What Are The Consequences Of Transfer Payments To The Elderly

It’s long past we ask ourselves that question. The entitlements are growing at a far faster rate than any other government spending and at a faster rate than can be sustained for very long no matter how much people think otherwise.

The people in living in ivy covered halls in the Ivy Covered Snob factories would like to believe that the status quo is sustainable.  Many people, especially those receiving benefits now seem to be of the same opinion. Here’s a case on point.

Bear that demonstrated fact in mind. Though the cheat itself may have predated Ponzi, his name clung to it, and by definition a “Ponzi scheme” is a criminal enterprise to fleece the gullible.

Now consider Social Security. It was launched by act of Congress in 1935, in the pit of the Great Depression. It is a completely self-funded program fed by a mandatory payroll tax, each worker and employer putting in a percentage of the worker’s salary. The annual retirement benefits vary and are paid basically out of the sum collected from that tax. If, after the paying the benefits, there is a surplus left in the Treasury, it goes into a dedicated fund, popularly called a lockbox, from which future benefits are paid.

And here is a bedrock reality: The system works. Through the years, despite sweeping changes in the economy, the size and longevity of the population, and changing ratios of retirees to still active workers, all of which required adjustments, Social Security has paid the beneficiaries in full and on time. The first one was a Mrs. Ida May Fuller, who got a check for $22.54 on Jan. 31, 1940. A little less five months later, on June 14, I was enrolled in the program on my first job as an office boy. The minimum wage, which I received at that time, was $12 for a 40-hour week. I still proudly show my original signed card. Not only does the system work but the evidence is overwhelming that public opinion from all points of the political spectrum is rightfully determined to preserve it.

Now think for a moment about what the tea party-dominated Republicans are actually saying: That this government-run public insurance program which for more than two generations has allowed seniors to live their post-working lives with a modicum of dignity and security is identical with a genuine criminal enterprise. It’s beyond outrage. It is a super falsehood spewed out of the publications of well-funded right wing think tanks and the mouths of well-paid right-wing radio and television liars.

What they claim is that the lockbox is a fraud, an accounting trick. It’s filled with government bonds, which are simply IOUs to ourselves, and will decline in value as the national debt, swollen by “entitlements” like Social Security and Medicare (but not gigantic military expenditures) mounts toward the stratosphere. They point to borrowings from it under certain legally permissible circumstances as “raids” to fund such sinful extravagances as programs to feed hungry children, fund research into curing treatable diseases or provide temporary unemployment benefits to working families whose jobs have been outsourced or automated.

The “Ponzi scheme” lie folds neatly into the prediction of the doomsayers that the growing number of retirees combined with the shrinking of the work force is leaving the yearly intake less than the outgo and will soon cause the system to go broke, ultimately leaving current and future beneficiaries — the old and the young as high and dry as Ponzi’s victims.

The math is not wrong. But it is a problem that can be fixed with adjustments to the tax to boost collections, and a start might well be made by raising the cap that allows salaried employees to escape payment after their paychecks reach $118,000 and the tax is a smaller bite out of their income — a regressive idea if ever there was one. Or by other reasonable adjustments to retirement age, the percentage of deductions in the payroll tax, the progressive taxation of the benefits, or means tests to eliminate the rich from the system altogether. I would personally deplore that last option because it violates the concept of social insurance rather than handouts to the improvident. In any case measures like these could extend the life of the system for decades.

Ah, yes, but that’s when the shortfalls are considered a problem, not a crime, and the doomsayers of the far right want it to be a crime because it fits so neatly into their longstanding basic agenda of demonizing government as the root of all evil. The mindset of the Wall Street plutocrats, whose greed has no limits, and their free market ideologue allies is one that aches at the very thought of some public service that could be turned into a fountain of private profit. They claim that deregulation and return to “free market” economics is the pathway to prosperity for all. Their recent success in pushing public policy in that direction has given us the “honor” of having the greatest income inequality in much of the developed world.

It takes a special kind of delusion to say that “the math is not wrong” yet turn around and say that all it will take is more taxes to “fix” the problem.  Yet where is that tax money going to come from other than the poor taxpayer who is already at the margins.  the simple fact is that there is no money left to tax. At least not without accelerating the death spiral that has already started.

You can’t tax money that doesn’t exist and we’ve been taxing investment and industry to the point that growth has become almost impossible.  What people fail to realize is that those taxes remove the key incentives that the country desperately needs right now. No investment, no growth, no jobs, and no tax revenues.  Which has dire effects that are just beginning to be felt.


For all the promises made by politicians on both sides of the aisle, budget math makes clear how little room exists for new government spending. The federal budget is on autopilot. Spending for entitlements will soon crowd out most of what Washington does. Any new initiative that requires major financing is suspect.

The underlying budget realities are stark. Some 70 percent of all federal spending goes to entitlements—Social Security, Medicare, Medicaid, unemployment insurance, and the still relatively small (for now) costs of the Affordable Care Act (ACA). These spending flows continue to grow automatically; Congress doesn’t even debate them. Legislative discretion does come into play regarding the next-largest budget item—defense, at about 17 percent of the total—but even here, little room for maneuver exists, given past cuts and today’s deteriorating geopolitical situation. Interest obligations on outstanding federal debt eat up another 6.5 percent of the total. That leaves barely 6.5 percent of the budget for everything else Washington does— including education, infrastructure spending, and all the other things that the political class discusses and about which it makes its most lavish promises.

And entitlement spending promises to narrow the choices still further. For decades, through both Republican and Democratic Congresses and presidential administrations, entitlement-spending growth has outstripped the growth of the rest of the budget, steadily enlarging its share of the total. The rate of gain has slowed from time to time, but it has never paused for long, let alone declined. In five years, entitlement spending could command three-quarters of the federal budget. The swelling ranks of retiring baby boomers and the new spending obligations imposed by the ACA could push that percentage even higher.

Other realities will bring even more pressure to bear. Outlays for interest payments on the national debt will take a larger share of the budget—perhaps doubling to 13 percent within a few years—not only because the size of outstanding debt is increasing but also because the cost of financing the debt will rise. Until now, a relative drop in Pentagon spending has offset the impact of increased entitlement spending on the rest of the budget. Today’s 17 percent Defense Department share is a far cry from the 1960s, when national defense commanded as much as 50 percent of the federal budget. Even additional outlays for the War on Terror pushed the Pentagon’s spending share only as high as 20 percent—and only for a short time.


The last campaign didn’t really have as much about the economy as it should have.  Nor did the true implications of the runaway entitlement spending is going to have.

Hillary Clinton and other Democrats plug fairer economic growth. Jeb Bush and other Republicans are more forthcoming (they talk about raising Social Security’s eligibility age) but concentrate their rhetoric on creating faster economic growth.

Government’s central reality has gone missing. There’s a bipartisan triumph of political expedience over professed beliefs.

Liberals shrink many domestic programs, because they won’t acknowledge that unchecked spending on the elderly is partially financed by curbing other activities – from food stamps to highway repairs.

Conservatives weaken defense, because they won’t concede that, even with cuts to domestic spending (including the elderly), an adequate military cannot be financed without additional taxes.

The irony is that – on paper at least – presidents and other political leaders can regulate the size and role of government through laws and budgets, but their control over the economy is (at most) indirect and incomplete.

So what do they do? They make promises on the economy that they cannot easily keep, while dodging unpopular budget decisions that might actually improve government’s performance. Both parties tell supporters what they want to hear.

What encourages the deception is the glacial speed of change. Over long stretches, government is being remade, but in any one year, the shift is tiny and virtually invisible. Look at what has happened since 1990 – and what lies ahead.

In 1990, federal spending equaled about 21% of gross domestic product. Social Security and major health programs (mainly Medicare and Medicaid) represented a little less than one-third of all spending.

The rest was defense, domestic “discretionary” programs (homeland security, environment regulation, law enforcement and the like) and non-elderly “entitlements” (unemployment insurance, welfare).

In 2015, the federal government is still spending 21% of GDP, but now Social Security and major health programs consume about half the budget, according to the CBO report. Most health spending goes to the elderly.

As the CBO makes clear, an aging population and high health costs will perpetuate this trend for years. Under current law, Social Security and health programs will account for two-thirds of today’s budget levels (measured by GDP) by 2040, estimates the CBO. What’s left for the rest? Not much.

The remaining amounts are “the lowest … relative to the size of the economy since the 1930s,” says the CBO. Either the rest of government will shrink dramatically – or Congress will expand government spending sharply. That, of course, would require higher taxes or bigger deficits.

But budget deficits are not the problem. They are simply the consequences of the problem, which is that the combination of an aging society and expensive health care threatens many vital government functions.

Whatever the economic costs of endless deficits – a controversial subject – the political effects seem straightforward. The young are being forced to subsidize the old through higher taxes and reduced public services. Some essential public services, starting with defense, are being sacrificed to avoid antagonizing the elderly.

The proper response is to spread the pain. Some benefits for the elderly should be cut through higher eligibility ages, lower payments and higher Medicare premiums. Some unneeded government programs (say, farm subsidies) should be ended. And some taxes should be raised.


The fact is that we have, for the last 60 years or so, been mortgaging the future to subsidize the past. Essentially the government has been forcing the young, who are trying to build their lives to pay for the elderly to live a life of leisure with inflated money.  The problem is that this means that every new generation has less money to grow and invest with which to make the incomes needed to pay for those taxes.  Do this long enough and you will get to the point where there it becomes a mathematical impossibility to ever make enough revenue by taxation to ever pay back the debts incurred by the pension system.  This is what is happening with Social Security and Medicare even as we speak.

If you could somehow work in this Public Service Announcement for your young readers, you would do them more financial good than anything they learn in school today.

IF you save 15% of your income (every year), for 40 working years, and invest it to earn 4% (above inflation), and don’t withdraw any, ever,
THEN you will accumulate just enough money to maintain your income level for 20 years of retirement. (AVI adds: and if you additionally had (even 70 cents on the dollar of) SS, received an inheritance, paid off the mortgage, worked part-time or any of the other common methods of having money in retirement, you would actually be richer than before.)

“Should some of your readers want the data, the basics can be found in the Social Security Trustees Report, here:  https://www.ssa.gov/OACT/TRSUM/index.html
However, it does take a little study to understand its implications.  Buried, way deep in the report, is the money quote:
“The OASI Trust Fund, when considered separately, has a projected reserve depletion date of 2035, the same as in last year’s report. At that time, income would be sufficient to pay 77 percent of scheduled OASI benefits.”
However, to get there, one has to wade through a mountain of obfuscation.  You might think that income to SS would simply be the taxes paid.  However, you’ll find things like income taxes … since most SS payments are subject to income tax, the Social Security Administration considers that income tax paid on SS benefits are actually income to the SS program.

In summary, the SS program has a structural imbalance.  The income from “investors” is just sufficient to pay 80% of the promised benefits.  To become and remain solvent, either the benefits have to be reduced, or the taxes funding the program have to be increased.  One can increase either the SS taxes, or increase the income tax, and use that money to subsidize the program.

“The key feature of a Ponzi scheme (corroborated by Wikipedia, no less) is that benefits to the early investors are drawn from the “investments” of later investors, rather than from a genuine return on the investment.  Don’t react negatively to the “scheme” word in the Ponzi Scheme, react negatively to the process for transferring investments from the new to the benefits of the old.

In the specific case of Social Security, there is no “savings account” or pile of money, from which benefits are paid.  Rather, Monday’s benefit check is just the transfer from someone else’s pay last Friday.  The benefits now being paid are NOT a result of responsible savings or investment of their contributions … rather, it is simply a transfer from the new “investors”.
As a comparison, compare this to a “responsible” pension plan (for private employers), in which the savings for the pension are required to be set aside, or escrowed, at the time they are earned.  When my company offers a pension benefit, they are required to set aside that money, and “hold” it specifically for me.  If, in future years, the company gets smaller, or even goes bankrupt, that money has been set aside, and invested in someplace OTHER THAN the company itself.  The existence of the pension, and the size of the pension, is based entirely on events/payments at the time the promise is made, and NOT on anything that might happen in the future.
To carry the comparison even further (and support your idea than a financial collapse is coming), consider the bankruptcy in Detroit.  This was brought about because the promised pension benefits for public workers were NOT set aside at the time they were earned.  Rather, the assumption was made that future benefits would be covered by the contribution of later coming employees (again, fitting the technical definition of a Ponzi).  The problem came because in the boom times of Detroit, lots of benefits were earned.  Then, all the taxpayers left, and the benefits were left to be paid by the much smaller group of current employees.

Seen from this perspective, Social Security is actually more like hazing than a pension.  In the Greek fraternities (and other places), the initiation was often a brutal, humiliating abuse of the incoming freshmen by the upper classmen.  The excuse/rationale/justification was that someday the presently abused would be upperclassmen, and they could be the abusers. In our current system, we are left to argue that it is moral/desirable to take from the current generation, and give to the older generation, with only the promise that the next generation will be similarly abused.

It’s actually worse than the post above thinks because of the consequences of the moneys that have already been drawn from productive and investment activities by the need to fund the entitlements already.  The problem with every Ponzi scheme is that they soak up more and more resources until there aren’t enough to sustain the scheme and it collapses. When the entitlements collapse, and they will, it’s likely they will take the economy down when they do. That is if the economy doesn’t go first.
Mortgaging the future to pay the past only works if there is a future.  But the very fact that you pay the past by mortgaging the future means that you are stealing from the very future that you are expecting to have to sustain the entitlements.  Bit by bit, over the last fifty years or so, the US has been doing exactly that.   Unfortunately  the bill always comes due in the end.

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