08-05-2011: Two Farmers and the Social Security Ponzi Scheme

Posted: August 5, 2011 in Weekly Constitution Watch

On August 14, 1935 then Progressive, President Franklin Delano Roosevelt signed The Social Security Act into law.  The first citizen earnings were forcibly taken in 1937.

Why on earth would I call this respected (most media-conditioned non-thinkers would say “necessary”) government entitlement a Ponzi Scheme?

Because that’s simply what it is.  It doesn’t really matter what the FDR Administration had in mind while creating it.  What matters is the fiscal reality and unfortunately the fiscal reality is a ponzi scheme that would put you or I in prison for financial fraud.  Why is it a fraud?  Bear with me because this may be boring.

First of all, the simple Arthur B. Laffer analogy of two farmers.  Mr. Laffer asks us to imagine the United States consisting of two farmers and their government.  No one else.  The first farmer gets benefits such as Social Security and Medicare;  the other gets nothing.  Who pays for farmer number one’s benefits as distributed by the government?  Farmer number two, of course.  Let me add, that the government creates nothing and has nothing other than what it takes from someone – in this case farmer two to give to someone else – say farmer one.  As benefits to farmer one grow;  farmer two eventually runs out of money and isn’t a farmer any more.  Now the perfect Marxist entitlement system is broken.

The government can borrow money or print money to continue farmer one’s benefits, but there is no one to pay the borrowed funds back.  This is not a sustainable government system, yet our Progressive Federal government not only stubbornly insists it is;  but also claims this system to be mandatory for the well being of our citizens.  America today has roughly 313 million citizens, so it takes longer for our equivalent farmer two to run out of money, but our specious Federal government is working very hard on accomplishing exactly that.

Again, I’m not questioning why FDR’s Administration or subsequent Administrations defend this flawed financial concept.  I am going to discuss what “they”, our elected politicians do with our supposed trust fund money.  First of all, Social Security is not an entitlement.  You and I pay our earnings into it every week.  It’s our money, not some gratuitous promise charitably made to the uninformed citizen on behalf of his or her beneficent Federal government.

You’ll hear some say, incorrectly, that Social Security funds were placed into the General Fund in 1968 by the Progressive Lyndon Baines Johnson Administration.  This is not correct.  Accounting procedures were revised and have been in several other instances as well, but all this is just number juggling, good, bad or otherwise.  Factually, The Social Security Act of 1935 stipulates that all monies confiscated (my word) into the fund are only to be invested in securities backed by the full faith and credit of the United States Federal government.  In other words the so-called Social Security trust fund monies are limited to such things as treasury bonds, treasury notes, treasury bills or special government issued bonds.

Basically this amounts to our Federal government confiscating your earnings, then lending that money to itself, after which it can freely spend the money on anything it wants.  Anything might include, but certainly isn’t limited to, building Progressive-dependent voter constituencies by funding food stamps, welfare programs, school lunches, liberal dis-education, State sponsored Progressive media such as NPR and public broadcasting, financially untenable green programs run by well connected insiders, Progressive propaganda art works, cash-for-clunkers, bank bailouts, pro-Marxist union friendly auto company take-overs, foreign aid to benefit various international elite insiders, etc.  It can also be spent on defense, the Postal Service, transportation systems, NASA, etc.  It is because of the re-direction of these funds from purchased treasury securities to General Fund items that people believe Social Security is part of the General Fund similar to Medicare, which it is not.  They are different, though both are pay-as-you-go systems, where nothing is really invested in any viable, sustainable sense.

Here is another explanation for my accusation that the Social Security concept is fraudulent by definition regardless of intent.  A “private” retirement account is voluntarily paid into by employee contributions into named accounts and may be matched to some percentage by the employer also making contributions out of annual profits.  To the extent the employer / employee business is successful at providing goods or services in a profitable manner – both this private business and the resultant retirement fund are self-sustaining.  These private trust fund monies can be invested in government securities, but can also be invested in securities offered by other self sustaining businesses, which are also successfully and profitably providing goods and services in the marketplace.  This system is sustainable in perpetuity because wealth is actually being created by hard work, risk  and capital investment.  The private system is further abetted by the fact that messing with this money will get you prison time.

A fraudulent, pay-as-you-go trust fund such as Social Security is not self sustaining in any way.  Current beneficiaries rely entirely on current contributions as well as the ability of the United States Federal government to repay the principal and interest on the Treasury Securities purchased by the trust fund.  As long as there are sufficiently more pay-as-you-go contributors than there are beneficiaries or as long as the full faith and credit of our Federal government is strong enough for the government to borrow from itself and pay itself back;  the system seems OK and its foundational flaws are not visible.  The obvious limiting factor of course, is that the full faith and credit of the United States government is 100% dependent upon the wealth generating capacity of those same pay-as-you-go businesses and contributors.

Today, we have a factual demographic situation where a baby boomer turns 65 every few seconds.  The pay-as-you-go contribution model is broken.  Current workers cannot sustain it.  When the economy weakens and more and more businesses fail putting more and more workers are out of work; the pay-as-you-go confiscation / contribution system falls short of its mandated burden and can no longer support the burgeoning growth of beneficiaries.

Simultaneously, non-Social Security related, government tax revenues also fall short.  The government now has four choices.  1.  Don’t pay beneficiaries at all or pay them less.  2. Borrow the money to make the mandated payments to beneficiaries, realizing that this borrowed money can only be paid back by printing fiat money or increasing the confiscatory burden on workers.  3.  Print more fiat money to cover the mandated payments and the additional borrowing.  4.  Increase the confiscatory burden on workers who are still working until there is simply nothing left to confiscate.

Any way you examine this Social Security concept;  it is doomed to failure by the two farmer principle.  It’s not a question of if.  It is a question of when.  Backers of Social Security claim that privatizing the trust fund and establishing named accounts that can be assigned to heirs upon passing is too risky.  It is risky indeed, but through privatization a contributor to the system has at least some chance of recovering their investment.  The current Social Security ponzi scheme is a guarantee that your confiscated wages will never be paid back to you in full and certainly not as a profitable, after inflation investment.

In a nutshell, Social Security, regardless its intent, is nothing more than an unaccountable methodology enabling corrupt politicians to build voter constituencies and amass potentially abusive power using your own hard earned wages to do it.  The unconstitutional, unsustainable negatives of the Social Security Slush Fund System heavily outweigh any benefits to “we the people”.  It is in the best interest of the citizens to scrap this outdated idea and do something else that might actually have a future sans the greedy and very sticky fingers of career politicians.

Get the Federal government out of our pockets.

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