Social Security: can one lose a lost horizon?

Certain politicos are currently shaping a political argument that Social Security is an item that should be excluded regarding any debt reduction/debt ceiling negotiations. That Social Security’s mere existence is of benefit to the “greater good“.

‘Senate Majority Leader Harry Reid, D-Nev., attacked the bill as a "radical plan to kill Medicare and Social Security," and said House Republicans needed to know it was dead‘. (1)

Don’t reduce benefits but reduce benefits?


The fall back position of those advocating no reductions in Social Security benefits is that any changes to Social Security, if they must occur, the changes should come in the form of raising the retirement age qualification [which in fact is a reduction in benefits]. (2)

The history of don’t reduce benefits but reduce benefits.


When Social Security was first proposed by Franklin Roosevelt the plan would be completely voluntary. The plan is no longer voluntary and hence the voluntary benefit became a coercive state mandated benefit. However, one would only be taxed at 1% of the first $1,400 of income. Sorry, today the tax is 7.65% of the first $90,000.

Then again, your contribution would be tax deductible and hence some other tax relief would be gained. Sorry the contributions are by and large no longer tax deductible.
At least their would be a Trust Fund and the Social Security contribution would be sequestered and not part of the general operating fund. Under the Lyndon Johnson Administration the Trust Fund corpus was moved to the general fund and subsequently spent.

Well, at least the future income derived from Social Security would not be taxed. Ops! Under the Clinton Administration the retirement income proceeds of Social Security became taxable of which 85% can be included as income based on the total income of the recipient.


Who created a plan that doesn’t reduce benefits but reduces benefits?


Was Social Security just so much pie-in-the-sky dreamed up by the public who wanted a secure retirement? That in the end the public outcry for retirement security was just so much populist blather? Sorry, no. The public demanded no such plan. Really? Oh yes, almost every state-run retirement plan in the world is a concoction of politicos and by no means a grass root phenomena. That’s right, state run retirement plans are the brain child of politicos. (3)


Why were we not warned of a plan that doesn’t reduce benefits but reduces benefits?


Due warning was given. How so? W.R. Williamson, Travelers Insurance Company actuary testified before the House Ways and Means committee in 1935 explaining how the plan would incur deficits. That a major burden of deficits would be passed onto [in his 1935 actuarial estimate] to those in 1965 or 1980. (4) (5)



Can one lose something that was lost in the first place? Can one consider value lost where no value exists?


Exactly who values Social Security the most? If Social Security checks can not be sent out 08/02/2011 without raising the debt ceiling exactly where is the value to James and Jane Goodfellow? Is the value increasing debt? Increasing debt can be considered “value”? (6)

Arguably the “value” of Social Security is an illusionary political value of, by, and for the politico. How so? By convincing James and Jane Goodfellow that value exists, and that somehow, someway a concrete, sustainable, and asset based value is being taken away [that indeed represents value] politicos merely extend and pretend the illusion of Social Security.

Notes:


(1) Boehner pulls out of White House debt talks. msnbc.com, 07/22/2011, http://www.msnbc.msn.com/id/43851666/ns/politics-capitol_hill/

(2) The red-hot debate over raising the retirement age, cnnmoney.com, 08/02/2010
http://money.cnn.com/2010/08/02/news/economy/social_security_retirement/index.htm

(3) Carolyn L. Weaver, The Crisis in Social Security: Economic and Political Origins, (Durham, NC.: Duke Press Policy Studies, 1982), p.33.

(4) Statement of W.R. Williamson, Assistant Actuary, Travelers Insurance C0., Hartford, Conn., House Ways and Means Committee, January 1935, pp.1013, 1014.

(5) Statement of W.R. Williamson, Assistant Actuary, Travelers Insurance C0., Hartford, Conn., House Ways and Means Committee, January 1935, p. 1014.

(6) Obama: Debt Ceiling Impasse Threatens Social Security, Veterans, Medicaid Checks. ABC news, 07/12/2011,
http://blogs.abcnews.com/politicalpunch/2011/07/obama-debt-ceiling-impasse-threatens-social-security-veterans-medicaid-checks-.html



　





　

USA Today: Is Social Security an investment Ponzi scheme?

' Q: Is Social Security an investment Ponzi scheme?


A: The Social Security system is under intense pressure as its method of taking current workers' contributions to pay for current retirees is under strain. And it's that method, which often draws criticism for resembling a Ponzi scheme.

Before we can decide if Social Security's structure qualifies it as a Ponzi scheme, a quick definition is in order. A Ponzi scheme "is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors," according to the Securities and Exchange Commission.

Some investors think that the fact that Social Security pays existing investors with cash collected by new investors makes it a Ponzi scheme. But that's not true, says Jack Coffee, professor of law and securities law expert at Columbia Law School. "This is less a question and more an aggressive assertion," he says.

Social Security is not a Ponzi scheme because it wasn't an intentional fraud, he says. In fact, the system has worked as expected since its creation in the 1930s. What's happening now is that, like many corporate pension plans, Social Security is running the risk of being underfunded as obligations grow faster than contributions. But again, Social Security wasn't created with this aim, he says. "It was a system that was quite adequate for a long time," he says.

Changes are certainly needed to keep Social Security working to reach the goals it was established to meet, he says. Either benefits will need to be curtailed or the government will need to kick in funding, he says. But again, it's not a Ponzi scheme, but a retirement system where the demographics have changed, he says. "It's a system where almost everyone agrees needs reform." ' - Matt Krantz, USA Today (1)



What about this depiction of Social Security? Is it accurate?

Regarding the Ponzi scheme portion of the article it tries to delineate between intentional fraud and good intentions. Let us revisit Coffee's statement:

'Social Security is not a Ponzi scheme because it wasn't an intentional fraud, he says. In fact, the system has worked as expected since its creation in the 1930s. What's happening now is that, like many corporate pension plans, Social Security is running the risk of being underfunded as obligations grow faster than contributions. But again, Social Security wasn't created with this aim, he says. "It was a system that was quite adequate for a long time," he says.'

Examine this statement: "...it wasn't an intentional fraud".  Is the statement including an implicit assumption that fraud existed but it wasn't intentional?

Examine this statement: 'But again, Social Security wasn't created with this aim, he says. "It was a system that was quite adequate for a long time," he says.'

Are those statements accurate? Regarding "...Social Security wasn't created with this aim" one needs to revisit the 1930's and the arguments put forth by the politicos through the mechanism of government for the enactment of Social Security. Yes, there was no populous movement for Social Security creation. That is, Social Security was a politico creation not a voter movement for the creation of a government sponsored retirement scheme. Hence the creation and aim were clearly politico driven. (2) The "....adequate for a long time" assertion is questionable because the arguments clearly included congressional hearings in which discussions of "inadequacy" occurred by Travelers Insurance Company Actuary W.R. Williamson (3)

Coffee's "wasn't an intentional fraud" and "wasn't created with this aim" are questionable statements. That is, arguments regarding funding with one generation paying for the next generation were clearly given and debated by politicos in the 1930's regarding Social Security. (4)

Upon Further Review

Coffee also states "....government will need to kick in funding". Government produces nothing that the private sector would not have produced if a transfer payment had never been made from the private sector to establish the public sector. Hence how does the entity "government" kick in funds? The answer is: it doesn't. Only the transfer payment from the private sector can increase funding with government merely acting the part of transfer agent.

Coffee goes onto say "But again, it's not a Ponzi scheme, but a retirement system where the demographics have changed....". This statement appears to assume that changed demographics were an unknown-unknown. Once again one must visit the 1930's and examine the politico arguments surrounding social security. In point of fact, demographic changes were in fact discussed and warnings were given regarding the changing demographics in the future.(5)

Finally Coffee states the obvious or does he misstate the obvious when he says "....Social Security is running the risk of being underfunded". The term underfunded carries with it the implicit assumption that a fund exists and that that fund may not be adequate. What fund exists that is underfunded?  No fund exists. (6)

Notes:

(1) http://www.usatoday.com/money/perfi/columnist/krantz/2011-06-21-social-security-ponzi-scheme_n.htm

(2)  Carolyn L. Weaver, The Crisis in Social Security: Economic and Political Origins, Durham, NC: Duke Press Policy Studies, 1982, p.63.

(3) Jim Powell, FDR's Folly, Chapter Thirteen, How Did Social Security Contribute to Higher Unemployment, pages 173 - 186.

(4) Ibid

(5) Ibid

(6) Dr. Donald Boudreaux, George Mason University, More on the ‘Trust-Fund’ Fraud, 03/16/2011,  http://cafehayek.com/2011/03/more-on-the-trust-fund-fraud.html