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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PubliusTacitus's picture

The redistributive aspect of Socialist Security is the most insidious component of the failed program.


Socialist Security is the time bomb that will destroy the country, and in many ways already has.  It has cemented, as Mr. Stockman observes above, the bipartisan coalition guaranteed to do nothing about the problem, and expand it to ensure it gets even worse.


Our only hope is that Obamacare works so well, and fails so spectacularly (it easily could), that it starts killing off baby boomers at 1.5 – 2x the current rate, and dropping life expectancy significantly.  That is our only hope.


nmewn's picture

Putting ones faith in a government program to kill off people who are a lot tougher & wiser than it or you, probably isn't the best strategy.

Just sayin ;-)

PubliusTacitus's picture

Au contraire, if there is one organizational force on the planet capable of mass murder (in the name of compassion, naturally), it is government, especially when it is convinced beyond all doubt that it is doing right and compassionate things, with the power of life and death granted to it by a clueless electorate and a criminal legislative body.


But you are correct in placing hope in such a fate – it isn’t likely to happen in that fashion.

nmewn's picture

I thought I understood your meaning...but wasn't sure.

When I was young, I always listened to the old guys. My peers thought it strange that I would hang out in the next door neighbors garage (the old WWII vet) in failing health but with a mind as sharp as a tack.

He taught me how to run a still...and how to make one, among other doesn't get to be old being a dumbass ;-)

PubliusTacitus's picture

Unfortunately, that seems to be changing.


The boomer generation is full of stupid people, and they will likely top out at the max life expectancy for the US Empire.  They are an enormous resource drain, and will suck what's left of the productive and wealth-generating capacity out of this country via SS and Medicare/Medicaid.


It's all downhill from there, and possibly quickly (faster than Britain or Japan).

Accounting101's picture

Good. I have you down as renouncing your Social Security and Medicare benefits. If you happen to ever cash one of those SS checks or hand a Medicare subscriber card to a doctor, you will be a gigantic hypocrite and a fraud.

nmewn's picture

"I have you down as renouncing your Social Security and Medicare benefits."

In the real world, its called repossession. In a statists world, its called slavery to the system.

Which world do you live in?

Accounting101's picture

I'm reading rhetorical bullshit. Your plan please.

nmewn's picture

Let me guess, you live in a world where "millions of old people" have no family.

Your plan is more of the same old socialist plan, raping the kids & grandkids...great plan.

Accounting101's picture

Oh, everybody moves in with their kids? Come on man. Publius types this kind of garbage. I expect more from you.

nmewn's picture

I thought I could expect more from you than this hysteria..."millions"?..really?

You're approaching eugenic overload on this one, you work in a nursing home or what?

PubliusTacitus's picture

I do renounce them – I have no hope of ever receiving them, so we are planning accordingly as though it won’t exist, because it won’t.  We should not be penalized for doing this, though we will be.


I am on record on this and many other blogs completely in favor of Gen X and younger forfeiting what we have paid into the system in favor of a self-run system.


The choice is not all-or-none; there is a concept called economic freedom. 


That will never happen until the baby boomers die.

Accounting101's picture

So when you eventually receive those SS checks you will return them to sender? Right? Again, what is the plan for keeping millions of senior citizens eating and alive? No bullshit, just a plan.

PubliusTacitus's picture

Sure, but won’t have to – they won’t exist (there’s a good chance this country won’t exist, or we won’t exist in it).


The plan is get younger generations off Socialist security, forfeit their contributions to date, sunset that system as boomers die, and allow everyone else to save for themselves.


That’s the fucking plan, asshat.


Again, as I say below,the last organization/body that should be “saving” for your retirement is fucking government.  There is absolutely no factual or historical reason to place any faith in the competence of a body which – especially lately – shows less than zero competence.

Accounting101's picture

Save in what? The stock market- the biggest of all Ponzi schemes? Rocks found in the ground? Obviously you haven't thought about this for longer than two seconds.

You will whore up to the trough when the time comes. It's the only way you will survive. If the meantime, you go on pretending to be a little capitalist. Tool.

wisehiney's picture

You're thinking the Ponzi stock market fails, and yet your beloved social security survives. The people here are more prepared to survive than at any other site you troll at. Your fear of fending for yourself is evident. Do not to project it on your betters. I can tell that you have not even earned the right to have an opinion. STFU. 

Accounting101's picture

You will be whoring up as well. Those SS checks won't come fast enough for you.

PubliusTacitus's picture

No, piece of shit statists like you haven’t thought about this at all, since you enacted a program designed to fail.


You are very scared of people like us, willing to step outside the horseshit state retirement fraud.


We are well diversified, owning not just shiny rocks, but land, some paper, and a significant amount of brass & lead.  That’s our insurance policy.


Your retirement Ponzi is dead, fuckbag.

nmewn's picture

"So when you eventually receive those SS checks you will return them to sender?"

He's being ripped off either way, the dollar taken in the past (in taxation, to go against those SS checks today) is worth less now isn't it?...1970's vs 2014.

What you're actually saying is he doesn't have the right to take whats legally his (what was confiscated from him) at less than par value! He's taking a haircut and you have problem with that?

All paper fiat declines in value, thats why prices for goods & services in paper fiat go up...surely you know this by now being a ZH member.

Accounting101's picture

So what is the alternative? People's lives depend on it.

nmewn's picture

I'm thinking the ones who profit from the system are the ones whose lives depend on it.

StychoKiller's picture

There's this 4-letter word:  WORK, perhaps you've heard of it.

Accounting101's picture

For Christ's sake! Work until 70, 75 or 85 years of age? Move in with the kids? That's what you idiots have come up with through the night? What about medical care? How is that going to be paid for? Think longer than two seconds please.

All you little fake capitalists are real pleased with yourselves as you sit in one big circle jerk. When the time comes, every single one of you will be there collecting Social Security and Medicare. Every single one of you will be the very thing you shake your fists at in righteous indignation. You all will be government whores.

espirit's picture

Die with the disease you're born with.  No taking chlolesterol meds so you can have that bacon-burger and fries.  Limp? Wrist it.

People used to work until they died, and since I'm a boomer I'll do the same but at a slower pace.

ISEEIT's picture

"no bullshit, just a plan"?

Well let's begin with accepting that what we are fed today is bullshit. It is bullshit. I'm seriously tired of leftist soiling their panties/tighty whities over the assertion of SS being solvent and not a problem.

Bitch..It is a problem.

Fantasy fest is plenty of fun. Fantasy fest is also a time to just let some steam blow off and enjoy yourself.

It doesn't make a real life you moron.

Pretend isn't an option (for long) in this real world.

Accounting101's picture

You mean like pretending you will not use SS and Medicare upon retirement? Is that the kind of pretend you are talking about?

fche's picture

"what is the plan for keeping millions of senior citizens eating and alive"

If they allowed themselves to become totally dependent on the state to eat and stay alive, they deserve pity, not their childrens' livelihoods.

nmewn's picture

Some boiler plate demagoguery from FDR...

"But they are guilty of more than deceit.

When they imply that the reserves thus created against both these policies will be stolen by some future Congress, diverted to some wholly foreign purpose, they attack the integrity and honor of American Government itself. Those who suggest that, are already aliens to the spirit of American democracy. Let them emigrate and try their lot under some foreign flag in which they have more confidence."

Well, it was stolen afterall, wasn't it?

Hedgetard55's picture


Yea, he was a despot, and yet is revered by the left.

PubliusTacitus's picture

FDR was a scumbag statist of the highest order, as were many of his openly socialist advisors.


Not only did he build the ticking Socialist Security time bomb, he prolonged the depression for a decade.

ISEEIT's picture

FDR was a 'gameboy'. Just a lucky 'nigga' who got placed into history at just the right time and place.

Fuck all you Leftist. Your shit makes people die.

It really does.

Accounting101's picture

So I assume all of you will forgo your SS benefits and Medicare. I'm sure you don't want to be part of the scam. I wait for your response with bated breath.

If not SS and Medicare, then what? How are you going to keep millions of senior citizens from starving to death because that is what's at stake? This is not some fucking game. The middle and lower classes can't afford 8-10% of their income going to a retirement wage and health care fund, and even that wouldn't be enough savings. Please, no 401 bullshit. Talk about a giant Ponzi scam. So what is the plan???

Wall Street loves when the tools do the dirty work.

A Lunatic's picture

You are correct it is not a game. Millions of senior citizens will be starving to death. Try not to be one of them. You are your own responsibility.

Accounting101's picture

I also have you down as a "No" to collecting your SS and Medicare benefits.

A Lunatic's picture

I have you down as an ignorant Statist tool.

wisehiney's picture

Naw, just cut em back enough to discourage all the crotch droppings or litters or whatever you want to call all of the little deadbeat freeloaders they lay up at the shack and create.

Accounting101's picture

Stay away from the fucking keyboard if you can't string together a coherent sentence. Loser.

wisehiney's picture

Stay away from the fucking calculator if you can't do math. Big Winner.

PubliusTacitus's picture

The plan is get younger generations off Socialist security, forfeit their contributions to date, sunset that system as boomers die, and allow everyone else to save for themselves.


That’s the fucking plan, asshat.


The last organization/body that should be “saving” for your retirement is fucking government.  There is absolutely no factual or historical reason to place any faith in the competence of a body which – especially lately – shows less than zero competence.

ISEEIT's picture

Go ask Sargent Schultz doofus.

PubliusTacitus's picture

Millions of seniors aren’t going to starve, asshole.


Younger generations will do most of the starving, and likely armed conflict, due to their ignorance.  And yours.


Fuck you & your bullshit entitlements.


Get your fucking hands out of my & my kids bank accounts, pig.

Demonoid's picture

"The middle and lower classes can't afford 8-10% of their income going to a retirement wage and health care fund..."


They sure as hell could if they didn't pay net 16% of wages that's currently deducted for SS.

The employer-paid half of that is a joke, too. Like any other business cost, it's simply passed along - in this case, as lower wages.


WTFUD's picture

Testifying to CONgress on sub-prime mortgage Ponzi

" we waz caught out finkin' house prices would keep on increasing"

and he is the top paid exec. ceo/chairman at the largest TBTF
WHAT chance for USSA with this criminal at the helm?

The post states a 5% growth year on year for the economy to meet SS payments.

Why does everyone in the USSA accept the Harvard/ Elite revolving door of Ponzi?

ChanceIs's picture

Why does everyone in the USSA accept the Harvard/ Elite revolving door of Ponzi?

Because FDR went to Harvard.  Per Wiki:  

An average student academically, he was a member of the Alpha Delta Phi fraternity and also editor-in-chief of The Harvard Crimson daily newspaper. Roosevelt later declared, "I took economics courses in college for four years, and everything I was taught was wrong."

Well maybe if you had studied, you arrogant douchebag!!!!  Was Adam Smith wrong?  Was Frederic Bastiat wrong?  Was Walter Bagheot wrong?  Just who taught you that burning crops would bring the US out of the Depression?  Please tell me that they taught Bastiat at Harvard and you slept through the broken windows lecture.

Much has been written about the Harvard, Wall Street, Washington circle jerk.  I can't recall the name of the movie - it discussed the '07-'09 crash starting in Iceland.  Towards the end the producer (also from Harvard) went after Columbia business school dean, Glen Hubbard for perpetuating the circle jerk.  Hubbard got quite infamously incensed. Romney would have made Hubbard Treasury Secretary.  There is no difference between the Dems and Pubs.  Don't forget that.

Max Keiser has been ripping George Osborne a new one for reinitiating the US, no money down, subprime housing finance scheme in the UK.  Unbelievable.  All we need to do is get consumer confidence and demand back up...........

See also:

Help to Buy 'bubble' could push house prices up by 30pc

The Government’s "reckless" Help to Buy scheme risks creating a new housing bubble and could push the average UK house price to £300,000 by the end of 2015, a leading economic think-tank has warned.

“Help to Buy is a reckless scheme that uses public money to incentivise the banks to lend precisely to those individuals who, absent the scheme, would not and should not be offered credit," said Andrew Brigden, a senior economist at Fathom.

"Had we been asked to design a policy that would guarantee maximum damage to the UK’s long-term growth prospects and its fragile credit rating, this would be it.”

StychoKiller's picture

The movie you're thinking of is "Inside Job."

ChanceIs's picture

FDR was a craven, subhuman leech.

Where is the discussion of morality in any of this?  This gets back to the story of the aunt and the grasshopper.

What I really wants to know is why life was so horrible before Social Security.  Didn't we have the roaring '20s?  Were things so bad then?  Where were all of the tears and whining about old people in the 1910s.  Wasn't life much better under the huge industrial boom of the Robber Barons era in the 1880s than say in the 1830s?

How did we get by before Social Security.  Numbers, regressivity etc be damned.  Where was the need for this nonsense?

Life is a beach and then you die. 

BTW:  Mother expalined Social Security to me for the first time circa 1966 was I was about nine yeas old.  She finished, and I said, 'Mother.  That is a Ponzi scheme.'  Hey.  If a nine year old could figure it out......  And please don't associate me with Texas governor Rick ('I can't remember which cabinet level department I will nuke') Perry.

PS:  I hope that Perry succeeds in getting all the gun manufacturers to move to Texas.  I have nothing against the guy because he is stoooooopid.  Well he is probably a friend of W's.  Hold that against him.

Mr. Hudson's picture

Before SS people lived to be 50. If they lived to be too old to work they were thrown in a poor house if their kids wouldn't take care of them. Then they started living longer and the hippies didn't want to take care of their old parents because they were too busy doing drugs and screwing chicks who didn't shave their armpits so Johnson gave the old people Medicare and rest homes to live in.

tony bonn's picture

wall street plutocrats invented big government to produce big borrowing, big interest, and complete takeover of the government.....wall street - the rockefeller nazis - love big deficits because it lines their pockets with more money and accelerates the transfer of wealth from the poor to the rich. the fucktarded liberal loves it because it represents job security and impoverishment of america....the welfare queen loves it because it is a way out of work.

the poor must be helped - a requirement which the plutocrat ignores except when the outcome is slavery.

Stuck on Zero's picture

Under the new immigration plan we will bring in 12 million people who will go on Social Security immediately.