it risks destroying his/her career.
Former U.S. House Speaker Thomas “Tip” O’Neill first called Social Security the “third rail of American politics,” and O’Neill did as much as anyone to make Social Security a deadly political issue. Social Security had become a difficult political issue long before the early 1980s. When Barry Goldwater lost the presidential race in 1964, observers believed the loss was due in part to voter perception that Goldwater wanted to dismantle Social Security.
Here are quotes from both President George W. Bush (R) and Senator Dianne Feinstein (D): “Social security – they used to call it the third rail of American politics,” President Bush told a news conference last year, “because when you talked about it, you got singed, at the minimum.” Senator Dianne Feinstein, Democrat of California, agreed about the reason so many politicians dreaded dealing with the dangerous subject of Social Security: “This is, kind of, the third rail. No one wants to touch it.”
As mentioned above, in 1964 Barry Goldwater lost the presidency to Lyndon Johnson in part because of the perception that Goldwater was hostile to Social Security. In 1980 Ronald Reagan had campaigned for the presidency on a pledge to preserve Social Security. Administration officials, faced with the prospect of ballooning budget deficits and runaway Social Security costs, mandated almost immediate cuts in benefits to people taking early retirement. A low-income worker retiring at age 62 in 1982 would see his monthly benefits cut instantly from $248 to $164. Tip O’Neill seized the opportunity to blast the administration. After months of defeats, O’Neill finally had an issue he could rally Democrats around. At a news conference he declared: “For the first time since 1935 people would suffer because they trusted in the Social Security system.” The system was eventually overhauled successfully by the Reagan administration in December 1981.
It wasn’t until the early 1980s that Social Security became known as the third rail of American politics. It was House Speaker Tip O’Neill who coined the phrase and O’Neill who, more than anyone, made Social Security murderous to touch.
Here is what Ron Paul (R-TX), who offered his now famous budget proposal, said about Social Security. He proposed to end it as we know it, and let people opt out of the system. He also said that Social Security is unconstitutional. And here are Ron Paul’s personal reasons for opposing Social Security. Further, he states, “Even the most modest proposals to trim Social Security or Medicare spending will be met with howls of indignation and threats of voter revolt. Legislators who propose any kind of means testing or increased retirement ages can expect angry visits from senior citizens and lobbyists ready to fund a candidate back home who supports the status quo. When it comes to Social Security we must understand that the system does not represent an old age pension, an insurance program or even a forced savings program. It simply represents an enormous transfer of payment with younger workers paying taxes to benefit the other beneficiaries.”
John Boehner (R-OH) invited Obama to join him on the third rail of politics. Boehner’s offering Obama to stand on the third rail of American politics with him, is one we can see Obama refusing.
And here is Boehner proposing to raise the retirement age (the age at which Social Security benefits can be drawn) to 70, to link Cost Of Living Allowance (COLA) to the Consumer Price Index CPI) rather than wage inflation, and to “means test” benefits. (The CPI, BTW, is the “official” government of inflation)
This article about John Boehner saying that he’s determined to offer a budget this spring that curbs Social Security and Medicare, despite the political risks. [emphasis mine]
Finally, someone in Congress with guts, someone who puts the country before his political career.
Congressional Freshmen: First-term GOP Rep. Allen West, a tea party favorite, told a town hall gathering in Coral Springs, if Social Security, Medicare and Medicaid “are left on autopilot, if we don’t institute some type of reform, they’ll subsume our entire GDP” by 2040 or 2050. In Greenville, S.C., a different Republican freshman with tea party ties, Rep. Trey Gowdy, also suggested during last week’s congressional break a paring back of social programs. Gowdy described a recent school classroom where most children indicated they think it’s the government’s job to provide health care, Social Security and education. “We’ve got to do something about the sense of entitlement,” Gowdy said. Gowdy’s office later said he thinks Social Security “is a key aspect of a broad effort to fundamentally reform our entitlement system, but any solution must honor our commitment to current retirees.”
Despite President Obama’s promises to lower the deficit and rein in spending, there was an omission from his 2012 budget that many say would go a long way toward easing the nation’s financial woes: Social Security reform. The White House and top congressional Democrats argue that Social Security isn’t contributing to the nation’s deficit. Others say that’s nonsense and accuse Democrats of using fuzzy math to justify their claim. Senate Majority Whip Richard J. Durbin, Illinois Democrat, and Senator Charles E. Schumer, New York Democrat, appeared separately on Sunday morning news programs to say Social Security doesn’t add “one penny” to the deficit.
Did the American Association of Retired Persons (AARP) abandon its opposition to cutting Social Security benefits? The question surfaced June 17, 2011, when the Wall Street Journal published an article suggesting the AARP’s board had approved an effort to ride the increasingly dominant view in Washington: Social Security must be overhauled to remain solvent beyond 2036 – especially considering that the retired population is expected to grow dramatically and the number of workers contributing to the program will shrink. Does that mean the AARP is open to cutting Social Security benefits, if it’s in the nation’s interest? Not necessarily. The organization wants to be a player in the conversation about Social Security’s future – especially if the program can be extricated from the escalating deficit debate. The apparent shift reflects an internal civil war, an acknowledgment that the long-held opposition to Social Security reform is unsustainable.
So where does all of the above leave us? It’s not as if Franklin D. Roosevelt set out to create a Ponzi scheme. But people who know the scheme is mathematically unsustainable are drafting plans that, horrors!, try to give some control over the situation back to individuals. Like so many government programs, Social Security started off with great intentions, but morphed into something else. Some people refute the Ponzi scheme comparison largely on the grounds that unlike a traditional Ponzi scheme, Social Security is completely disclosed, was never sold to as a way to make anyone rich, and that it has good intentions rooted in compassion for the poor.
Old age is NOT a surprise. If people do not plan for it, they should not look to others (in the form of taxes or discounts or Social Security) for help. People who depend upon Social Security for retirement will receive exactly what they deserve – not much or nothing. The current system WILL go broke. Then all the dependers on the current system will look to us, the savers, for a bail out (in the form of more taxes). This brings us to personal responsibility. Everyone should save for retirement, not depend on Social Security.
Crossposted at RWNO, my personal web site!