Not Far OT: PJO on SS
> Rolling Stone, April 15, 1999
>
> By Straight Arrow Publishers Company, L.P. 1999.
> All Rights Reserved.
>
> The Great Ponzi-Scheme Rescue Act of 1999
> The last Social Security story you'll ever have to read.
>
> by P. J. O'Rourke
>
> P.J. O'Rourke is the Cato Institute's Mencken research fellow.
>
> Sometimes the most dangerous thing about political issues is
> trying to figure them out. We're all getting what we want from
> Social Security without understanding it. This is what economists
> call "rational ignorance." Old folks get something to carp about
> -- the $770 average monthly payment. Young folks get to tell old
> folks to shove off: That $770 will be a fortune in Sun City; we
> need the spare bedroom for a home gym. A huge number of government
> bureaucrats get a huge government bureaucracy to run. And
> politicians get an issue that everybody's for and nobody's
> against. Plus, every couple of election cycles, there's a "crisis"
> with this issue -- a crisis that politicians don't have to
> understand, either, but that allows them to make thoughtful,
> caring and statesmanlike noises.
>
> At the moment, the crisis with Social Security is that the Social
> Security trust fund will run out of money in 2032, which is right
> around the corner -- if you're a sequoia. Whatever the politicians
> propose, these politicians will be on their way to the grand-jury
> room in the sky before their proposals take effect. Meanwhile, in
> the name of "shoring up the Social Security trust fund," the
> politicians have an excuse to spend surplus tax dollars. As
> President Clinton told a crowd in Buffalo, on the day after his
> State of the Union speech solved the current Social Security
> crisis, "We could give it all back to you and hope you spend it
> right. But...if you don't spend it right..." So, on top of
> everything else, Social Security has saved us from foolishly
> buying a snowmobile just when an Al Gore administration with all
> its global warming is about to set in.
>
> If we began to investigate Social Security, we could become
> irrationally knowledgeable. Our heads might explode. We should
> not, for example, peek into that Social Security trust fund.
> There's nothing inside. Since 1939, the Social Security payroll
> tax on employers and employees has been used simply to pay Social
> Security benefits. In 1916 an Italian immigrant named Charles
> Ponzi created an investment fund that paid large dividends without
> making any investments. Money from new investors was transferred
> to old investors, while the new investors received money from
> newer investors yet. The system had flexibility and boldness, and
> worked as long as an ever-expanding pool of suckers could be
> found.
>
> Charles Ponzi made a profit on this, and so does the U. S.
> government. Social Security payroll-tax receipts have always been
> greater than Social Security benefit payments and will continue to
> be until about 2013, when the baby-boom sucker pool retires. The
> federal government has taken this surplus revenue, spent it and
> given the Social Security trust-fund IOUs in return. That is, the
> government spent the money and then promised to spend it again
> later.
>
> Debts owed to the government by the government are absurd in the
> first place. Furthermore, these IOUs have the same force of law
> as, oh, the statutes against perjury and obstruction of justice in
> a case against the president of the United States involving sex.
> Our Social Security taxes do not have to be spent on Social
> Security. In 1937 the Supreme Court ruled that Social Security
> taxes "are to be paid into the treasury like any other internal
> revenue generally, and are not earmarked in any way." This despite
> President Roosevelt's saying, "Those premiums are collected in the
> form of taxes...held by the government solely for the benefit of
> the worker in his old age."
>
> Roosevelt also said, "We put those payroll contributions there so
> as to give the contributors a legal, moral and political right to
> collect their pensions." But in the 1950s, a deported communist
> filed a capitalist suit to reclaim his Social Security premiums.
> The Supreme Court said, "To engraft upon the Social Security
> system a concept of 'accrued property rights' would deprive it of
> the flexibility and boldness in adjustment to ever-changing
> conditions which it demands." Charles Ponzi never had the
> opportunity to appoint Supreme Court justices. He went to jail.
>
> Having a Social Security trust fund is exactly like not having a
> Social Security trust fund. Social Security will go into the red
> no matter what. Without a trust fund, the government will have to
> pay off the Social Security deficit by raising taxes and cutting
> benefits. With a trust fund, the government will have to pay off
> the Social Security IOUs by raising taxes and cutting benefits.
>
> Unfortunate people who scrutinize the Social Security trust fund
> discover two facts: It's not there. It's not theirs. But, for the
> rest of us who are rationally ignoring such things, the real
> question is, how are we doing with this retirement fund that
> doesn't exist and we don't own? We're doing surprisingly well.
> We're getting an average return of more than 16.5 percent on our
> employer/employee payroll contributions. If we're eighty-two years
> old. On the other hand, if we're sixty-seven, we're getting about
> 1.4 percent -- a financial coup we could have managed on our own,
> without the help of the federal government, by holding onto our
> Beanie Baby collections a little too long. And if we're age
> twenty-four to sixty-two, we can expect a return of between -0.34
> percent and -1.7 percent, and might be better off leaving the
> money in our old jeans and going through the closet when we
> retire.
>
> Here again we see the genius of Charles Ponzi. Initial payments
> into Social Security were very small. From 1937 to 1949, the
> combined employer/employee payroll tax rate was two percent, and
> this tax was levied on only the first $3,000 of annual income. The
> generation that made these payments then went on to surprise
> demographers, shock their heirs and delight Winnebago dealers by
> taking a really long time to die. The first Social Security
> recipient, Ida M. Fuller of Vermont, retired in 1940 after paying
> Social Security taxes for three years. She and her employer had
> put a total of forty-four dollars into the system. Ms. Fuller
> lived to be 100 and collected $20,933.52 in benefits. Mr. Ponzi
> could have done as well, and been honored for his business savvy,
> if only he had the legal and legislative muscle to create a Ponzi
> scheme that preyed upon the most gullible of all suckers: people
> who haven't been born yet.
>
> But although the Social Security system does a good job of
> stealing prospective candy from future babies, this won't work for
> long. There are too many old people. In 1950 there were sixteen
> working Americans for every retiree. Now there are 3.3 (the 0.3
> being down in corporate communications, eating hash brownies and
> putting the company Web site together). By 2025 each George Bush
> or Bob Dole will be supported by only two George W.s or Liddys.
> We're going to need a really aggressive assisted-suicide program:
> "Sure, Pops, it feels like indigestion, but it's probably
> pancreatic cancer. I'll help you put the plastic bag over your
> head."
>
> And that is the great conundrum of Social Security, the thing that
> makes all rational people want to stay as ignorant as possible
> about it: Everything we could do to fix Social Security would make
> it worse.
>
> We could, for one thing, forget the whole concept of Social
> Security as a government-run pension and insurance system, and
> just pay the benefits out of general tax revenue. This would be
> more honest, which is why it's such a bad idea. The delicate
> fabric of rational ignorance would be destroyed. People would see
> where their retirement money was coming from -- from voting for
> any candidate who'd raise Social Security payments to $100,000 a
> month. Old people vote like the dickens. And tapping general
> revenues does nothing about the fundamental ratio problem of one
> geriatric duffer getting AARP skydiving discounts to two of us
> trapped in office cubicles.
>
> Or we could stick to the present system, which, as mentioned,
> would mean raising taxes, cutting benefits and increasing the
> retirement age by so much that Reagan would still be president. (A
> chief executive with Alzheimer's would be an awful thing. He might
> get mixed up about what the meaning of is is or forget to bomb
> Serbia.) Keeping the present system would tick off the retired,
> the unretired and those about to retire -- in other words,
> everybody. It's an unusual kind of politician who has the guts to
> do this, the kind of politician we will have gotten rid of through
> the assisted-suicide program.
>
> We could also stick with the present system while trying to put
> some real money into the Social Security trust fund. During the
> next fifteen years, there is supposed to be a $2.7 trillion
> federal budget surplus. Let's save it all to pay for Social
> Security. Except this can't be done. The federal government does
> not have the same relationship to money as a human does. The
> federal government issues that money. When the money comes back to
> the federal government, it must go away again or it gets unissued,
> in effect destroyed. Yanking $2.7 trillion in currency (about
> one-third of the gross domestic product) out of the economy would
> cause a howling recession. When the government reissued that
> currency, it would cause screaming inflation. And such
> money-supply shenanigans would give Alan Greenspan a heart attack.
> Where would the nation be then?
>
> When a budget surplus happens, the federal government can (per
> Clinton's suggestion) give it back. This is nice because then
> there's more money and we can all have some. Or the government can
> pay down the national debt. This is nice, too, because then
> there's more money to lend and we can all borrow some. Or the
> government can do what it usually does, which is fund public
> television, welfare, NASA, the military, etc. And this is also
> nice, because then we get more Teletubbies, surplus cheese, space
> stations and maybe (if the draft is reinstated) free trips to
> Kosovo.
>
> What government can't do is save that money in the Social Security
> trust fund. The only way to place money, as opposed to IOU's, in
> there is for the government to buy something real -- such as $700
> billion worth of Microsoft stock. This would put the government in
> an interesting position with its antitrust suit against that
> company. We were just kidding, Bill.
>
> Having a government that owned economic assets is what made the
> U.S.S.R. the success that it is today. Maybe Bolshevism could be
> avoided, but conflict of interest couldn't be. Businesses would
> all want a slice of the federal investment pizza, and so would
> labor unions, special interests, pressure groups and every ad hoc
> group of scalawags and hard graspers you can imagine. Not to
> mention that the government itself might be tempted by all the
> mushrooms, pepperoni and extra cheese sitting around uneaten.
>
> The track record of trust funds run by individual states is not
> encouraging. California and Illinois raided their funds to balance
> state budgets. Pennsylvania put $70 million into a Volkswagen
> plant now worth half that. Kansas wasted $87 million because
> Kansas legislators insisted on investing in Kansas. Minnesota
> tried to be moral and lost $2 million selling off tobacco stock.
> Connecticut tried to be amoral and lost $25 million bailing out
> Colt's Manufacturing. And the Missouri State Employees' Retirement
> System venture-capital fund was shut down because of low yields
> and lawsuits.
>
> The marvel of President Clinton's proposal for Social Security
> reform is that it combines all these ways of making Social
> Security worse. It does so with what economist Robert J.
> Samuelson, writing in the February 10th Washington Post, called
> "programs of mind-boggling complexity." (And if you took econ, you
> know that economists' minds don't boggle easily.)
>
> Clinton would spend the current Social Security surplus in
> traditional government fashion, giving the trust fund an IOU.
> Clinton would use some of that surplus to reduce the national
> debt. But he wouldn't really repay any federal obligations. He
> would transfer these paper claims from the individuals who hold
> T-bills and treasury bonds to the Social Security trust fund. This
> would give the trust fund a claim on general tax revenues while,
> at the same time, leaving it more full of debt than ever.
> Meanwhile, Clinton would also keep expenditures at the current
> levels, so somebody (not Clinton) would still need to raise taxes
> and cut benefits. Furthermore, Clinton wants the Social Security
> trust fund to purchase $18 billion worth of common stock. That
> isn't much, since Social Security spends $347 billion a year. But
> it's enough to cause plenty of influence-peddling scandals and
> bureaucratic cock-ups.
>
> The above paragraph is the most eloquent plea for rational
> ignorance that I have ever read, let alone written.
>
> The only real solution to Social Security is to own it --
> privatize the whole system of national social insurance. This
> would still leave us with enormous unfunded liabilities owed to
> people too old to go private. But we'll have those anyway. And
> privatization would work. There is no twenty-year period in
> American history when stocks lost money. And even from 1930 to
> 1939, a conservative portfolio -- half stocks, half bonds -- would
> possibly have made 0.68 percent a year. That's not a spectacular
> return, but it beats waiting until we're sixty-five to rummage in
> the Silver Tabs for change to buy cat food.
>
> Privatization, however, will happen at about the same time Al Gore
> and Liddy Dole get naked and hook up. Thirty-eight percent of the
> federal budget is spent on Social Security and other social
> insurance. By 2020 that share will be between fifty-nine and
> sixty-eight percent. Two-thirds of a politician's throw weight
> will come from controlling social-insurance dollars. Money is
> power. What use is it to endure the Dutch rubs and Indian rope
> burns that are politics if you can't obtain mastery over people
> and give them noogies back? Politicians would rather discard their
> spouses than discard two-thirds of their power. Some politicians
> would much, much rather.
>
> And what about the rest of us? We'd have to take responsibility
> for ourselves and maybe even our parents if the Beanie Baby fad is
> really over and Mom and Dad's investment strategy flops. We'd need
> to pay attention, learn things, make difficult decisions. It's far
> more pleasant to slide along in blissful (and rational!) ignorance
> and hope that before we lose our teeth (and shirt) something will
> come up. It did for Charles Ponzi. After he got out of jail, he
> went back to Italy and became a top economic adviser to Benito
> Mussolini.
|
