Parents don’t lay awake at night trying to figure out how to repay the money they loaned themselves. The government, however, thinks that it makes perfect sense to collect $100 of tax revenue, spend the $100, and then declare that it now owes itself $100. This scheme is not limited to Social Security. Currently, federal intragovernmental debt for all programs totals $4.3 trillion. FULL ARTICLE
Source link: http://blog.mises.org/10018/the-social-security-scam/
The Social Security Scam
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Everyone keeps pointing to the date when SS goes from positive cash flow to negative. They are missing the point that all those other programs being funded with the SS “surplus” will need to be cut (right?) or find another funding source as the SS surplus shrinks.
So the budget problem is NOW, not the future date of cross over.
PS: SS was created to grab the money. The idea of helping people was the cover story. The money’s been grabbed, it’s gone. Now all that’s left is to redefine the story…
SS is a purely marxist idea. It is totally uncompatible with a free nation. Unfortunately, until we have term limits for all fed. politicians nothing will change.
The following was taken from the intragovernment debt… link in the article. Q & A regarding the debt. quite amusing.
How do you make a contribution to reduce the debt?
Make your check payable to the Bureau of the Public Debt, and in the memo section, notate that it is a Gift to reduce the Debt Held by the Public. Mail your check to:
Attn Dept G
Bureau of the Public Debt
P. O. Box 2188
Parkersburg, WV 26106-2188
There’s no theoretical reason why each worker can’t (or shouldn’t) support ten, or more, retirees, WITHOUT any increase in the rate of tax or the (inflation-adjusted) base to which it’s applied.
All that’s necessary is sufficient improvements in the capital used by the average worker. Unfortunately, capital isn’t improving at a rate sufficient to keep up with the rate of growth of the retired population. And guess what large institution is responsible for the slow growth of the capital base?
The REAL problem is that the government takes away our money without our consent. You are FORCED to pay social security taxes and all other taxes. This is the real problem.
I don’t care about what they do with the money, I just care that they leave my money alone, it belongs to me !
The government does not pay interest to Social Security – it merely credits the trust fund with additional government bonds.
Social Security payroll taxes provide the government with money to spend. But, interest credited to the trust fund is neither collected, paid, borrowed, or spent. It exists only as an accounting entry. Once Social Security begins running tax deficits (payroll taxes plus income taxes on benefits), the government will have to find another source of money to cover the shortfall. From an accounting perspective this would be described as redeeming the trust fund bonds.
See -
http://www.cbo.gov/doc.cfm?index=3982&type=0
http://www.cbo.gov/doc.cfm?index=3948&type=0
http://www.cbo.gov/doc.cfm?index=3974&type=0
As we all know, “The Government” only takes money and redistributes it to whom ever it deems worthy or advances its agenda. “The Government” produces nothing..
We know that the actions taken by our “Government” for our benefit can not go on for much longer..
My question to this quandary is, “What do we do about reversing this social and economically destructive way of doing business?”
How do we get back to our once free and prosperous republic? There are so many questions and not enough answers..
Once Social Security begins running tax deficits (payroll taxes plus income taxes on benefits)
No, the problem starts appearing before the tax deficits!
Here’s a little story:
You’ve been working for many years and saving for retirement, putting some money each month in a cookie jar. Your uncle has been borrowing from the cookie jar and replacing the money with an IOU. He’s borrowed all the money, the jar only contains his IOUs.
Now that you’re near retirement, you’ve decided to cut back on work a bit, so you put a bit less in the cookie jar each month. As a result, your uncle has less to spend right now, not at some future date, since there is less money for him to replace with his IOUs.
Uncle is in trouble now…
The post by I Hate Taxes was on mark. It is the involuntary nature of Social Security that makes it deserving of blame. There are actually examples of private lifetime income insurance in the market.
The first is the concept of a defined benefit pension plan offered at some companies. It is noteworthy that these plans were reactions to government wage controls. When firms could no longer compete at market levels of wages, they were allowed to come up with this loophole to set aside money that would be used to pay defined benefits upon retirement.
Like Social Security, these plans often entailed “wealth transfers” among participants. e.g. Older or longer tenured employees received greater benefits than others. However, they are “wealth transfers” in the same way that paying a higher wage to some employees is transfering wealth from the lower paid employees. For whatever reason, the firm has decided to more highly compensate some employees. The employment contract is voluntary for all employees. They are able to negotiate the terms of their wages and other benefits. Indeed, defined benefit plans have waned in favor of defined contribution plans (such as 401(k) plans) in part for reasons fo equitability.
Another example of private lifetime income insurance is less tainted by government influence. While annuities do receive favorable tax treatment, they are, for the most part, rational market responses to legitimate risks – outliving your retirement savings. The insurance company takes a lump sum premium and promises to pay a stream of income (not necessariliy level) for a specified period or for life to the annuitant. The insurer plays the law of large numbers to provide insurance and make a profit. The lower expected value of payments for the annuitant offsets the decrease in uncertainty.
Notably, both private pensions and annuities can offer negative returns to some participants. It’s all part of the contract and is the tradeoff that willing market participants make for decreasing the uncertainty that they may run out of money. To criticize Social Security for this same feature is off the mark.
Imagine a CEO of a company raiding his employees’ pension plan to fund the business. He’d be marched off to jail pronto – and rightly so.
So how come the crooks in Washington get away with larceny? Oh, I forgot. Those that make the rules always seem to exempt themselves. The rule of law, my foot!
If we look at the rates for SS taxes in other countries (My source is Harry Browne’s book Why Government doesn’t Work) we see that the US has a lot of room to raise taxes without there being a revolution.
Looking at his chart on page 164, he shows that the total for the US is only 15% while it’s 47-56 for Holland, France and Italy.
There was time when I believed that Americans were different – no longer. I believe they will simply pay through the nose – especially when, as the author writes, the scam of making people think their employers are paying 1/2 (this percentage gets bigger up to 90% for Italy) sucker the sheep who can’t do basic economic calculations.
The bottom line is once the boomers are retired, they will use their voting clout to force up the rates above the (comparatively) small 15% that exists today – if world history is any guide.
And naturally, they will call this new plundering the “Rescue of SS”.
Steve Hogan:
Agreed. I have made the argument that Social Security is very much like private pension plans with the exception that there is no way to opt out. Were it actually private, the plan would long ago have been rolled up and its sponsors charged with violation of their fiduciary responsibility under ERISA regulations.
Here is an interesting article discussing how Social Security is in violation of ERISA. I only distance myself from its conclusion that pondered what might have been if the surpluses had been invested in “stocks, bonds and other typical retirement plan assets”. The politicization of retirement investing is not a scenario that I care to consider.
I’ve heard that if you count for future SS and Medicare IOU’s, the real deficit is much higher, closer to $80 trillion.
What happened to the concept of having Wall Street invest SS funds? Seems there was a big push for this to occur. I imagine most are thankful this did not happen.
>However, the federal government spent this $180 billion on other programs.
And exactly what should the government done with the money? Bought GM stock?
Messrs. Hogan and Stoutenburg,
There is no need to “imagine a CEO of a company raiding his employees’ pension plan to fund the business.” GM has done this very thing. It isn’t necessarily illegal.
I don’t think that private insurance is much different either. It is a ponzi scheme too, and not that “private” btw. It takes money from one group to pay the other. Governments indirectly force people to own insurance, or you are denied services like healthcare etc at least where i live.
Remember Katrina victims? Many of them where insured, the insurance company decided that it wouldn’t pay a dime, even though these people payed for that insurance. If these roaches would live people alone, i am sure insurance, social security, and other piracy schemes would go bust, people can save their own money, they don’t need a nany to do it for them.
All income to the Social Security program which has run surpluses from the beginning should have been invested in a sovereign wealth fund with the purchase of gold as the basis. Had this been done, the SS program would be sitting on trillions of dollars of REAL WEALTH not subject to the ravages of inflation. The Republicans prevented this system from being used and forced the governement to use the current system which is failing, not because there is anything wrong with the Social Security program itself, but because Republicans and some Democrats have forced the misuse of SS funds.
There is nothing wrong with the social security program. The problem is with the ideology seeking to destroy it.
Did you really expect the Congress to keep their hands off the Social Security Trust Fund. There was all that money just wait to be spent, they were just accomodating their constituents. I am 100% Disabled. I have a vested interest in the Social Security System. The money has already been spent. If you think your taxes are going to be raised by the current resident of the White House, he is not the only one who is going to raise your taxes. These funds must be restored in the future. Look out.
Great article,
I remember when I found out that the SS Trust Fund surplus was used to “purchase” Government Treasuries, I just couldn’t believe it! Collect under the guise of “benefit” and then transfer to the spending column and have the taxpayer pay himself the benefits and interest back! Amazing!
It really is not much of a stretch since the Supreme Court originally declared Roosevelt’s SS program unconstitutional. It was then changed from a “fund” to a “tax” and relocated under the IRS tax code, thus making it not only legal but a tax.
Well it is a flat tax, sure doesn’t feel as fair as the flat tax people claim!
Americans want their social security and there is zero chance that it will be replaced by a voluntary system. President Obama will fund it very simply in 2010 while he controls both houses of Congress. It will help him secure his second term in 2012. It does not require reducing benefits or any sacrifice from the poor or middle class.
Households earning $250,000 or more will pay FICA on all of their wages. Those earning more than $106,800 but less than $250,000 will not pay more.
President Obama will even have money left over from this to help pay for Medicare expenses. Aging baby boomers will keep Obama in the White House since he has secured their retirement income and health care. The young voters will choose him again for his soaring rhetoric. They do not understand economics, except for the Ron Paul supporters. High income earners will work less and reduce their earnings below $250,000. Tax receipts will fall, so more paper money will be printed, causing more inflation etc. This takes us to 2016 when interest rates and unemployment rates will be about 20%. America will then be ready for change we can believe in.
Wow, As I remember it, 2016 was the anticipated date for SS to go broke back in the 60s. That kind of consistent prediction can only be topped by the predictions of the Maya and Nostadamus that the world will come to an end in 2012. Thanks “gene,” I had looked at SS as a regressive tax, a balance to the income tax. But you are closer; if one counts taxpayers, not tax dollars, it is close to a flat tax. Now I have a response to all the nimrods who whine about implementing a flat tax. “So you like Social Security, eh?”
You’ve got to start thinking big, big like the government. If you can’t do anything to increase the supply side (i.e., the number of workers paying taxes), then you need to do something about the demand side (i.e., the giant glut of retirees). If you had fewer retirees, then you would get a better ratio of payers to spenders.
So how can you do this. Maybe raise the retirement age? Yeah, but that’s just delaying the problem a little while. How about taking total control of the health care system and culling the herd over time so you end up with fewer retirees. Sure, we’ll end up paying for all the sick people from the very beginning, but if they die quicker the overall cost will be much lower.
Think of how much money could be saved if all those cancer and heart disease and diabetes patients died in say five years, instead of being treated for decades. That way they’ll never retire and their overall medical costs will also be reduced. And in the process, we will look like we’re doing everybody a favor by giving them free health care.
It’s really quite simple. You just have to think big.
Ben Ranson:
Though I have not seen GM’s financial personally, I have heard that contention frequently enough to grant it credibility in my mind. Point given. Clearly, government doesn’t follow its own rules if it doesn’t wish. It is also not beyond imagination that it would allow favored businesses to flaunt the rules as well.
My point stands that Social Security is nothing but a involuntary pension scheme that doesn’t follow the rules set for *most* (but as you rightly point out, not all) private plans.
thesprot:
As an actuary working in the insurance industry, I write based upon years of work and study. While you touch upon an important point regarding government’s depredations upon the industry, I must refute you about insurance more generally.
Insurance must be a fundamental free market response to statists. Left to the voluntary decisions of market participants, it allows society to internalize many of the so-called externalities proposed by statists. While I could go on in depth about how insurance could provide for criminal arbitration or national defense (Robert Murphy wrote a fine paper on the later for anyone interested), your comments make me think that I have to go more basic on the legitimate function of insurance.
Here is a simplistic illustration:
Let’s suppose that there is a slight probability of 0.2% every year of fire or some other hazard destroying your home (valued at $300K). Your expected losses are only $600 every year ($300K * 0.2%). Most years, for most people, the actual losses will be zero. Many people will never have a catastrophic loss. However, some years your loss will be a complete destruction of your home – a loss of $300K.
If an insurer can determine that the average losses on all insured homes is 0.2% (or in practice, refined estimates place different probabilities based upon various factors), it can make use of the law of large numbers to insure the homes. While the variation for a single home is quite large (either zero or $300K), the variation for many homes is quite small. It may charge $700 a year to insure your home. The $100 excess over expected losses pays expense and profit. The home owner may be happy to pay the extra $100 to trade uncertain (and potentially catastrophic) losses for certain (but small) ongoing expenses.
The same arguments may be applied to pensions and annuities. On expectation, the uncertain value of future cash flows are only slight less than the up-front lump sum (again, the insurer must pay expenses and make a profit). You might willingly pay this spread if you are worried that your savings are insufficient to last the rest of your life. Rather than rolling the dice, you pay a slight premium to assure that your income lasts.
You may be right that a free society would require less insurance. If individuals chose to save more, they might self insure. However, there would probably always be some desire to pay a small premium to transform an uncertain future into a certain nominal expense.
The only insurance that I won’t at all defend is so-called health insurance. While there should be legitimate coverage for catastrophic illnesses, most health insurance really has become a back door to socializing health care. I won’t have anything to do with that industry as currently constituted.
Social Security is an entitlement to consume in the future. When the retirees start drawing their benefit from SSA, they don’t receive consumer goods from SSA, instead, they receive U.S dollars. In order for those U.S dollars to buy something, someone has to produce those consumables, or else the money is useless.
So it is somebody else’s production that we are after, which is where that 1retiree to 2.1 worker becomes significant. This would cause a shortage of consumption goods relative to the money in circulation.
Now imagine the inflationary nightmare if government prints up the money to cover the monetary shortfall.
Joe, great points on the basics of insurance.
also, I couldn’t agree with you more on health insurance, it is simply a way the monopolized health industry has found to fund their outragious costs. catastrophic injury and disease is the only “real” need within health insurance, similar to a house burning to the ground. We don’t insure our house to have a leaky faucet repaired!
pensions are required due to inflation which is caused by the monetary policy and government spending. The same monster that creates the problems pretends to fix it to keep us all happy. Without inflation, retirement would be a very simple calculation and easily attainable. With sound money, deflation might even be common, encouraging retirement and relaxation.
Do you think maybe they have already thought of that????
This is a great article, but I think it is interesting to see how the blog comments reflect such utopian ideology. If there were no social security, some number of people who were stupid with their money (and a few that were just unlucky) would be homeless or destitute in their old age, and realistically would be a drain on society by either requiring some tax funded social program or by the soft costs involved with having a lot of homeless people around. (Assuming for a moment that purely voluntary charity would not be adequate to take care of it.)
Arguably a better option would be to have an involuntary insurance program that is solvent. One important difference from current SS is that your benefit relative to how much you pay in (the more you pay in, the more you could get out when you retire). The only way for this to work would be to have a true trust fund that could not be raided, and to have a hard currency with no inflation, or perhaps have the fund invest in gold. (Investing SS funds in stocks would just create massive dislocations in the market.)
This is not a perfect solution, but it would not be a wealth transfer, and it would be fair. It would be based on the (not utopian) assumption that a significant number of people are stupid and it is in the self interest of the population as a whole to mitigate some of their stupidity. I suspect it would also be a political possibility, rather than the utopian idea that in a democracy a majority of the people will some day vote to eliminate social security benefits, especially when almost all working people today have paid significant money in to it.
The system I propose looks very little like the ponzi scheme we currently have, but would achieve the same goal most people think SS is supposed to.
Many here would say once you start something like this it’s a slippery slope to a centrally planned economy, but the same argument could be made about any government program – courts, a standing military, etc. etc. In the real world there is some appropriate amount of government and taxation, it’s just a fraction of what we currently have. Of all the government social programs, this kind of SS seems like one of the few wise ones to me.
Comments?
“It does not require reducing benefits or any sacrifice from the poor or middle class.”
TINSTAAFL – So, all those people who make 108K to 250K will see FICA taxes (15.3% now) of income disappear into SS. So, does upper-middle class America not spend that money in ways that provide jobs to people? It’s just a redistribution that sounds good to the 95% getting and not giving. One step closer to something awful.
One issue that I always wonder about is the extent to which the general public (the voters) willingly go along with government plans that provide current benefits that future taxpayers will have to pay for, and, instead, the extent to which this is simply the result of public ignorance. Do the majority of Americans actually have any idea of the future tax cost of current administration spending? Have they consciously decided that the government spending is providing a current benefit and it is perfectly ethical to shift this cost onto the backs of future taxpayers? Or, do most people believe that current huge deficit spending by government is beneficial and that there won’t be much cost to future taxpayers? A third possibility, of course, is that current voters willingly allow governments to provide current benefits that future generations of taxpayers will pay for.
I think that the third possibility is often at play, but I also believe that the majority of voters are quite ignorant (many willfully so) of the basic idea that each bit of government spending must be paid for by taxation, either now or in the future. I think that most people believe, at least implicitly, that taxes can be permanently less than government spending – for example, that social security benefits do not have to be fully paid for with taxes.
GunderDog:
I think that it is all well and good to caution us visionaries that society will not turn into utopia by the mere act of eliminating government programs. We should understand that the real world is complex and that any solutions are bound to encounter new problems.
I think that the charge of utopianism should be turned around though to people who think that solutions must be coercively applied by government. In my opinion, it is naive to expect politicians to wield massive amounts of power benevolently. Also, if you are a frequent read of this site, you know about the position of Austrians regarding the ability of socialism/bureaucracy to perform economic calculation.
You point out a real problem that some people may be unwise or unfortunate and find themselves homeless if they do not receive assistance. These people may impose costs on the rest of us, and it should be in our interests to help them. In my judgment, taxation and central planning are huge net negatives. To the extent that government assists anyone, it is frequently only addressing problems that it initially caused.
A freer society would release capital and improve conditions that would hopefully lead more people to be self sufficient. Reclaiming the people who have been destroyed down through the generations by dependency is the real problem. But like kicking a drug habit, you don’t make an addict better by feeding him more drugs.
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