Guest Post: Social Security: The New Deal’s Fiscal Ponzi

Tyler Durden's picture

Submitted by David Stockman via the Ludwig von Mises Institute,

The Social Security Act of 1935 had virtually nothing to do with ending the depression, and if anything it had a contractionary impact. Payroll taxes began in 1937 while regular benefit payments did not commence until 1940.

Yet its fiscal legacy threatens disaster in the present era because its core principle of “social insurance” inexorably gives rise to a fiscal doomsday machine. When in the context of modern political democracy the state offers universal transfer payments to its citizens without proof of need, it offers thereby to bankrupt itself—eventually.

By contrast, a minor portion of the 1935 legislation embodied the opposite principle—namely, the means-tested safety net offered through categorical aid for the low-income elderly, blind, disabled and dependent families. These programs were inherently self-contained because beneficiaries of means-tested transfers simply do not have the wherewithal—that is, PACs and organized lobbying machinery—to “capture” policy-making and thereby imperil the public purse.

To the extent that means-tested social welfare is strictly cash-based, as was cogently advocated by Milton Friedman in his negative income tax plan, it is even more fiscally stable. Such purely cash based transfers do not enlist and mobilize the lobbying power of providers and vendors of in-kind assistance, such as housing and medical services.

Social insurance, on the other hand, suffers the twin disability of being regressive as a distributional matter and explosively expansionary as a fiscal matter. The source of both ills is the principle of “income replacement” provided through mandatory socialization of huge population pools.

On the financing side, the heavy taxation needed to fund the scheme has been made politically feasible by the mythology that participants are paying a “premium” for an “earned” annuity, not a tax. Consequently, payroll tax financing is deeply regressive because all participants pay a uniform rate regardless of income.

At the same time, benefits are also regressive because those with the highest life-time wages get the greatest replacement. This regressive outcome is only partially ameliorated by the so-called “bend points” which provide higher replacement on the first dollar of covered wages than on the last.

The New Deal social insurance philosophers thus struck a Faustian bargain. To get government funded pensions and unemployment benefits for the most needy, they eschewed a means test and, instead, agreed to generous wage replacement on a universal basis. To fund the massive cost of these universal benefits they agreed to a regressive payroll tax by disguising it as an insurance premium. Yet the long run results could not have been more perverse.

The payroll tax has become an anti-jobs monster, but under the banner of a universal entitlement organized labor tenaciously defends what should be its nemesis. At the same time, the prosperous classes have gotten a big slice of these transfer payments, and now claim they have earned them—when affluent citizens should have no proper claim on the public purse at all.

Accordingly, social insurance co-opts all potential sources of political opposition, making it inherently a fiscal doomsday machine. It was only a matter of time, for example, before its giant recipient populations would capture control of benefit policy in both parties, and most especially co-opt the conservative fiscal opposition.

Within a few decades, in fact, Republican fiscal scruples had vanished entirely. This was more than evident when Richard Nixon did not veto but, instead, signed a 20 percent Social Security benefit increase on the eve of the 1972 election. Worse still, the bill also contained the infamous “double-indexing” provision which since then has generated massive hidden benefit increases by over-indexing every worker’s payroll history. The fiscal cost of relentless universal benefit expansion has driven an epic increase in the payroll tax. The initial 1937 payroll tax rate was about 2 percent of wages, but after numerous legislated benefit increases, the addition of Medicare in 1965, the Nixon benefit explosion and the Carter and Reagan era payroll tax increases, the combined employer/employee rate is now pushing 16 percent (including the unemployment tax).

Accordingly, Federal and state payroll taxes for social insurance generate $1.2 trillion per year in revenue—four times more than the corporate income tax. So with the highest labor costs in the world, the U.S now imposes punishing levies on payrolls. It thus remains hostage to a political happen-stance—that is, the destructive bargain struck eight decades ago when high tariff walls, not containerships loaded with cheap goods made from cheap foreign labor, surrounded it harbors.

Yet there is more and it is worse. The current punishing payroll tax is actually way too low—that is, it drastically underfunds future benefits owing to positively fictional rates of economic growth assumed in the 75-year actuarial projections. As a result, the benefit structure grinds forward on automatic pilot facing no political opposition whatsoever. In the meanwhile, the fast approaching day or reckoning is thinly disguised by trust fund accounting fictions.

In truth the trust funds are both meaningless and broke. Annual benefit payouts already exceed tax receipts by upward of $50 billion annually, while the so-called trust funds reserves—$3 trillion of fictional treasury bonds accumulated in earlier decades—are mere promises to use the general taxing powers of the US government to make good on the rising tide of benefits.

The New Deal social insurance mythology of “earned” annuities on “paid-in” premiums that have been accumulated as trust fund “reserves” is thus an unadulterated fiscal scam. In reality, Social Security is really just an intergenerational transfer payment system.

Moreover, the latter is predicated on the erroneous belief that new workers and wages can be forever drafted into the system faster than the growth of benefits. During the heady days of 1967, for example, Paul Samuelson and his Keynesian acolytes in the Johnson administration still believed that the American economy was capable of sustained growth at a 5 percent annual rate. The Nobel Prize winner thus assured his Newsweek column readers that paying unearned windfalls to current social security beneficiaries was no sweat: “The beauty of social insurance is that it is actuarially unsound. Everyone ... is given benefit privileges that far exceed anything he has paid in ...”

Samuelson rhetorically inquired as to how was this possible and succinctly answered his own question: “National product is growing at a compound interest rate and can be expected to do so as far as the eye can see. ... Social security is squarely based on compound interest ... the greatest Ponzi game ever invented.”

When 5 percent real growth turned out to be a Keynesian illusion and output growth decayed to 1–2 percent annual rate after the turn of the century, the actuarial foundation of Samuelson’s Ponzi game came crashing down. It is now evident that Washington cannot shrink, or even brake, the fiscal doomsday machine that lies underneath.

The fiscal catastrophe embedded in the New Deal social insurance scheme was not inevitable. A means-tested retirement program funded with general revenues was explicitly recommended by the analytically proficient experts commissioned by the Roosevelt White House in 1935. But FDR’s cabal of social work reformers led by Labor Secretary Frances Perkins thought a means-test was demeaning, having no clue that a means-test is the only real defense available to the public purse in a welfare state democracy.

When the American economy was riding high in 1960, Paul Samuelson’s Ponzi was extracting payroll tax revenue amounting to about 2.8 percent of GDP. A half century later, after a devastating flight of jobs to East Asia and other emerging economies, the payroll tax extracts two-and-one half times more, taking in nearly 6.5 percent of GDP. So the remarkable thing is not that wooly-eyed idealists who drafted the 1935 act succumbed to social insurance’s Faustian bargain at the time. The puzzling thing is that 75 years later—with all the terrible facts fully known—the doctrinaire conviction abides on the Left that social insurance is the New Deal’s crowning achievement. In fact, it is its costliest mistake.

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FreeMktFisherMN's picture

SS is worse than a ponzi because at least with a ponzi it is voluntary and it is one's own stupidity if one falls for it.

cue LTER's morally relativist/statist apologist remarks

Hedgetard55's picture

+55 million. A Ponzi where you have to play OR A JAIL CELL AWAITS YOU.

machineh's picture

FUCK YOU, FRANK ROOSEVELT.

AND THE MEDICARE SCOOTER YOU RODE IN ON.

Jim B's picture

And if you are self employed, you even get to pay moar!

 

James_Cole's picture

Exactly right Stockman, SS (a program which was cleverly raided by Reagan and Greenspan, something Stockman knows rather well) is the problem here. Not trillions in bailouts, trillions in 
subsidies, trillions in military spending, it's gawddamn grandma!

In truth the trust funds are both meaningless and broke. Annual benefit payouts already exceed tax receipts by upward of $50 billion annually

OMGGGGG!! $50B during a massive recession? God help us all! It's over!!

ISEEIT's picture

Denial isn't really much of a response.

This isn't Huff motherfucker.

James_Cole's picture

This isn't Huff motherfucker.

Brilliant counter, I salute you sir! 

401K of Dooom's picture

Ummm, excuse me but how, when and why did this raid occur?  You are lying through  your teeth about this claim you make.  Would you show us the laws that were passed to do this raid on the trust fund?  There is no raid on SS as the money is being given out to the "recipients".  You did not mention the TEFRA act which increased the payroll tax to it's current level of 12.5% of income, passed during the Reagan administration.  And do not tell me that they raided the additional funds from that

AmCockerSpaniel's picture

>>>The Social Security Act of 1935 had virtually nothing to do with ending the depression<<< Well for starters this statement is wrong. SS moved many employed workers to leave their jobs for SS. This open jobs to the younger unemployed. So that helped to end the depression. So you don't like SS, and want out. Go for it and work for the government. Many of those employed by the governments (local, state, and national) have an opt out on SS. Wife was a teacher and opt in. So she paid for the insurance, and she should get it.

fiftybagger's picture

"So you don't like SS, and want out. Go for it and work for the government."

Wow, can we put you in charge?  You'd run this thing off the tracks faster than even obungler's minions.

fche's picture

"Not trillions in bailouts, trillions in subsidies, trillions in military spending .."

Those are problems too.

"it's gawddamn grandma"

... and her peers' tens of trillions of unfunded liabilities.

"$50B during a massive recession"

This is not cyclic stuff like unemployment payments, do keep up.  Plus $50B is just the start.

kaiserhoff's picture

The whole federal budget is a mickey mouse cash basis fraud.

The biggest mistake was allowing welfare recipients to vote.  That needs to be fixed, and soon.

wisehiney's picture

The biggest mistake was allowing non property owners to vote. - Fixed for you.

otto skorzeny's picture

You forgot the "white male "part-also crucial.

A Lunatic's picture

The property owners (banks) are the only ones that DO get a vote.........-Fixed it 4 U........

Kirk2NCC1701's picture

Do you know that these days they prosecute and deport white landowners who vote before they officially become citizens?

They can't even vote in local or state elections, to voice how their income taxes and property taxes are used. God forbid that they'd vote against more spending and more taxes.
/s

Personally I don't have a problem with these ppl voting. Compared to all those who don't pay taxes, but benefit from them.

beaglebog's picture

Nah, the biggest mistake is the substitution of Reason with Voting.

bunnyswanson's picture

"voting is the best revenge" 

fiftybagger's picture

"The biggest mistake was allowing welfare recipients"

There.  Fixed it for ya.

q99x2's picture

I like David Stockman. He's cranky like me. My version below.

Time to get real.

The Central banks gather money from nations around the world. Their primary function is to fund black-ops and pocket as much of what is left over. If there ever was an accurate way of budgeting Social Security you'll never know anything more than what the central banksters tell you.

The banksters stole everyones wealth and when the shit hits the fan we are coming for them and going to take it back.

End of story.

disabledvet's picture

ah, if the STATUTORY purpose is not to fund the Federal Government. The only reason it can do so is because of the amazing ability of the US economy to create wealth and jobs. Good luck beating the returns of SSI if you worked from the 1950's up to the 1990's. Simply put all of Wall Street combined can't compare. Having said that i do agree without serious reform this thing is in danger of "being bankrupted" in the sense that the rest of the Federal Government will struggle without those surpluses to spend. "Money for thought" as the Fed continues to monetize..."though at less of an increase" (the real meaning of 'taper' yes, yes? in other words THE INCREASE IN PURCHASES will taper off...but not the purchases themselves.) I'm not an expert in the fixed income space...and looking at the area "like trading an equity" i agree is dangerous. but it's what i'm doing and why i'm still sticking with "the trade" as it were.

LongBallsShortBrains's picture

,,,,,,,,,,,

They're commas,,,,,,,

Don't be afraid to use them....

WAMO556's picture

Interesting!

Similar to Frank Herbert's OMNIUS - The Evermind!

Taint Boil's picture

 

 

Another Dune reference …. I see a lot of them here. The best science fiction series ever and is a must read. Some of the parallels and similarities to our current situation are amazing; Frank Herbert was a genius in my mind.

ShrNfr's picture

If I did accounting the way the government does it, I would be sharing a cell with Bernie Ebbers or a crypt with Ken Lay, depending on who got to me first.

eddiebe's picture

Let's not forget the lock-box.

world_debt_slave's picture

those that foisted and reaped the beginning ponzi are long gone and they don't have to concerned with what they have perpetrated on future generations.

wisehiney's picture

SS is not as regressive as you think. The earned income tax credit refunds the employer's and the employees share (and then some in most cases) of social security taxes deducted from paychecks. The middle class mule gets kicked again. The hidden phase out of deductions and credits also effectively increase tax rates beyond what is advertised. These phase outs will affect 2013 taxpayers much more than before. So bummercare taxes are not all you have to look forward to!

Umh's picture

True. Especially for those with real low incomes for their working life. If you make minimum wage for 35 years SS will be 90% of that.

essence's picture

Medicare is several times the budget blowout than Social Security but notice how it never gets any flack. That wouldn't be because its constituency is Big Pharma, Lawyers, Insurance and the Medicos would it?

Way to go Stockman, going after granny while fat cats get windfall profits.
Nevertheless, count me in but only if everything gets cut. That includes the NSA, CIA, DHS, ESF, Military,Congresses perks & retirement, Michelle's O  22 servants  .... the works.

FreeNewEnergy's picture

I see there's a serial red arrow puncher on the loose, but I'll take my chances with this off-topic comment.

Watching CBS News with Scott (puke) Pelley tonight, they put up a graphic that showed over 400,000 private contractors with top-secret clearance and then over 700,000 government employees with same. The numbers went by so fast, and I was so alarmed, I didn't get the actual figures, but over 1.1 million people have top-secret clearance in the USA.

What's so startling about this? Well, just figure that if each one of these were handed 300 names to investigate, using Prism, or whatever else is at their disposal, they could take a full day to put together a dossier on everybody in America, and it would take less than a year.

I thought top secret meant, like TOP SECRET, like maybe only 200 or even 2000 people have this kind of clearance. Naw. Way off. Your every move can be monitored, just as what I've been reading on the internet and writing right now is.

We're screwed. Game over.

I'd like to think that there's another country to flee to, or, my first thought, to stand and fight. Reality is that if you stand, you will be shot. If you flee, they will find you, that is, if they let you out of the country.

This was a great country when I was a kid in the 50s and 60s. Now that I'm almost 60, I realize that the country I loved so much is now lost. I've suspected it for a long time - since 9/11, for sure - but I am convinced. True patriots are few and far between, pretty much on our own, now.

This is Germany in the 30s, except larger and deeper. Everything is controlled and dictated. We have lost all our freedoms.

Sorry to sound so depressed, but that number - of people with top secret clearance - absolutely floored me. We're completely out-gamed, out-manned and out-gunned.

Good luck to all. Hope we make it through to some better future, but I have serious doubts.

otto skorzeny's picture

Never underestimate the incompetence of large governmental bureaucracy. Remember- the USSR had a massive internal spying apparatus at their disposal and look at the result there.

Stuck on Zero's picture

We should just grant every U.S. citizen Top Security clearances and then we can spy on them at will.

 

Chuck Walla's picture

FreeNewEnergy -

Amen, + 100 million. It was a great country once, but the progressives, always selling nirvana one welfare check at a time, bought the idiots in wholesale lots.

 

LBJ said:

“I’ll have those niggers voting Democratic for the next 200 years.”

– Lyndon B. Johnson

 

Much of the social history of the Western world, over the past three decades, has been a history of replacing what worked with what sounded good.

~ Thomas Sowell 

 

 

 

Kirk2NCC1701's picture

Can they vote if they have a felony record? And not all felons do prison time, is that right? Just asking.

FreeNewEnergy's picture

Thanks for the links, guys. Even my figure of 1.1 million spies was low. According to ABCnews, it's more like 1.4 million. So, u pays ur taxes so the guv can spy on u. Nice system.

As many others have expressed recently, starve the beast.

After a good night's sleep, I'm a little less despondent and more resolved to expose SpyNet. Glad I was able to live in this country when it was free. Ain't so any more, but we need to make changes.

Fight or flight, bros. I'll fight. After all, what do I have to lose?

"Freedom's just another word for nothing left to lose..." -- Janis Joplin, Me and Bobby McGee

ISEEIT's picture

So I'll go for the 'long' shot..

North Korea really has been a lab all these years. The games played there were truly for 'scientific' purposes. They advertise it now. Having Dennis Rodman pop in for a visit really was just a lark for these 'jewels' running the show.

Barack obozo is a crowning achievement. They make this guy 'President'? Seriously?

It's all bizzaro world on purpose and they want you to know that.

spooz's picture
Austerity: the greatest bait-and-switch in history


Scottish economist Mark Blyth discusses the stupidity of austerity as a means of recovering from recession:

 

"Governments today in both Europe and the United States have succeeded in casting government spending as reckless wastefulness that has made the economy worse. In contrast, they have advanced a policy of draconian budget cuts--austerity--to solve the financial crisis. We are told that we have all lived beyond our means and now need to tighten our belts. This view conveniently forgets where all that debt came from. Not from an orgy of government spending, but as the direct result of bailing out, recapitalizing, and adding liquidity to the broken banking system. Through these actions private debt was rechristened as government debt while those responsible for generating it walked away scot free, placing the blame on the state, and the burden on the taxpayer.

That burden now takes the form of a global turn to austerity, the policy of reducing domestic wages and prices to restore competitiveness and balance the budget. The problem, according to political economist Mark Blyth, is that austerity is a very dangerous idea. First of all, it doesn't work. As the past four years and countless historical examples from the last 100 years show, while it makes sense for any one state to try and cut its way to growth, it simply cannot work when all states try it simultaneously: all we do is shrink the economy. In the worst case, austerity policies worsened the Great Depression and created the conditions for seizures of power by the forces responsible for the Second World War: the Nazis and the Japanese military establishment. As Blyth amply demonstrates, the arguments for austerity are tenuous and the evidence thin. Rather than expanding growth and opportunity, the repeated revival of this dead economic idea has almost always led to low growth along with increases in wealth and income inequality. Austerity demolishes the conventional wisdom, marshaling an army of facts to demand that we recognize austerity for what it is, and what it costs us."

http://boingboing.net/2013/06/10/austerity-the-greatest-bait-a.html

Jim B's picture

What austerity? 

Accounting101's picture

Greece, Italy, Ireland, Portugal, Spain where unemployment rates are 25% plus. How about in this country with police, fire and teacher layoffs? That austerity. Stop being a rube.

nmewn's picture

Public sector austerity...ie government spending less, leads to private sector unemployment?

In what fields...NSA, CIA, FBI, IMF, WHO, WTF?

ISEEIT's picture

Thanks for playing troll. They really don't coach you kids any better than this?

What's it pay?

malek's picture

"Regressive"

Oversimplification bullshit. It is linear and only turns regressive if you earn more than $113,700 individual income.

pemdas's picture

SS is not regressive, it is in fact very progressive. The bottom 80% have a net negative tax rate, only the top 20% is paying their way. See this from American Enterprise Institute:

http://www.aei-ideas.org/2010/04/does-paul-krugman-know-what-progressivi...

Hedgetard55's picture

+55. Stockman clearly does not know what regressive means. And, since 113K is the limit, it is not even regressive above that, it is nothing as no money is collected above there, and benefits are calculated based upon what has been collected.

fijisailor's picture

OK.  I've paid into the damn thing for 30 years so what's next?  It's a rotten system so just deny me any of it in retirement or better yet just let inflation make it worthless.