I ran into a brochure from AARP recently. The brochure is advocating, as should be no surprise that the elderly “Keep Social Security Strong.” Unfortunately while it get some of the facts right, the brochure doesn’t contain the most import fact of all. That is that there is no more money for the Ponzi Scheme anymore.
That’s the problem with all pyramid, schemes, whether it’s Bernie Madoff, Multi Level marketing or Social Security. The big difference being that the government put Madoff in jail and points guns at people’s heads to make them pay ever higher taxes until things collapse.
Here’s a scan of the brochure. I couldn’t find a copy online. I did find an archived web page.
Here’s the problem:
Social Security: The challenges
- Funding shortfalls: Social Security can pay full benefits for nearly 25 years, provided the U.S. Treasury repays the money it has borrowed from Social Security. After that, Social Security will still be able to pay about 75 percent of promised benefits for the next 75 years or more even if no changes are made.
- Longer life expectancy: In 1940, a 65-year-old could expect to live an additional 12 or 13 years. A 65-year-old today can expect to live another 20 years. As a result, many individuals will collect Social Security benefits longer than previously anticipated. In fact, the number of Social Security beneficiaries is expected to rise from 57 million in 2012 to nearly 92 million in 2036.
- A lower worker-to-beneficiary ratio: The drop in birthrates and the increase in life expectancies have reduced the number of workers per beneficiary and the trend is expected to continue. Today there are 2.8 workers for each person who receives Social Security benefits. By 2036, the ratio will be 2.1 workers for each beneficiary.
It’s not as if this is an unknown problem. I’ve known about it since I was 17 or so and that was a LONG time ago. What I couldn’t have known was how much drag the program would cause to the economy, year after year, decade after decade.
Consider this: A person would need to have saved $386,000 as of January 2012 to buy an annuity (an investment product that guarantees to pay a steady stream of income) that would pay out about $1,228 a month, an amount equal to the average Social Security retirement check
Had the typical worker even earning a modest salary actually been able to save the moneys taxed from him to pay other people earning that $400k would have been easy even at modest interest rates, IE the interest rates that normally apply in a healthy economy. Instead of course, the government took the surpluses paid in from people’s hard earned labor and replaced them with IOU’s
Which of course leads to the next problem. The money has to be paid back to keep Social Security solvent and the Treasury doesn’t have it. From the brochure:
Social Security can pay full benefits for nearly 25 years, provided the U. S. Treasury pays back the money It’s borrowed from Social Security.
With what money? The Treasury is already broke and both running up deficits on a scale never seen in history and printing money like it’s going out of style. The fact is that right now the government is spending just about very tax dollar on the entitlements and debt service and the constitutional functions of government are being funded with borrowed money.
The fact is that Social Security and Medicare have been a drug on the economy since they were enacted. They were soaking the seed corn that was needed for the future. The money that was drawn from everybody’s wages was money that could have been saved and invested. Instead that money was used to fund government extravagances and ever more payouts to people to not work. All on the back of the ever suffering taxpayer.
In discussions about benefits it’s easy to forget who pays for them and where the money comes from. Yet that should be the first point of discussion. When you have a program like Social Security that pays out benefits to people from taxing working people you are taxing their future. The first benefit recipients from Social Security made out like the bandits that they were, but nobody paid much attention to the poor suffering taxpayers paying in. And in the beginning, like all pyramid schemes, that worked because the drug was masked by all those people paying in and there was all that surplus that the government could spend.
For the first fifty years the system continued to “work” because the baby boom, the largest group of new people the country had ever seen were making huge payments into the system starting about 1965 or so. That wouldn’t continue and for a variety of reasons the baby boomers did not have as many kids as their parents. Many people might think that was a good thing, but systems like Social Security absolutely rely on an increasing population to keep the system afloat.
So the managers in government are looking for new sources of money to rob, because they can’t afford to admit that the system is unsustainable. The problem is that Robbing small businessman or investor Paul to pay retiree Peter result in Paul not being able or willing to earn the kind of money that allows him to create the wealth that the system needs to function at all.
There’s also the problem that people won’t just let them selves be robbed. The risk is that people will malinvest to avoid the higher taxes, causing shrinking investment in businesses, causing lowered economic activity, necessitating the need for even higher taxes and on into the death spiral where government revenues never increase and the economy dies.
The problem with all their schemes is that the A and B’s in government, in their rush to see that C gets paid forget that it’s X that’s paying the bills. The problem is that poor X doesn’t have an unlimited pile of funds to pay his bills and everybody else’s too. He’d like to have a nice house, have kids and send them to college if that’s what he wants. he doesn’t have the money to do those thing that he wants and pay for somebody’s else’s high life on Social Security at the same time. So if the taxes are crushing, and they have been, well Mr. X stops spending.
The problem is what is not seen. The tragedy is that Mr. X has been cheated out of his good life by the promise that he might get paid a sum later, but all the economic activity that X’s life would generate doesn’t happen either. That’s the unseen drag on the economy and like Mr. Bastiat points our the consequences are not pretty.
It’s the unseen that kills things like Social Security. It’s impossible to “keep Social Security strong” if the economy itself has been weakened and crippled by high taxes and regulations. Social Security recipients need to understand that a strong Social Security more than likely means a dead economy that can no longer carry the weight and shortly thereafter no Social Security at all.
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