This article was published by The McAlvany Intelligence Advisor on Monday, November 19, 2018:
It wasn’t supposed to happen this way. After all, former Social Security commissioner Robert Ball called the scheme “social insurance” designed to help people
when earnings stop because one is too old to work or too disabled to work, or because the wage earner in the family dies, or because there is no job to be had, or when there are extraordinary expenses connected, say, with illness.
But it was a Ponzi scheme from the start, enforced by government mandate to keep people from leaving when they learned it was a scam after all. Those careful with words and their meanings knew it was a lie from the start: it was called FICA, the Federal Insurance Contributions Act, illicitly borrowing the credibility of insurance companies that didn’t go bankrupt in the Great Depression to cover up the fact it was never actuarially sound from the beginning.
The scheme is simple: it makes early participants richer and later participants poorer.
And so it has. The scheme has now, according to the worthies entrusted with its management, reached its “inflection point”: that moment in time when revenues from payroll taxes aren’t enough to cover all the benefits promised and they are forced to start liquidating the special government bonds they hold as reserves. According to those worthies, the liquidation will continue until the U.S. Treasury has redeemed them all, in about 15 years.
It could happen much sooner for the simple reason that the millennials have figured out the scam, and those approaching retirement are taking early retirement for fear that by waiting they will get less, not more. More than half the millennials, according to pollsters, don’t think there will be anything waiting for them when they retire, and they represent an increasingly influential voting bloc, while those retiring are leaving the scene in ever greater numbers.
But most have bought the lie, and consequently have failed to provide for themselves outside of Social Security. Starting in January, the 62 million Americans receiving Social Security will get a cost of living adjustment in their benefit checks of about $40 a month. For three out of five of them, their check represents about half of their total monthly income.
For those waiting to cash in, more than half don’t have enough saved elsewhere to support a “decent” retirement, according to the Center for Retirement Research. More than 90 percent don’t have a pension plan at work, and half of those who do, don’t participate. Translation: by the time they start receiving Social Security, four out of 10 will be living at or near the poverty level.
In other words, of the three legs of their retirement stool, two legs are missing and the third is getting weaker.
Just how is the scheme coming unwound? First, payroll taxes now cover only 87.5 percent of the payments being made to beneficiaries.
Second, the “worker-to-beneficiary” ratio, originally more than 40 to 1 when the welfare state program was instituted under the Roosevelt administration, is now less than 3 to 1 and dropping. In the next ten years, it’s estimated to be closer to 2 to 1.
Third, as in any Ponzi scheme, its success depends upon the entry of new participants to keep it going. Most Ponzi schemes fail when the participants figure out the scam. Of course, Social Security is not voluntary but a government mandated program that uses the threat of force to keep the flow of new workers coming in. But that flow, despite the economic recovery, isn’t anywhere near enough to offset those retiring and claiming “their benefits.”
Fourth is demographics: baby boomers are retiring sooner and living longer.
The scheme at present has three sources of income, not just payroll taxes. Those taxes make up most of the revenues coming into the program, along with interest earned on the government bonds issued in place of the funds that were spent to support the government. Once those bonds have been redeemed (out of the general treasury using taxpayers’ income taxes), interest payments on those bonds into the scheme’s trust accounts will cease.
For those counting, that means that each beneficiary is paying three times for his benefits: first, through payroll taxes; second, through his income taxes being used to redeem the special government bonds held “in trust”; and third, through the income taxes they pay when they finally receive their benefits. Last year, those income taxes on Social Security benefits amounted to almost $40 billion.
Can Social Security be “fixed?” The answer is no because it was based on the threat of force and was never actuarially sound in the first place. In the short run there are “fixes” to keep the scheme from failing, such as extending the retirement age and reducing the COLA calculation. Since nearly every worker now is forced to participate, there are no new sources of workers to be brought into it. But those participating may enjoy the privilege of paying more in taxes. There’s the rub: in the new Congress, Republicans favor extending the retirement age and reducing the COLA while the Democrats want the rich participants to pay more. As a result, nothing is likely to happen thanks to “gridlock” guaranteed by the midterm election results.
And so Social Security will continue its decline. Eventually those “reserves” will have been liquidated (around 2033 or earlier) and benefits paid out will be limited to payroll and income taxes coming in. The trustees estimate that those depending upon Social Security, wholly or in part, will suffer at least a 20 percent haircut.
And thus the scam will be revealed. Generations of participants have believed Ball to the point where Social Security is the only leg of their three-legged stool still standing. When that leg gets shorter by 20 percent, many will finally conclude that it was a Ponzi scheme after all, and not to be relied upon in their old age. By that time of course it will be too late.
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