Chapter 6

Social Security, the Ponzi Chain Letter

Don't be alarmed by this chapter if you are now getting Social Security benefits or are over 60. The big problems described herein will not occur until after you are gone, and it's too late to do anything about it anyway. If, however, you are under 55 and worry a lot, take this chapter very seriously.

Millions of people are betting that Social Security will be there for them when they retire and will provide enough for a comfortable life. Financial planners build this assumption into their financial plans. For millions of Americans, this is a lie, and it is a very expensive mistake to bet on it!

Every time I express my politically incorrect views on this subject, I rub a lot of people the wrong way. Social Security is a sacred cow that we are not supposed to question. It is also called the third rail of politics. But, as the saying goes, “Fools rush in where angels fear to tread.” I guess I'm a fool.

I may be beating a dead horse here; many of you already know in your heart of hearts that Social Security is a big ripoff, but you still bet on it, hoping that the day of reckoning will not come until after you have gotten yours. But if you are under 50, you may never see your money, or it may be so inflation-ravaged that it won't buy much. Social Security is by far the biggest Ponzi pyramid ever conceived, and, like all Ponzi schemes, it will have its day of reckoning.

PONZI REVISITED

Social Security is a perfect reflection of a classic fraud case some years ago in which a man by the name of Ponzi raised funds from investors by promising huge payoffs as high as 40 percent a month. He did nothing productive with the money and earned no real profits for his suckers, but he paid huge “dividends” to previous investors by using the money raised from new investors. The Ponzi pyramid eventually collapsed of its own weight, and Ponzi went to prison. This type of scheme is considered a crime when private citizens do it, but it is considered compassionate social engineering when the government does it.

As long as there are enough new suckers to balance the books, the fraud holds up. But if the number of paying “marks” diminishes until they cannot or will not balance the books, then the scheme collapses spectacularly. Just understanding this truth may give you more incentive to begin preparing for a retirement that does not depend on Social Security—even if it somehow hangs together until you die. You can be far better off when you retire than if you just keep betting on Social Security. You will also learn here why Congress will never fix Social Security before it is too late to save it.

Most Americans believe that Social Security is supposed to take care of them in their old age, and they plan their lives accordingly, but Social Security wasn't even intended for that in the beginning. It was only to be an income supplement to your personal savings and other pensions. Under the most optimistic scenario, Social Security alone wouldn't allow you anything but genteel poverty when you could no longer earn a living. Here are some hard truths: In the most likely scenario, either Social Security won't even be there when you need it, or the money the government will have to print to pay you your monthly check will cause saber-toothed inflation that will so diminish the purchasing power of the money that it will be next to worthless.

So here are the rules to help you avoid a monumentally stupid mistake.

Rule #1: If you are under age 50, plan your future without Social Security. If you are over age 40, plan on progressive benefit cuts after you retire, steadily increasing FICA deductions from your paycheck, and growing inflation that shrinks the value of your benefits when (and if) you actually get them.

Rule #2: Don't retire at age 65 unless you are physically, mentally, or emotionally unable to be productive. Maintain your income stream as long as possible.

Rule #3: Accept personal responsibility for your own retirement income by becoming frugal and starting now to build a nest egg big enough to live comfortably on the interest without Social Security, following the guidelines in Chapters 3 through 5.

Let me explain the Social Security scam.

The following exchange took place 25 years ago during Senate Social Security hearings between Senator William Proxmire and a Mr. Cardwell of the Social Security Administration.

Just to bring you up to date, 49 million people received Social Security benefits in the year 2000, 25 years later.

Social Security is the most dishonest, reprehensible, deceitfully unsound scheme ever foisted by a government on a trusting public—a fraud so huge that the imagination is unable to grasp it—and the politicians have made us willing accomplices to the fraud. (Someday I will tell you what I really think!)

Try this short true/false quiz:

If you marked both of these true, you score 0 percent. All your basic assumptions about the Social Security Trust Fund are probably false.

The national economy has become dependent on the Social Security system. It disburses more funds than any other governmental subdivision. FICA is the biggest single tax paid by most Americans. The impact of changes in Social Security payroll taxes or benefits is immense, and if we increase or decrease either, the effects on the economy are complex and ultimately negative.

Pensioners are trapped in the system. Many are totally dependent on it. According to the Social Security Administration, their Social Security check represents more than half the income of 64 percent of the recipients. Millions of people would be in for genuine suffering if the Social Security system were to go broke, or if benefits were to be cut, or if they were not increased to accommodate cost-of-living increases. Even worse, though, is the easily demonstrable fact that rather than saving for their retirement—a good old-fashioned, time-honored American tradition—millions have spent everything they earned (usually on debt payments) and placed a touching level of faith in Uncle Sam to take care of them.

I have a tough question for you. What would your life be like if you were forced to retire at age 65, you were heavily in debt, and your principal income was your Social Security check?

Well, I am about to make a big dent in this faith in a beneficent uncle in Washington with the unpleasant, unvarnished truth. You are about to learn why you must not make your retirement totally dependent on government promises.

THE LOCKBOX MYTH—A GRIM FAIRY TALE

Let's reexamine your true/false quiz: “Payroll deductions for Social Security go directly into a Social Security Trust Fund ‘lockbox’ where they are saved for your retirement.” During the 2000 presidential election, Al Gore made a big deal of the lockbox into which he would put your Social Security Trust Fund. It was a crock!

If that's a crock, what is the truth?

When the government forces your employer to deduct Social Security taxes from your paycheck, all of this money, along with your employer's “contribution,” goes into the General Fund. It is all used for current government expenses, and current Social Security checks are just a part of it! It is not held separate from other funds. The Treasury borrows all of it by issuing illiquid, non-negotiable IOUs to the Social Security Trust Fund, and they constitute the whole fund—just under $1 trillion as of December 31, 2000. The Trust Fund has never seen any of that money, only these pieces of paper that represent that the government has taken the money and spent it, and will print more if necessary. All there is in the Trust Fund “lockbox” is a mountain of government IOUs.

The government uses a rhetorical trick to make this palatable; they tell us that, “in the interest of safety,” the Social Security Trust Fund is “invested in the safest possible instrument—U.S. Treasury Securities.” These securities are a liability of the United States Treasury, secured by “the full faith and credit of the United States government,” which means the printing press. When the fund disburses its monthly benefits, it merely calls on the Treasury to issue checks. The government would do this even if there were no government IOUs in the fund. The cost to the taxpayer would be the same. It is just that everyone feels more secure if there are pieces of paper saying the government promises to do this. That's what makes the scam work and the public feel secure even as they are robbed, but it really doesn't make any difference; the so-called Social Security Trust Fund is nothing more than a glorified set of bookkeeping entries.

Just for form's sake, if it should issue more money than was collected for FICA, the Treasury merely retires some of those notes and the “Trust Fund” shrinks. If it issues less money than was paid out in current benefits, the Trust Fund is in “surplus,” and the pile of IOUs grows.

How valuable is a Treasury security held by the Social Security system? If you were to write yourself an IOU for $1 billion, add it to your financial statement, and take it to the bank to obtain a loan, you would be laughed out of the bank. We cannot create real wealth by giving ourselves our own IOU. The Social Security Administration is a division of the United States government holding IOUs of another division of the United States government that has spent all the money and has no assets of its own for collateral. This paper represents no value at all. It is not an asset. As a result, the political debate in the last election over whether the Social Security trust fund should be put in a “lockbox” is simply a discussion of cosmetics—the appearance of things. Already the current Social Security payments are paid from the General Fund. The so-called “depletion of the Trust Fund” or “dipping into the Trust Fund” is not the real threat to the system, nor is it new; it's the way it has always been. The real threat is the ever rising tide of pension payments supported by fewer and fewer workers.

There used to be 90 workers supporting each person in the system; now there are three. Within five years, there will be only two. You are making a monstrous bet on your children's willingness to bear that increased burden, which in a few years will have to be more than 30 percent of their paycheck, until they won't dare take any more out of people's paychecks, lest it cause a war between the generations.

The Social Security system depends on the people believing that their payroll deductions will pay for their retirement, but that's not true, and it never was. The government plays games, and we are conned. Social Security payroll deductions are simply another method of raising money to fund the government's alleged needs. Your FICA payroll deduction is a slush fund to pay for Defense, Agriculture, FTC, EPA, and the rest of the alphabet soup of federal government, as well as current Social Security benefits.

THE GOVERNMENT-CERTIFIED CHAIN LETTER

But the real fraud is the fact that the system is really a gigantic chain letter. Chain letters operate under the assumption that when you add your name to the bottom of the list and send your dollar to the top, other suckers will add their name under yours so eventually your name will rise to the top and you will get money from the bottom. It pays off only if a continual new supply of workers continues to fall for it. Sooner or later, as the number of contributors shrinks and the number of recipients grows, it sputters to a stop, and the last guys in lose out.

Everyone now receiving Social Security will get payments until the day they die, so if you are a current recipient, you have nothing to worry about. The real victims are those young workers who are paying into the system now through FICA deductions. They will pay rising and increasingly onerous FICA taxes, expecting to retire in 15, 20, 30, or 40 years. They will be ripped off when they retire, or they will be paid with inflationary funny money.

The money taken from you is also used to pay benefits to many who have paid nothing into the system, as the system is being used to achieve social benefits other than the original intent, such as Medicare and subsidized or free prescription drug benefits. Because of that, plus cost-of-living increases in benefits that have outstripped increases in payroll deductions, it is now being operated on a pay-as-you-go basis. The result? The supposed “dipping into the Trust Fund” we have already discussed, which we have always done anyway. If this were honestly labeled, the admitted federal surplus under Clinton would have been far smaller, or maybe even in deficit.

Democratic Minnesota Senator Paul Wellstone (since deceased) asserted that Social Security “will be able to pay all promised benefits until 2038 without any changes.” That sounds like good news, but even if it turns out to be true, all that means is that someone entering the workforce today can look forward to paying Social Security taxes for 34 years only to find there is nothing left when he or she retires.

This Trust-Fund fantasy is worse than false—it is dangerous, because it creates a huge political obstacle to sensible, fiscal policy, and lends itself to demagoguery. It has turned Social Security into the third rail of politics—touch it and your re-election hopes die a sudden death.

Meanwhile, you hope the system will hang together long enough that when you reach retirement age, others entering the system will be willing to pay enough in FICA taxes that you can be paid when you get to the top of the chain letter. You are totally dependent on a continuous flow of new money from those new workers entering the Social Security system.

GOOD MEDICINE: THE ENEMY OF THE SYSTEM

More people are living longer into their golden years, and they vote in disproportionate numbers; and this great voting bloc is treated very carefully by our legislators, who continue to increase their benefits faster than payroll deductions. The irony is that medical advances that prolong life are actually an enemy of the system. An effective, widely accepted cancer cure or an end to heart disease would devastate it, because as people live longer than expected, each unanticipated recipient is a financial threat to the system. Even without them, too few will soon be paying for too many.

The baby boom of the 1940s and 1950s, which brought a large number of workers into the system in the 1960s and 1970s, is about over, and fewer worker bees will enter the hive, while the number of recipients will increase enormously. If the government continues to increase the payroll deductions to maintain the appearance of solvency, the economy will grind to a halt because of this terrible drag on the spending power of the American worker.

Our senators and congressmen are pretty smart, however. They know how unsound the Social Security system is, so they have their own sound, healthy, fully funded pension program with generous cost-of-living escalators. Let me give you an example: When they retire, no matter how long they have been in office, they continue to draw their regular pay (unless increased by cost-of-living adjustments) until the day they die. Former Senator Bill Bradley (D, New Jersey) and his wife can expect to draw $7.9 million over their lives, assuming they live out a normal life span. It costs them nothing! You and I pick up the tab. We would have to collect Social Security benefits for more than 46.5 years to do as well.

This leads to a suggestion that would trigger some honest changes—cancel Congress's wonderful plan and put them on Social Security, then watch them rush to fix the system! However, on second thought, they might just increase the payoff on the scam and place demands on it that would topple it sooner. Then they can continue to cynically vote for spending programs and more Social Security taxes and bigger monthly checks to buy votes because they are insulated from the problem they have caused. Just remember that the next time you vote for a big-spending “defender of the Social Security system.”

I'm not so much worried that the Social Security system will collapse but that the Social Security system will be the cause of the nation's bankruptcy, because it is the single largest obligation of government and the debt defies description. According to Business Week, the Social Security system's unfunded obligations (the excess promised to future recipients over the amount to be collected) amount to an almost unimaginable $20.6 trillion over the next 75 years. That's twice the expected output of the entire U.S. economy this year. The amount of unfunded obligation grew in excess of $1 trillion in 2000, and is accelerating.

Put another way, it's now a rotten deal getting worse every year. Workers who earned average wages and retired in 1980 at age 65 recovered the value of the retirement portion of their and their employer's contribution, plus interest, in only 2.8 years. Every month they lived beyond that was pure gravy. It was a pretty good deal for them, even if the return was only 2 percent per annum. However, those who retired at age 65 in 2000 will need 16.7 years to recover their money. If they die before age 81, they are shortchanged. And younger Americans who don't retire until 2025 will really take it in the shorts. It will take 27.4 years to get your contribution back. Just be sure not to die before age 93!

And that, of course, assumes that the system will still be alive and well then.

WHY SOCIAL SECURITY WILL NEVER BE REFORMED

During the 2000 presidential campaign and the first few months of his administration, President Bush proposed that two percentage points of your FICA contribution be yours to invest in market securities at your option. Historically, that money would produce a return double the 2 percent yield you now get from Social Security, and the principal would be yours at retirement. This proposal was immediately attacked by Gore and other Democrats as “a risky scheme” allegedly opened up to market risks, such as the bear market we are in as I write.

Do you want to know the real reason they oppose this fresh idea? It's because Social Security is a huge slush fund for government, and the big spenders will never let it out of their hands. Can you imagine what would happen to federal spending if all of a sudden the Congress could not borrow the Social Security Trust Fund and spend it on their favorite programs? They'd be about $175 billion short every year! And what would happen if you could invest 2 percent of your FICA as you choose? There would simply be that much less money in the slush fund.

And how “risky” is the scheme? That depends on what you invested the money in. If you invested it in Treasury securities or a T-bond fund, that is riskless.

SELF-FULFILLING PROPHECY?

I have been accused of destroying the very confidence in the system that keeps it alive by telling you this, but I trust the truth. What choice do I have? The present Social Security System is the real risky scheme. Sooner or later the problems will be recognized and the jury-rigged, dishonest system will collapse of its own weight, whether or not I talk about it. My concern is for you. You must plan your life on the sure premise that Social Security will be of very little help to you, and may have done a lot of harm. It has discouraged saving, because it takes money away from you that you might have saved for yourself and gotten a return at least twice as high while continuing to own the principal. Also, most people believe that Social Security will take care of them. That's what the AARP tells its members as it lobbies for more benefits, and that's what our national legislators and political candidates tell us ad nauseum. They have made Social Security junkies out of us because even the most sophisticated financial planners seldom seriously question that Social Security will be there when needed.

Those who will be hurt most are those who were promised the most. The system is immoral, dishonest, and unethical, and we have bought the big lie and become hooked on it. The only honest way to save the system and the economy would be to slash benefits, which would not only be cruel at this point, but politically impossible. But the greater cruelty is yet to come when the system collapses under its own weight.