10.9.11

PYRAMIDS AND CONTINGENT LIABILITIES.

Professor Mankiw reminds readers of an observation Paul Samuelson made a long time ago.
Social Security is squarely based on what has been called the eighth wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived.
At the time, both output per worker and the population of workers was growing, ensuring that receipts from current workers were more than sufficient to cover benefit payments to current retirees.  That might have sufficed to satisfy New Dealers, and nostalgists such as the ever-more-agitated Chris Matthews.
“You pay for it while you work. When you retired and have no other form of income, this will help you out. In fact, a lot were impoverished in the old days without Social Security. It’s a great anti-poverty program. But then people started to live past 65. Even the great Franklin Roosevelt didn’t make it to 65. In those days, if you made it to 65, you were lucky. You got a few bucks on Social Security.”
The eligibility age for full Social Security remains 65, which deprives the program of another form of economic growth. Population growth rates tend to track life expectancies closely, and older workers bring additional experience and productivity gains in jobs that don't require a great deal of muscle power. Retirements to obtain Social Security eligibility chop off the revenue from taxes on those forms of population growth and economic growth.
As for whether it's a Ponzi scheme, well, when the program was adopted, there were 17 workers for every retiree, and the average life expectancy was 58 for men and 62 for women. By 2035, there will be an estimated 2.1 workers for every retiree, and life expectancy -- even if it remains at 2011 levels (male 75, female 80) -- will still be about 18 years longer. What Perry said was the simple truth -- there will be no funds for 25 year-olds to draw upon when they reach retirement age.

There was a time when Social Security was a net asset to the government, which is why the federal government routinely raided the funds raised by the Social Security payroll tax to spend on other programs. But that is no longer true. As the Social Security Trustees' 2011 report documents, Social Security added $49 billion to last year's budget deficit and is projected to add $46 billion to this year's deficit. And $2.6 trillion of our $14 trillion national debt is owed to the Social Security trust fund or rather "trust fund."

This reality was dramatized during the debate over raising the debt ceiling, when President Obama attempted to scare seniors by warning that Social Security checks might not go out on time if recalcitrant Republicans continued to refuse to raise taxes. He thus exposed the naked truth -- the trust fund is bare and that the checks to current and future beneficiaries depend upon taxes and borrowing.
However, to call "Social" "Security" (a policy that pits generation against generation in a commingling of funds subject to the kind of raiding Congresses of both parties have engaged in is neither social nor secure) a Ponzi scheme might be an insult -- to Charles Ponzi and Bernie Madoff.
One, a Ponzi scheme collects money from new investors and uses it to pay  previous investors—minus a fee. But Social Security collects money from new investors, uses some of it to pay previous investors, and spends the surplus on programs for politically favored groups—minus the cost of supporting a massive bureaucracy. Over the years, trillions of dollars have been spent on these groups and bureaucrats.

Two, participation in Ponzi schemes is voluntary. Not so with Social Security. The government automatically withholds payroll taxes and “invests” them for you.

Three: When a Ponzi scheme can’t con new investors in sufficient numbers to pay the previous investors, it collapses. But when Social Security runs low on investors—also called poor working stiffs—it raises taxes.
Thus, the return on your investment is subject to reduction by Act of Congress, whether by increase of taxes or change of benefit formula or means-testing or subjecting benefit payments to tax.
In addition, at least until the final collapse of his scheme, Ponzi was more or less obligated to pay his early investors what he promised them. With Social Security, on the other hand, Congress is always able to change or cut those benefits in order to keep the scheme going.

Social Security is facing more than $20 trillion in unfunded future liabilities. Raising taxes and cutting benefits enough to keep the program limping along will obviously mean an ever-worsening deal for younger workers. They will be forced to pay more and get less.
The commingling of funds and the erosion of benefits is all perfectly legal.
In a decision the following year upholding the Social Security Act, the Supreme Court confirmed what anyone who read the law would already have discovered: Payroll taxes weren't held by the government solely for the benefit for retirees. On the contrary: Social Security taxes "are to be paid into the Treasury like internal revenue taxes generally, and are not earmarked in any way." 
Likewise, for all the talk of Social Security as an "entitlement," retirees have no ironclad right to that monthly check. "Congress can change the rules" whenever it wants to, the Social Security Administration's website acknowledges. "Benefits which are granted at one time can be withdrawn." That too was explicit in the law FDR signed in 1935. There are no "accrued property rights" in the Social Security system, the Supreme Court ruled in 1960. Payroll taxes withheld from your wages today don't confer on you a contractual right to benefits when you retire tomorrow. 
Yet is it any wonder so many Americans believe the opposite? They have been assured for years that Social Security's considerable surpluses have been piling up in a trust fund worth about $2.6 trillion at last report. With assets like that, insist the status quo's defenders, there will be enough money to pay retirees' benefits for decades to come. 
But the trust fund's assets are an illusion. Social Security doesn't own $2.6 trillion in gold bars or real estate or shares of Google. All it has are Treasury IOUs. Those IOUs represent $2.6 trillion that the government has already spent and promises to spend again. But in order to spend it again -- to redeem those IOUs -- Congress will have to raise taxes, cut spending, or go deeper into debt. Which is exactly what Congress would have to do if the Social Security trust fund didn't exist. 
A US government bond is a sound and valuable asset -- for anyone but the US government. Just as you don't increase your wealth when you write yourself a check, the government cannot sock away $2.6 trillion by promising to pay itself $2.6 trillion. "The assets of the Social Security trust fund," the Congressional Budget Office has explained, "do not represent any real stock of resources set aside to pay for benefits in the future." The trust fund is a ledger entry, nothing more. 
President Obama suggested in July that without a debt-ceiling increase, Social Security checks might not go out "because there may simply not be the money in the coffers to do it." Granted, he was playing political hardball. But he was also conceding the inescapable truth about Social Security's vaunted trust fund: It doesn't exist.
Remind me again, why allowing young workers the opportunity to park some of the money withheld from their paychecks (we'll deal with the fiction of the employer contribution some other day) in other productive assets is a bad idea.

Governor Perry will probably say a great many foolish things in his quest for the nomination.  His characterization of "Social" "Security", however, is trenchant in the same way that the eight year old's observation of the emperor's clothes was.

No comments: