Social Security

Shikha Dalmia over at Reason Magazine has a bit responding to a riff on a previous article describing Social Security as worse than and Ponzi scheme.

The original piece, here, gave three reasons why Social Security is worse than a Ponzi Scheme:

One, a Ponzi scheme collects money from new investors and uses it to pay previous investors—minus a fee. But Social Security collects money from new investors, uses some of it to pay previous investors, and spends the surplus on programs for politically favored groups—minus the cost of supporting a massive bureaucracy. Over the years, trillions of dollars have been spent on these groups and bureaucrats.

Two, participation in Ponzi schemes is voluntary. Not so with Social Security. The government automatically withholds payroll taxes and “invests” them for you.

Three: When a Ponzi scheme can’t con new investors in sufficient numbers to pay the previous investors, it collapses. But when Social Security runs low on investors—also called poor working stiffs—it raises taxes.

But there is a fourth reason. A Ponzi scheme is not backed up by the full faith and credit of the United States.

Lest there is anyone out there, liberal, conservative or other, who thinks that the money deducted from you paycheck for Social Security taxes is still there, sitting in an account until the day you retire, take a gander at this little bit: Right now, according to Jagdaeesh Gokhlae of the Cato Institute, Social Security Trust Fund has $2.5 trillion in accumulated surpluses.

When the program was started during the 1930s, early retirees received more benefits than their payroll taxes, thus contributing a deficit to the program. As the program's benefits and taxes were increased, subsequent generations also received more benefits during retirement than their payroll taxes while working. The Social Security trustees report that under current payroll tax and benefit rules, the system's total shortfall equals $16.1 trillion. Of this, the legacy from past and current generations is a debt of $17.4 trillion ($20 trillion worth of gross debt offset by $2.5 trillion of trust fund Treasury securities) and a net projected contribution by future generations of $1.3 trillion.

So, what does this mean. Social Security was sold to the public as a bill of goods it was never intended to be, not from the beginning and certainly not now. In the 1930's, 40's and 50's people did not receive 20-25 years of Social Security benefits, indeed, most Americans never saw any at all, dying before they reached eligibility. But even then, the redistributionist policies of the program created a deficit in the scheme.

People were told, we the government are going to take a small percentage of you pay (1% at the time and another 1% coming from the employer) and put it into an account so that when you retire you will get your money back. But that money never went into the account. The money came out almost as soon as it was paid in. Now this wouldn't be nearly as bad if the money going out was just used to pay benefits, but that is not the case, it has been used for all sorts of governmental purposes. (not to say that the lie is better if it is used for benefits only--just a bit more palatable.) But in reality the money was used for all sorts of things.

What is shocking is that years ago, we were hearing debates, when the solvency of the Social Security "Trust Fund" was raised, of creating a Social Security "Lockbox" so that taxes paid in would be protected from use in general fund spending. That should have been a warning that the funding mechanism is a joke. But no, our politicians continued on, spending Social Security taxes for all sorts of matters, not caring one whit about the lies they have told.

The old saying that lie repeated often enough soon looks likes the truth is so apt. For decades, the American people have been told a lie about Social Security. The hard part is that it is people of my generation and our children that have to wake up to the actual reality--that government lied to us about Social Security. The 70 year old lie is coming home--and it is not pretty.