Saturday, January 24, 2009

Social Security's Design Flaw

Recently President Bush revealed during his final press conference that, in hindsight, he wished that he had begun his second term with immigration reform rather than social security reform. Hindsight is also very clear that the congress and the American people were proven prudent in rejecting the notion of transforming Social Security into a national 401K plan. The initial results of such a transformation would have been a disaster. The congressional Republicans would have been thrown out on their collective ears. Imagine that! Despite the fact that the wealthiest Americans supplement their social security benefits with 401K plans, the instability of our financial institutions and the absolute bankruptcy of ethical values on Wall Street and in Washington, has made it plain that serious moves to reform Social Security into an equity portfolio is a course fraught with peril.

Had President Bush successfully reformed Social Security, we would, of course, not be experiencing the world wide financial collapse that cost the Republicans two houses of congress and the White House during a single second term of the Bush presidency. No, the massive infusion of capital into the financial markets would have spawned dozens more reckless, unregulated, financial instruments so deceitful that we would be in a bubble that would last well into our children’s future. We would be in a delirium of euphoric delight over wealth we had on paper while the wickedness of our negligence continued to rot away the fabric of our financial institutions. The ultimate collapse would have dwarfed the calamity we are now, thankfully, forced, in part, to acknowledge. Let a politician even burp an accidentally slushy blerb at an innaugural party that sounds even remotely like Social Security reform and that unfortunate soul will be resoundly excluded from public office for a generation.

Nonetheless, although FDR has avoided a direct comparison with Bernie Madoff, comparisons between Social Security and illegal Ponzi schemes persist. Charles Ponzi, like Bernie Madoff, was guilty of fraud. Ponzi, of roaring 20’s fame, claimed to be passing on the 400% profit he was earning on "postal reply coupons." Bernie Madoff claimed to be passing on the profits from hedge fund investments. In truth both were simply paying initial investors with money taken from later investors. Since Social Security discloses that the benefits it pays retired workers comes directly from the money paid by current workers, it is not, entirely, fraudulent. However, like a Ponzi scheme or a pyramid scheme, Social Security is, by its own definition, impossible to sustain. Like all pyramid schemes, sooner or later Social Security must go broke.

Though the Social Security trustees themselves cannot be called frauds, fine print, often passed over quickly in political sound bites, is filled with ominous double meanings. Even though the government websites about the Social Security trust fund plainly disclose the difference between the "special issue" federally backed securities held in the trust fund and the marketable securities that are widely sought as sound investments, the definitions of Social Security solvency based on any discussion of the trust fund can easily become misleading. Once, the difference between these securities and marketable securities becomes clear, the answer provided by the government that Social Security is solvent until 2041, when the "trust fund reserves are exhausted," is plagued with ambiguity. The special issue treasury bonds will begin to need "redemption" by about 2017. That’s when "Ponzi shceme" nature of Social Security really kicks in. In fewer than ten years social security will again be, by common bookkeeping practices, technically insolvent. After about 2017 only higher taxes or more government borrowing will allow Social Security benefits to be fully paid.

This social security crisis is not new. Such crises have happened repeatedly, throughout Social Security's history, because of the unsound pyramid scheme nature of the program itself. As one might predict by any common sense analysis of a pyramid scheme, each crisis in the Social Security program has made it more profoundly enslaving to each new generation involved in the program. Rates that began as low as 1% for participants have increased to 6.2% today. Likewise the value of benefits for participants has eroded. This must continue, no matter what "fixes" desperate politicians employ. The program itself must be completely overhauled, completely revised.

Hence, lesson one: we can no more afford Social Security than we can afford to invest with Bernine Madoff. Despite Wall Street’s complete loss of the public’s trust and respect, we have dodged no bullet by avoiding changes to the Social Security system that allows younger workers to have genuine investment accounts that they can leave to their children. The euphoric joy we might have experienced by the influx of payroll taxes into the hands of wicked investment bankers would have been no less illusory than the blessed ignorance politicians are currently bathing us in. Perhaps all future financial planning on a public level should be abandoned. Perhaps employers, state governments, and federal governments should all resist the arrogance that tempts them to think they know what is best for every American worker thirty years into the future. Perhaps we should simply call for the end of all payroll and employer taxes and contributions for retirement programs of any kind. Americans have been fooled too long into believing that the government is wiser than they are when it comes to planning for each American’s retirement. The consequences of liberty include responsibility. Americans might be well advised to demand their financial liberty again by reclaiming their individual responsibility for their own financial futures…

Oh, I forgot… We can’t…That’s lesson two: national debt means something.

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