The Great Ponzi-Scheme Rescue Act of 1999

By P. J. O'Rourke
web posted May 1999

Sometimes the most dangerous thing about political issues is trying to figure them out. We're all getting what we want from Social Security without understanding it. This is what economists call "rational ignorance." Old folks get something to carp about -- the $770 average monthly payment. Young folks get to tell old folks to shove off: That $770 will be a fortune in Sun City; we need the spare bedroom for a home gym. A huge number of government bureaucrats get a huge government bureaucracy to run. And politicians get an issue that everybody's for and nobody's against. Plus, every couple of election cycles, there's a "crisis" with this issue -- a crisis that politicians don't have to understand, either, but that allows them to make thoughtful, caring and statesmanlike noises.

At the moment, the crisis with Social Security is that the Social Security trust fund will run out of money in 2032, which is right around the corner -- if you're a sequoia. Whatever the politicians propose, these politicians will be on their way to the grand-jury room in the sky before their proposals take effect. Meanwhile, in the name of "shoring up the Social Security trust fund," the politicians have an excuse to spend surplus tax dollars. As President Clinton told a crowd in Buffalo, on the day after his State of the Union speech solved the current Social Security crisis, "We could give it all back to you and hope you spend it right. But...if you don't spend it right..." So, on top of everything else, Social Security has saved us from foolishly buying a snowmobile just when an Al Gore administration with all its global warming is about to set in.

If we began to investigate Social Security, we could become irrationally knowledgeable. Our heads might explode. We should not, for example, peek into that Social Security trust fund. There's nothing inside. Since 1939, the Social Security payroll tax on employers and employees has been used simply to pay Social Security benefits. In 1916 an Italian immigrant named Charles Ponzi created an investment fund that paid large dividends without making any investments. Money from new investors was transferred to old investors, while the new investors received money from newer investors yet. The system had flexibility and boldness, and worked as long as an ever-expanding pool of suckers could be found.

Charles Ponzi made a profit on this, and so does the U.S. government. Social Security payroll-tax receipts have always been greater than Social Security benefit payments and will continue to be until about 2013, when the baby-boom sucker pool retires. The federal government has taken this surplus revenue, spent it and given the Social Security trust-fund IOUs in return. That is, the government spent the money and then promised to spend it again later.

Debts owed to the government by the government are absurd in the first place. Furthermore, these IOUs have the same force of law as, oh, the statutes against perjury and obstruction of justice in a case against the president of the United States involving sex. Our Social Security taxes do not have to be spent on Social Security. In 1937 the Supreme Court ruled that Social Security taxes "are to be paid into the treasury like any other internal revenue generally, and are not earmarked in any way." This despite President Roosevelt's saying, "Those premiums are collected in the form of taxes...held by the government solely for the benefit of the worker in his old age."

Roosevelt also said, "We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions." But in the 1950s, a deported communist filed a capitalist suit to reclaim his Social Security premiums. The Supreme Court said, "To engraft upon the Social Security system a concept of 'accrued property rights' would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands." Charles Ponzi never had the opportunity to appoint Supreme Court justices. He went to jail.

Having a Social Security trust fund is exactly like not having a Social Security trust fund. Social Security will go into the red no matter what. Without a trust fund, the government will have to pay off the Social Security deficit by raising taxes and cutting benefits. With a trust fund, the government will have to pay off the Social Security IOUs by raising taxes and cutting benefits.

Unfortunate people who scrutinize the Social Security trust fund discover two facts: It's not there. It's not theirs. But, for the rest of us who are rationally ignoring such things, the real question is, how are we doing with this retirement fund that doesn't exist and we don't own? We're doing surprisingly well. We're getting an average return of more than 16.5 percent on our employer/employee payroll contributions. If we're eighty-two years old. On the other hand, if we're sixty-seven, we're getting about 1.4 percent -- a financial coup we could have managed on our own, without the help of the federal government, by holding onto our Beanie Baby collections a little too long. And if we're age twenty-four to sixty-two, we can expect a return of between -0.34 percent and -1.7 percent, and might be better off leaving the money in our old jeans and going through the closet when we retire.

Here again we see the genius of Charles Ponzi. Initial payments into Social Security were very small. From 1937 to 1949, the combined employer/employee payroll tax rate was two percent, and this tax was levied on only the first $3,000 of annual income. The generation that made these payments then went on to surprise demographers, shock their heirs and delight Winnebago dealers by taking a really long time to die. The first Social Security recipient, Ida M. Fuller of Vermont, retired in 1940 after paying Social Security taxes for three years. She and her employer had put a total of forty-four dollars into the system. Ms. Fuller lived to be 100 and collected $20,933.52 in benefits. Mr. Ponzi could have done as well, and been honored for his business savvy, if only he had the legal and legislative muscle to create a Ponzi scheme that preyed upon the most gullible of all suckers: people who haven't been born yet.

But although the Social Security system does a good job of stealing prospective candy from future babies, this won't work for long. There are too many old people. In 1950 there were sixteen working Americans for every retiree. Now there are 3.3 (the 0.3 being down in corporate communications, eating hash brownies and putting the company Web site together). By 2025 each George Bush or Bob Dole will be supported by only two George W.s or Liddys. We're going to need a really aggressive assisted-suicide program: "Sure, Pops, it feels like indigestion, but it's probably pancreatic cancer. I'll help you put the plastic bag over your head."

And that is the great conundrum of Social Security, the thing that makes all rational people want to stay as ignorant as possible about it: Everything we could do to fix Social Security would make it worse.

We could, for one thing, forget the whole concept of Social Security as a government-run pension and insurance system, and just pay the benefits out of general tax revenue. This would be more honest, which is why it's such a bad idea. The delicate fabric of rational ignorance would be destroyed. People would see where their retirement money was coming from -- from voting for any candidate who'd raise Social Security payments to $100,000 a month. Old people vote like the dickens. And tapping general revenues does nothing about the fundamental ratio problem of one geriatric duffer getting AARP skydiving discounts to two of us trapped in office cubicles.

Or we could stick to the present system, which, as mentioned, would mean raising taxes, cutting benefits and increasing the retirement age by so much that Reagan would still be president. (A chief executive with Alzheimer's would be an awful thing. He might get mixed up about what the meaning of is is or forget to bomb Serbia.) Keeping the present system would tick off the retired, the unretired and those about to retire -- in other words, everybody. It's an unusual kind of politician who has the guts to do this, the kind of politician we will have gotten rid of through the assisted-suicide program.

We could also stick with the present system while trying to put some real money into the Social Security trust fund. During the next fifteen years, there is supposed to be a $2.7 trillion federal budget surplus.Let's save it all to pay for Social Security. Except this can't be done. The federal government does not have the same relationship to money as a human does. The federal government issues that money. When the money comes back to the federal government, it must go away again or it gets unissued, in effect destroyed. Yanking $2.7 trillion in currency (about one-third of the gross domestic product) out of the economy would cause a howling recession. When the government reissued that currency, it would cause screaming inflation. And such money-supply shenanigans would give Alan Greenspan a heart attack. Where would the nation be then?

When a budget surplus happens, the federal government can (per Clinton's suggestion) give it back. This is nice because then there's more money and we can all have some. Or the government can pay down the national debt. This is nice, too, because then there's more money to lend and we can all borrow some. Or the government can do what it usually does, which is fund public television, welfare, NASA, the military, etc. And this is also nice, because then we get more Teletubbies, surplus cheese, space stations and maybe (if the draft is reinstated) free trips to Kosovo.

What government can't do is save that money in the Social Security trust fund. The only way to place money, as opposed to IOU's, in there is for the government to buy something real -- such as $700 billion worth of Microsoft stock. This would put the government in an interesting position with its antitrust suit against that company. We were just kidding, Bill.

Having a government that owned economic assets is what made the U.S.S.R. the success that it is today. Maybe Bolshevism could be avoided, but conflict of interest couldn't be. Businesses would all want a slice of the federal investment pizza, and so would labor unions, special interests, pressure groups and every ad hoc group of scalawags and hard graspers you can imagine. Not to mention that the government itself might be tempted by all the mushrooms, pepperoni and extra cheese sitting around uneaten.

The track record of trust funds run by individual states is not encouraging. California and Illinois raided their funds to balance state budgets. Pennsylvania put $70 million into a Volkswagen plant now worth half that. Kansas wasted $87 million because Kansas legislators insisted on investing in Kansas. Minnesota tried to be moral and lost $2 million selling off tobacco stock. Connecticut tried to be amoral and lost $25 million bailing out Colt's Manufacturing. And the Missouri State Employees' Retirement System venture-capital fund was shut down because of low yields and lawsuits.

The marvel of President Clinton's proposal for Social Security reform is that it combines all these ways of making Social Security worse. It does so with what economist Robert J. Samuelson, writing in the February 10th Washington Post, called "programs of mind-boggling complexity." (And if you took econ, you know that economists' minds don't boggle easily.)

Clinton would spend the current Social Security surplus in traditional government fashion, giving the trust fund an IOU. Clinton would use some of that surplus to reduce the national debt. But he wouldn't really repay any federal obligations. He would transfer these paper claims from the individuals who hold T-bills and treasury bonds to the Social Security trust fund. This would give the trust fund a claim on general tax revenues while, at the same time, leaving it more full of debt than ever. Meanwhile, Clinton would also keep expenditures at the current levels, so somebody (not Clinton) would still need to raise taxes and cut benefits. Furthermore, Clinton wants the Social Security trust fund to purchase $18 billion worth of common stock. That isn't much, since Social Security spends $347 billion a year. But it's enough to cause plenty of influence-peddling scandals and bureaucratic cock-ups. The above paragraph is the most eloquent plea for rational ignorance that I have ever read, let alone written.

The only real solution to Social Security is to own it -- privatize the whole system of national social insurance. This would still leave us with enormous unfunded liabilities owed to people too old to go private. But we'll have those anyway. And privatization would work. There is no twenty-year period in American history when stocks lost money. And even from 1930 to 1939, a conservative portfolio -- half stocks, half bonds -- would possibly have made 0.68 percent a year. That's not a spectacular return, but it beats waiting until we're sixty-five to rummage in the Silver Tabs for change to buy cat food.

Privatization, however, will happen at about the same time Al Gore and Liddy Dole get naked and hook up. Thirty-eight percent of the federal budget is spent on Social Security and other social insurance. By 2020 that share will be between fifty-nine and sixty-eight percent. Two-thirds of a politician's throw weight will come from controlling social-insurance dollars. Money is power. What use is it to endure the Dutch rubs and Indian rope burns that are politics if you can't obtain mastery over people and give them noogies back? Politicians would rather discard their spouses than discard two-thirds of their power. Some politicians would much, much rather.

And what about the rest of us? We'd have to take responsibility for ourselves and maybe even our parents if the Beanie Baby fad is really over and Mom and Dad's investment strategy flops. We'd need to pay attention, learn things, make difficult decisions. It's far more pleasant to slide along in blissful (and rational!) ignorance and hope that before we lose our teeth (and shirt) something will come up. It did for Charles Ponzi. After he got out of jail, he went back to Italy and became a top economic adviser to Benito Mussolini.

P.J. O'Rourke is the Cato Institute's Mencken research fellow.

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