Social Security makes us party to a Ponzi scheme - Social Security-Perhaps Huge Ponzi Scheme

Social Security makes us party to a Ponzi scheme
By JON N. HALL
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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” (Dec. 31, letters to the editor), Don Porter and Lloyd Hellman have their say. “From the beginning it has been a pay-as-you-go government system and never an ‘investment,’ ” Porter wrote.

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 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 has a so-called trust fund, said to contain more than $2 trillion. But the treasuries in the “trust fund” are IOUs, and differ from “regular” treasuries in that they are not marketable. In reality, there is no Social Security trust fund.

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 meet benefit obligations.

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. That 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 his letter to the editor, Hellman 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 a 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.” That 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.

The question isn’t just whether Social Security will be there for you, but whether the good old 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 in Kansas City.