Posted tagged ‘Social Security Trust Funds’

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CLASH OF WORLDVIEWS — EXHIBIT 1

September 9, 2011

Have a look at this exchange between Rick Santelli and Tom Friedman on CNBC. Santelli is very focused on the fact that social security is a pyramid scheme requiring constantly increasing numbers of participants over time in order to support those who got in the system, the scheme, ahead of them. Such schemes were apparently originated by Charles Ponzi beginning in the early 1900’s. Friedman is focused on the “out of order idea” that a “popular” government program could be associated with a situation otherwise characterized as criminal conduct. The two of them, Friedman and Santelli, then proceed to cross talk for a couple of minutes instead of carefully delineating what they agreed about and what they did not agree about. Have a look. It looks for a moment that Friedman will begin to reach across and agree with Santelli about the pyramid scheme when Rick removes the criminal connotation from contention but that moment passes and they get back in their corners and fight it out.

This is so very instructive as to what happens in America in the 2010’s. These two men, both very smart, are so invested in their own worldviews that they do not seek points of practical and factual agreement, they seek only points of disagreement.

Who was right? A Ponzi scheme, according to the SEC’s government website, has the following characteristics.

What is a Ponzi scheme?
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

Why do Ponzi schemes collapse?
With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

Santelli and Friedman could have agreed on the fact that Social Security requires an ever-growing pool of funds from newer workers over time to pay the mandated benefits of retired workers. This certainly meets at least one of the criteria specified in this government website description. Likewise, as with the Ponzi scheme there is no investment activity which goes on with social security, the money is used to pay people who joined the system earlier. Any money not so used is placed into government IOU’s with very low interest rates which, when they are redeemed, will have to be paid out of other government tax monies. They could have agreed that the available funds must meet the mandated benefits over time and that this can only be achieved, in the context of Social Security, by: 1. Cutting mandated benefits; 2. Quickly increasing the numbers of those paying into the system; or 3. Increasing by some means the per person amount that the newer folks, those still working, are required to pay in. The latter solution was tried and is the one alluded to by Friedman which occurred during the Reagan administration in 1984, the last time social security came close to running out of money to pay mandated benefits. Santelli’s implied criticism of this “solution” is that the 2.4 Trillion dollars in taxes which exceeded the benefits actually paid out between 1984 and 2009 was gobbled up by federal government which spent the money as if it were ordinary tax money and the government left a bunch of IOU’s in the till. In terms of the description of the Ponzi scheme, these funds may legitimately be viewed as having been used for the personal expenses of the scheme promoters, in this case the U.S. government. This fact, Santelli’s argument implies, made the government the equivalent of Charles Ponzi, the criminal, who raked off some of the proceeds from the new “investors” for his own use rather than to pay the early investors. It appears to me that just the label, Ponzi scheme, angered Friedman greatly. No real attempt at rational discussion was made after this charge was leveled by Santelli. Pehaps had Santelli chosen the less judgmental term “pyramid scheme” it would have seemed less offensive to Friedman?

What purpose did this exchange serve other than entertainment for CNBC viewers? Who comes off well? Until we get to the point where we can stop calling each other liars or “idiots” because the other’s worldview is different than our own, we’re not going to get very far in bridging the differences between us. We will remain at drawn daggers over every issue. And that is not good since the existence of a country, this country, which is a multicultural country, must necessarily be based upon reaching some type of a broad based agreement across the generations and the classes and the races and the cultures as to what this country’s government should be about.

They could have agreed on all of the facts. But they chose instead to fight out a war of terminology which predicably degenerated into calling the other a belittling name. The different assumptions which each makes underly this argument. The distinction is whether the government is viewed as a benevolent father figure seeking only the good of its citizens or as a self-interested participant whose actions benefit some of its citizens at the expense of others. There you have it, a concrete example of the clash of worldviews.

Categories: Clash of Worldviews, Taxes
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HEAD’S UP IN THE UPCOMING DEBATE OVER FUNDING SOCIAL SECURITY

March 13, 2011

Remember when President Obama, last week, said in a press conference that in the middle of the decade his budget would have us to a point where we would no longer be adding to the deficit? Halleleujah!! Unfortunately, it is indisputable that the Obama budget never once comes close to matching income and outflow. The following is how the President’s new press secretary explained it, and did it without backing down an inch from what the President said:

This is an example of avoiding a plain mathematical truth through application of obfuscation and is just plain tomfoolery. It is true that:

In war, truth is the first casualty. Aeschylus Greek tragic dramatist (525 BC – 456 BC) .

But our politicians, for purposes other than war, have seemed to take this adage and placed it at the service of their intramural debates and elections. This is not a difference of worldviews, a topic often explored by this blog, with it’s attendant differences in context, language and emphasis created by differing worldviews. This is an example of a simple lack of candor. In no one’s world should this be okay. This is not an issue of context, of language or emphasis. It is just not true.

This also gives us a little taste of how we’ll be treated in the upcoming social security debates. An example of this was delivered by a group of Democrat Senators about 30 days ago. These Senators explained that the Republicans are in favor of ‘privatizing’ social security and that social security can pay every dollar of benefits for the next 27 years and that social security is actuarially sound among other important things.

I am unsure whether there have been any post-Bush Republican proposals for “privatizing” social security but I am certain that there is a big problem with calling social security “actuarially sound” and explaining that it has the resources to pay benefits for 27 years without any changes without further explanation. It is a bit like the President’s news conference when he suggested that in 2015 his budget will be balanced and his press secretary had to spin and spin the point until he was dry.

What is the truth? The truth is that in 2011 current social security benefits will exceed current social security taxes. How can it be that social security is “actuarially sound” or able to pay every penny of benefits for the next 27 years without any changes and yet social security has now started to pay out more in benefits than it receives in taxes? Are the Republicans ginning up lies? Are the Democrats now having to courageously put a stop it?

Well, the truth is that the social security system will need to call on non-social security tax revenues in order to pay the difference between current social security benefits and current social security taxes for the foreseeable future. It is a fact that this began in FY 2010. There is no end in sight. Since this is undeniably true, what do the Democrat Senators mean by saying that social security can pay every penny of benefits for the next 27 years? These Senators are only saying that the general tax revenues which are going to have pay the social security benefits will not be used to do so directly, they are saying that something else will happen between cup and lip. What will happen, however, is only on the books of the Social Security Administration. The government’s general revenues will, instead, be used to pay off some of the IOU’s which have been piling up in the SSA for 27 years. The general revenue funds which have redeemed the IOU’s will then be used to pay current social security benefits. In this way there will be two stops for these dollars, not one. The dollars will change status from general revenues to the proceeds from paying off the IOU’s. The net effect will be nothing, zero.

Do you remember the old pragmatic-sounding “pay as you go” Unified government budgets which began in 1983. Under the Unified budget social security taxes were used to pay-as-you-go for non-social security government programs. The surplus between social security outlays and expenditures in those years was used to make the federal budget deficit look smaller or the budget surplus look larger, including during the years of Mr. Clinton’s magic “budget surpluses” of FY 1998, 99 and 2000. See the chart below for a graphic example of what was going on.

For instance, as the chart shows, in FY 2000 approximately $200 billion was added to the trust fund as a result of this social security surplus. The accumulated surplus is what the Democratic Party’s Senators are actually talking about in terms of the “solvency” and “actuarial soundness” of the program. The existence of these IOU’s will not lessen the difficulty and the reality of coming up with the difference between the social security taxes and the social security benefits to pay retirees on an ongoing year to year basis.
This is a fact that everyone needs to know so that when politicians deny that social security amounts to a fiscal problem at the present time, you’ll know that they are trying to tell you something about accounting, not about reality. Because the general tax revenues will first be used to pay off the IOU’s which the SSA has been accumulating in it’s filing cabinets before being used to pay benefits doesn’t make a hill of beans to the painful reality that somebody will have to pay the bill.

Oh and by the way, as to the partisan politics of this. Control of Congress has been split almost evenly during the period since FY 1984 between Democrat and Republican. The presidency a bit more Republican at 16 years to 10. It should also be noted that during the legendary Clinton “budget surpluses” the Congress was Republican. In short, this not a partisan problem (notwithstanding the rather duplicitous grandstanding and fear-mongering by the Democratic Senators featured above) it’s a government problem. The only reason that the Social Security system didn’t collapse in the 1980’s, after nearly 40 years of Congressional control by the Democrats, the party whose Senators are now yoohooing about how the Republicans are all for putting granny out on the street, was because the government used it’s power to raise taxes not because it used it’s head to properly administer the taxes it had to fund the social security entitlement it had created!!!!!!

Categories: Politics, Taxes
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