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February 13, 2005

Social Security: There May Be An Elephant In The Living Room

The reality is that the Social Security program, as it was envisioned, implemented, and operated, up to this point in time, is an illegal Ponzi scheme. If you or I tried to start an “investment program� where the contributions of one group of people were used to pay off another group of people, we would be charged with a felony, arrested, and incarcerated.

The Social Security program tarnishes the U.S. balance sheets like a herpes sore on a beauty queen. But, up until now, no one has had the kahunas to actually bring it up. Mentioning the words "Social Security" has historically been viewed as political suicide. Mentioning the challenges facing the program was to subject oneself to extraordinary rendering at the hands of the AARP. Social Security is widely referred to as the “third rail� of American politics. As in the rail that carries enough electricity to kill anyone that touches it.

So, for Bush Jr. to mention it means that he’s either stupid, or crazy, or a true leader. He certainly raised the stakes on his presidency when he dragged the Social Security program into the limelight recently. Bush basically pointed out that "there is, in fact, an elephant in the living room". In doing so, he caught the Democrats flatfooted. Predictably, they collectively lambasted his plan as reckless, irresponsible, and financially insolvent, but then realized that they didn’t really have a plan of their own. So, right now, the Democrats are saying “there may or may not, in fact, be an elephant in the living room…we’re looking into it.� So, for the time being, it’s a Mexican standoff.

Who’s Right? Or…uh…what’s...uh…the deal?

Sometime around 1993, the feds decided to split FICA(Federal Insurance Contributions Act) into two components, Medicare and OASDI(Old Age, Survivors, and Disability Insurance - this is what is commonly known as Social Security). To oversimply things, Medicare is for poor people, and Social Security is for old people(retirees). Medicare is financially destitute, and has been since it's inception. We won't even talk about Medicare. It's a freaking train off the rails.

The Social Security program, however, has always been self sufficient.That is, Social Security contributions collected from the payroll taxes have been more than enough to offset the expenses incurred by paying benefits for retirees. (Not too surprising when you realize that they’re confiscating 12.4% of every employee’s salary for three hundred million people.)

The problems with Social Security(OASDI) today are:

a) The surplus funds have been raided for as far back as anyone can remember. (I don’t care to get into a blame storming game of who tapped into the surplus first or who tapped it the hardest or who liked it the most. It really doesn’t matter at this point. The only thing we need to mention now is that almost all of it is, in fact, gone.

b) People are living longer.

c) There are less people entering the workforce. So, with less people paying for more benefits, there will come a day of reckoning, when there won’t be enough funds collected to cover the benefits paid out under the system.

The reality is that the Social Security program, as it was envisioned, implemented, and operated, up to this point in time, is an illegal Ponzi scheme. If you or I tried to start an “investment program� where the contributions of one group of people were used to pay off another group of people, we would be charged with a felony, arrested, and incarcerated.

Pyramid investment schemes and Multi-Level Marketing schemes have been around for some time. The problem with them is (1) they become unsustainable after only a few iterations and (2) they’re illegal because of (1).

So, taking contributions from people coming into the workforce to pay for an ever growing number of people retiring from the workforce, in the long run, isn’t going to work. This is, in a nutshell, what President Bush has had the courage to point out. Although Bush is right in asserting this, and on some level, even the Democrats can’t dispute this, their argument is that it won't happen for a long time, and Bush’s plan might make it worse, so let’s just not meddle with it at this point in time.

There is a certain amount of truth to this. Bush’s proposal is a bold, if controversial, one. Perhaps the best model of what he is proposing is Chile’s retirement system. In their system, workers are forced to set aside 10% percent of their earnings into a private retirement fund. Then, when they retire, they can receive distributions from their fund based on their life expectancy. This is radically different than Social Security because there are no surplus funds for the government to raid. Your money is set aside for you in a private account in your name. In Social Security, the money they withhold from your check is used to subsidize rice farmers in the Sonora Desert. So, I’m sure you begin to see the difference here.

There Is An Elephant In The Living Room

So, if it’s intuitively obvious to the casual observer that there is, in fact, an elephant in the living room, and a relatively large one, at that, why don’t we fix it? Or, alternately, why isn’t it in the news?

The answer, predictably, is a variety of reasons(It's a little long winded, but your retirement may depend on it, and, if not yours, then your childrens' surely will, so do it for them.):

• The American Association of Retired People(AARP) is vociferously against changing Social Security, for obvious reasons. These are the people who have paid into the plan all their life, and they feel that they are entitled to the benefits they were promised. Go figure. So, if you’re a politician, you don’t mention the third rail (Social Security) because the AARP will send you packing before you can say “Gericycle�.
• Not everyone in Congress is enrolled in Social Security. Up until 1983, Congress did not participate in Social Security. They have their own retirement plan called the Civil Service Retirement System(CSRS). If they were hired after 1983, they have to contribute to Social Security, but I assume it would be a more pressing issue if they were all subject to the financial whims of the same retirement system as the rest of us. Interestingly, Colorado, California, and Oregon public employees have their own retirement system: PERA, CalPers, and PERS, respectively.
• People, in general, are not great at long-range planning. Governments, in particular, are abysmal at long range planning. Governments, by their nature, are risk averse. In a bureaucracy, there’s no reward for solving problems until they become a full-blown raging crisis, and there’s a great incentive not to fix something unless it is a crisis. Don’t fix it if it ain’t broke. Don’t go out on a limb. You get the idea here. So, Social Security, although it is clearly headed for a disaster, is not there quite yet.
• Privatizing Social Security has many inherent risks, and, in the short run, may cause more problems than it solves. If people start contributing to private savings accounts, and reduce contributions to FICA, then that destabilizes the current Social Security program, at least in the short term. Where would the money come from to make up this difference?
• You manage what you measure. Conversely, you don’t manage what you don’t measure, and Social Security isn’t on the books. I should back up here. The Financial Accounting Standards Board(FASB) is an organ of our government that writes rules for companies to follow when reporting their financial health. The theory is that we want to make sure we’re comparing apples to apples when we’re evaluating the prospectus of a company to make an investment through the stock market. About a decade ago, they decided that companies should show unfunded pension obligations as an unfunded liability. This was not a trivial accounting change. GM took a one-time charge of twenty billion dollars over the issue. Predictably, the United States government’s Congressional Budget Office(CBO), is not subject to FASB. So, they don’t show our retirement benefits as an unfunded liability on their books. If they did, they would have to take a charge of tens of trillions of dollars, which would require them to stick their neck out.
• Even if the CBO were subject to the rules of FASB, there’s nothing that says the United States has to have a balanced budget anyway. Until we require the CBO to play using FASB’s rules like everyone else, AND require the CBO to submit a balanced budget and, at worst, break even financially every year, it’s really a moot point. It really doesn’t make sense to talk about what we can and can’t afford to do, if we don’t hold the books to a certain standard of principles and hold the deficit down to a certain amount of money. Why not just double the benefits we’re paying out and stop collecting FICA contributions altogether? We’re already the largest debtor nation in the world. So what? What difference does it make? Obviously, other countries keep lending us money. Who’s to say it matters one iota if Social Security is financially insolvent or not?

The Ultimate Shell Game: Three Card Monte in D.C.

So, these are the challenges facing us today. And, this is why the Democrats and the Republicans find themselves in a standoff over the issue. Bush gets credit for mentioning the elephant in the living room, and for proposing a long-term solution to the problem. But, he also ran up record deficits over the last 4 years, so he’s partly to blame for our current financial catharsis.

The Demagogues get credit for stonewalling Bush, and forcing a more in depth study of the issue, which is certainly warranted. But they’re far from blameless though, as FDR initiated the New Deal program to begin with.

Both parties get an F-, though, for not suggesting the obvious. Namely, that it really makes no sense what-so-ever to have any discussion at all without forcing the CBO to adopt the FASB guidelines, signing a Balanced Budget Amendment, and showing Social Security as an unfunded liability on the books. Until we take these first, very basic steps, any pain associated with changes to the currently social security plan will be hidden as a footnote and kept off the books for the future generations to deal with. And we owe our children more than a shell game of benefits, financed by a Ponzi scheme. We owe them more than that, don't we?

Posted by Peenie Wallie on February 13, 2005 at 11:31 AM