Right to the Point (4/2/09)

Social Security: The world’s biggest pyramid

April 2, 2009

By Mike Benevento

For Americans, a regular Social Security check during retirement is a government benefit they count on. After all, they paid into the program their whole working life. Like far too many government promises, however, there is more (or in this case, much less) than meets the eye regarding Social Security.

President Franklin Roosevelt established Social Security to help protect the elderly, who had a 50 percent poverty rate during the Great Depression. As conceived, workers pay into the program during their earning years, the government provides current benefits and invests the remainder and workers receive benefits once they retire. Since there were many more workers than retirees when the program was established, the program was considered self-perpetuating.

In reality, the world’s largest government program resembles what economist Thomas Sowell describes as a pyramid scheme. Those who paid in first received money from those who paid in second — and so on, generation after generation. This works as long as the large baby boom generation supports the smaller generation existing when Social Security began. Like all pyramid schemes, however, Social Security will run into big trouble once the pyramid stops growing. When the baby boomers retire, Sowell believes, Social Security will reach that point.

Social Security works on the “rob Peter to pay Paul” principle, as money from new investors pays off older investors. Rather than generate wealth through productive investments, the scheme transfers wealth from new investors to earlier investors. The scheme works as long as the number of newer investors continues to grow. Otherwise, the pyramid collapses.

According to the Vermont Republican Party, “Politicians have promised more than we can deliver. Those who have made their careers robbing Peter to pay Paul have promised Paul more than Peter can ever possibly produce.”

Economist Walter Williams notes that Congress collects about $785 billion in Social Security taxes from about 163 million workers to send out $585 billion to 50 million recipients. Social Security’s trustees claim that the surplus goes into a $2.2 trillion trust fund to meet future obligations.

The trust fund, in a so-called “lock box,” invests the surplus tax money — with interest — to furnish future benefits.

The fund, however, was too tempting for politicians: Saving money for a seemly distant obligation. Congress quickly got its hands on it. The money was history.

Once it realized it could spend money set aside for Social Security, Congress jarred the “lock box” wide open. Money no longer is invested to fund future obligations. The problem is that after paying current recipients, Congress replaces the leftover money with government bonds and spends the surplus on whatever it wants. These bonds amount to little more than IOUs in which future generations (new investors) must pay.

“Truthfully,” economist John Williams said, “there is no Social Security ‘lock-box.’ There are no funds held in reserve today for Social Security and Medicare obligations that are earned each year. It’s only a matter of time until the public realizes that the government is truly bankrupt and no taxes are being held in reserve to pay in the future the Social Security and Medicare benefits taxpayers are earning today.”

The Supreme Court has ruled that, despite paying taxes all their working years, Americans do not have a right to a Social Security check. That means, Walter Williams pointed out, Congress can cut benefits, raise the retirement age, raise Social Security taxes and do anything it wishes — including eliminating payments.

Expect Congress to start making some choices relatively soon, because projections show Social Security surpluses will stop within the next decade. According to trustee estimates, around 2016, the amount of Social Security benefits paid will exceed taxes collected. That means Congress will have to raise taxes and/or reduce benefits to keep Social Security going.

Social Security’s long-term future of doom and gloom will be a big surprise to hundreds of millions of Americans who blindly trusted the government to make reasonable investments with their tax money. Then again, it is not like Americans really have a choice with their taxes. The government just takes it. It is either let government have it and hope for the best — or go to jail.

Almost from Social Security’s beginning, Congress broke the lock off the box, emptied the trust fund, replaced it with IOUs and spent the money on whatever it desired. While we may be lucky to eke out some reward from Social Security (if we live long enough), the outcome for our children’s children is very bleak indeed. The pyramid scheme is rapidly nearing collapse.

Michael Benevento is a former Air Force fighter jet weapon systems officer. He has a bachelor’s degree in Military History and a master’s in International Relations. Mike resides in Williston with his wife Kristine and their two sons, Matthew and Calvin.