Social Security is Not a Ponzi Scheme

Thursday, September 29, AD 2011


Top Ten Reasons Why Social Security is not a Ponzi Scheme:

1.  Ponzi scheme participation is voluntary, unlike Social Security where participation is mandatory for most citizens.

2.  Ponzi scheme participants usually receive brightly colored reports telling them how much illusory interest their investments are earning.  Social Security participants make do with drab annual reports.

3.  When a Ponzi scheme goes bust the perpetrators can be sued for damages.  Good luck suing the Feds after Social Security goes belly up!

4.  Participants in a Ponzi scheme do not lose their claim against the perpetrators upon death, unlike people who die prior to receiving a check from Social Security.

5.  Ponzi schemes usually have few to no solid assets that can be seized by participants.  Social Security has endless IOUs signed by Uncle Sam.

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27 Responses to Social Security is Not a Ponzi Scheme

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  • If it wasn’t for SS, I’d be homeless. I paid in, now collect. What’s wrong with that?

  • Joe,
    First, I don’t think SS is really a Ponzi scheme as such (because the government can always insure payment by raising taxes or printing money), but it is a very poorly designed defined benefit plan in that it is not funded by what retirees paid into it but by what current workers can afford to pay. This can be workable if the commitments are fairly modest since demographic changes such as the number of workers, life expectency, etc. can be accommodated for modest committments, but our committments are not remotely small. Also, for many decades we have consistently enriched benefits for those who paid in amounts that were actuarily based on smaller benefits. Most retirees today are receiving present value benefits with far in excess of their present value payments. That is nothing more than a redistribution of wealth from workers to retirees. There is no moral basis for this whatsoever. It’s just a money grab from by the politically powerful.

  • Well, Mike, when you get to be my age you look at things differently. I worked full-time nearly 50 years and it was the only way I could “save” toward retirement. I, along with millions of others and their employers, was forced to contribute. Had the money been invested wisely, like a private plan, it would have paid dividends and been able to make a profit and sustain itself. SS is not broke. That is a myth. It’s been raided over the years and mismanaged but there is enough in the kitty to pay everyone entitled even with an aging population.

  • Raise the retirement age! When SS was started life expectancy was about 63. Retirement age should be raised to 70+. If you want or need to retire before then, it’s up to your own savings and/or family. This is going to create some extreme inter-generational bad feelings if folks my age (32) have our taxes raised to keep SS solvent when we’re trying to raise our families. Most of my friends under age 45 don’t think SS will be there for them when they retire. I give as much credence to those “statements” that come in the mail from SS as I do to sweepstakes junk mail.

  • “I paid in, now collect. What’s wrong with that?”

    For you it is doubtless a good deal Joe. For my kids it is a very bad deal indeed. The essence of any Ponzi scheme is that the first in line reap a fairly good return and the last in line end up with the empty sack. Of course my kids will do far worse than the empty sack since they will have huge bills to pay for the privilege of holding the empty sack, something that does not happen in regular go-to-jail Ponzi schemes.

  • “SS is not broke. That is a myth. It’s been raided over the years and mismanaged but there is enough in the kitty to pay everyone entitled even with an aging population.”

    There is nothing in the “kitty” Joe. Social Security taxes go into the same pot as regular income taxes, and is paid out from the same pot. Social security is broke because the federal government is broke. All the talk over the years about social security lock boxes and investments is the sheerest blue smoke and mirrors.

  • Pacem, Joe and Mac,

    I think SS yet brings in more FICA tax receipts than it pays out in benefits. Today, it is not “broke.” OTOH, if the gubmint had to comply with ERISA . . .

    Soon enough, SS will need to pay out of liquidating its “assets”, i.e., nonmarket US Treasury debt. In order to pay from that source, our congress of baboons will need to tax someone or print money (inflation is a tax).

    And, there just aren’t enough millionaires!

  • Don, et al…When have you ever heard a government — national, state or local — say that it had too much money? Or a surplus? Practically never. We are always being told that we’re “broke” and “can’t afford” this or that, but there always seems to be money there for foreign aid, fighting dubious wars, pork projects, you-name-it. It’s the same old mantra designed to keep the hoi polloi in a state of perpetual fear or distracted from other problems.

    Secondly, the implication that somehow those who paid in early are now reaping unfair benefits is bogus because the dollars that went in were worth a lot more than they are now. The dollar I put in the kitty in 1960, factoring in inflation and devaluation, is probably worth 20 cents today. No one ever got rich collecting SS, believe me. It’s a safety net and an essential one. Would I have been wiser to invest that money on my own? Probably. Would I have done so regularly? Probably not.

    The “government” is supposed to be We the People, not some separate entity. It is all of us, acting collectively for the common good and “general welfare.”

    Years ago, when I was walking the streets of NYC one day, I had three dollars in my pocket and was approached by a bum asking me for a dollar. I gave it to him because I had 3 and he had none. So, even with 2 in my pocket, I still had one more than him. To me that was an act of charity. I didn’t ask him what he was going to do with the dollar. Isn’t Christianity about compassion? I don’t see much when it comes to taking care of either the very old or the very young in America any more.

  • “It’s a safety net and an essential one.”

    It’s a welfare program Joe, plain and simple. The average recipient today makes about $60,000 more in benefits, after adjusting for inflation, over the dollars paid in. Earlier generations reaped a much larger bonanza. Future generations will pay in far more than they ever receive back, and this generational unfairness will utlimately lead to the repeal of social security. People simply will not stand for paying 17 cents on the dollar which is what will be the social security rate be around 2035, probably much earlier due to Social Security using rosy economic projections.

    “Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The $49 billion deficit last year (excluding interest income) and $46 billion projected deficit in 2011 are in large part due to the weakened economy and to downward income adjustments that correct for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink to about $20 billion for years 2012-2014 as the economy strengthens. After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Through 2022, the annual cash deficits will be made up by redeeming trust fund assets from the General Fund of the Treasury. Because these redemptions will be less than interest earnings, trust fund balances will continue to grow. After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085.

    Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable wages will grow rapidly from 11-1/2 percent in 2007, the last pre-recession year, to roughly 17 percent in 2035, and will then dip slightly before commencing a slow upward march after 2050. Costs display a slightly different pattern when expressed as a share of GDP. Program costs equaled roughly 4.2 percent of GDP in 2007, and are projected to increase gradually to 6.2 percent of GDP in 2035 and then decline to about 6.0 percent of GDP by 2050 and remain at about that level. ”

    Anyone who is below 35 and who thinks social security will be there for them when they retire is very much mistaken.

  • “Secondly, the implication that somehow those who paid in early are now reaping unfair benefits is bogus because the dollars that went in were worth a lot more than they are now. The dollar I put in the kitty in 1960, factoring in inflation and devaluation, is probably worth 20 cents today. No one ever got rich collecting SS, believe me. It’s a safety net and an essential one. Would I have been wiser to invest that money on my own? Probably. Would I have done so regularly? Probably not.”

    First, you are dead wrong in your present value assumption. Since you are retired, you should have the time to look it up — this stuff is hardly a secret and has been true for a long time. In fact, that is the true “raiding” of the system.
    And it is wrong to tax hard-working young people trying to raise their families simply because you were not wise enough to save. I know one young man who makes $29.5K per year and is saving $5K. He lives very frugally, and does not have much, but he would be insulted at the suggestion that he was impoverished.
    As far as a safety net is concerned, that is the key. The dirty little secret is that Social Security is not a forced savings system at all. It is simply a transfer of money from the currently young to the currently old. Do you seriously think that the first recipients got back the money they had paid in? Not a chance. They had hardly had the chance to pay in anything before they promptly retired and received a wonderful return funded by the then current workers. This system works nicely if (i) the number of workers per retiree is stable and (ii) the payouts are enriched only if the payroll taxes are increased to pay for it. We have done the latter why the tax is so much higher today than it used to be when you first started paying in, but we have not accounted for the latter.
    And Joe, your charity toward the “bum” was no doubt well-intentioned, but it is pretty weak compared to what many other people who participate on this forum have done and do all the time — I would not brag about it if I were you. Folks who want government to take the lead in dealing with poverty almost always use that as a way to justify their intention that “other people” pay for it. Read “Who Really Cares” by Brooks. It will open your eyes.

  • Mike, I wasn’t holding myself as a model of charity. I was never any good at handling money as everyone else on this forum appears to be.

  • I think a lot of the issue with the “ponzi scheme” description has to do with how the Social Security program actually works versus how it was sold to the American People.

    The original sale was based on the idea that it was a forced savings/social insurance regimen in which people “payed in” and “got back” their benefits later. This is the way my grandmother (intensely loyal to the Democrats up through JFK and then to the Republicans starting with Nixon) always described the system, and no argument could shake her basic conviction that it was like a good, old fashioned savings account with the money safely in the government’s “lock box”.

    The problem is that the government “saves” the money by lending it to itself. It then goes off and spends the money in the happy assurance that it’s promise to pay itself back is “savings” sitting in the bank.

    The way people my age (30s) tend to look at social security is, to my mind, a lot more realistic. It’s a system whereby the government takes money from those who are working and pays it out to those who are retired. Given that most of us don’t want to live in a society in which many of the old are indigent, this seems like a relatively good idea. Though if one accepts the idea that it’s basically a welfare scheme it seems like one would heavily means test it. Why should Warren Buffett be drawing a Social Security check?

    The trick is, to those who think that Social Security works the way my grandmother did, it really is a Ponzi scheme. After all, the definition of a Ponzi scheme is pretty much that it pretends to be a savings/investment program while in fact it’s using the contributions of new “investors” to pay out distributions to earlier ones.

    If, on the other hand, one simply accepts it as a welfare program, it simply is what it is and a few tweeks would probably make it a lot more sustainable than it is — though the demographics of the country are going to make it more and more painful as the decades pass.

    After all, a Ponzi scheme wouldn’t be a fraud if people understood that their money was going to be used to pay off earlier members that that their future pay offs would rely on finding future investorys to “pay in”.

  • If you remove social security, you’ll simply have more people on welfare. Last year the average social security check nation wide was $1177 a month which is $14,124 a year….or the budget of an abstemious Carthusian monk who does not have cable or internet or property taxes or a car and it’s insurance.
    If you could find stable 5% bonds (and you cannot) a person would have to save $282,480 to earn that income in those bonds on their own if social security ended. There are numerous job holders who will never save that and don’t have pensions….unless society pays them more: diner waitresses, janitors, parish receptionists, small factory assembly workers, retail non owners (like people who work in bakeries, flower stores etc.), auto parts delivery men, small business truckers etc., dish washers in restaurants.
    The Amish take no social security because grandparents live with the younger generation who have many children who help with the farm….and they have no cable, internet or autos with insurance….nor do they have medical insurance but the community chips in for hospital stays.
    Heck….they’re like our Carthusians as to budget.

  • Good post, Darwin, but I’d clarify an important distinction between two phenomena. First, there never was a lock box system. People who retired right after SS was made effective received payments even if they had only paid into it for a single paycheck. The only way that can happen is for the current workers to pay for current retirees. The system was never designed to allow for workers to build up savings sufficient for defined benefit payouts. Accordingly, the system resulted, quite predictably, in huge current surpluses for many years simply because the number of workers was so much greater than the number of retirees who had paid in. The federal government, quite sensibly perhaps, invested that surplus in federal government bonds, which is the same thing as saying it loaned the surplus to the federal government (itself) to pay for operating expenses (i.e., the deficit). It is this latter practice that many folks (Joe presumably) consider “raiding” SS, but in truth no other investment would have been safer. The idea that the surplus would have been invested in the private sector was never seriously considered to my knowledge. SS currently holds huge IOUs from the US gov’t, which will almost certainly be paid one way or another, but it still won’t be enough simply because the money being paid in is not sufficient to cover current obligations, which means we are eating away at the surplus which eventually will disappear, at which point SS will not be able to pay its obligations unless it is restructured. In addition to Mrs. Zummo’s option (which is very sensible of course), other options include reducing benefits, means-testing benefits, and increasing taxes. All have political and economic risks. Delaying benefits would be politically palatable only if its effect is phased in well into the future, I think, unless the delay is just a year or so. Reducing benefits would present genuine hardships for many people who depend on SS for getting by, regardless of the fact that in many cases these persons have no one to blame but themselves for their situation. Means-testing would risk the viability of the system to the extent it becomes exposed as a welfare program rather than a forced savings program. It would also be somewhat counter-productive in that it would encourage workers to save less in order to make sure they qualify. Increasing taxes on current workers in order to pay for retirees who failed to save (because they were not good at handling money — gheesh) creates huge political and moral issues, especially since demographics will not allow current workers to participate in the system in a meaningful way when they retire. The system was terribly designed, and we should phase out of it over time the best we can.
    There are no easy answers. The system was poorly designed from the beginning.

  • Bill, you are right in that eliminating SS would mean more folks go on welfare, but make no mistake — that would be a much cheaper option. It just would not be especially fair for all the folks who have been paying in believing that they were earning a defined benefit and who also have been responsibly saving for retirement. Also, it should be remembered that flawed as it is and was, SS was never designed or even marketed as anything other than a *supplemental* retirement income program. The idea that it is supposed to be enough to live on is and always has been nonsense believed only the irresponsible who rationalize not saving. In addition, I take issue with your sense of who can save. Most households in the US are saving far less than they could or should. Their neighbors who are saving are choosing to delay gratification, and those who choose otherwise should not be expected to eat their cake and still have it.

  • Mike
    But in the occupations I named, those are people who live on the edge and probably are going bare on medical insurance which in NJ for example is about 7K for a single and 12K for a family.
    Once they are hit with an unusual bill, they finance that on their credit card and probably pay the minimum monthly for a decade. Let’s say a Bodega owner in Hoboken with a family of four has medical at 12k a year with a $2500 deductible and as a result nets 29k yearly after medical in an area with $1300 a month rents to live in danger crimewise.
    One robbery at his Bodega or on the street in which he gets shot but lives but then has engine trouble two months later….and he and his family are behind the 8 ball for years paying Chase
    over 20% on the credit card he used for the deductible and the engine job. Will he save $282K in his context? No. You are thinking of the baby boomers making 60K a year and buying wave runners and such and saving an average amount that is half of their yearly if we are to believe some figures. And we should be alarmed if those people have no pensions but if many of them have pensions, we should look at the savings equivalent of those pensions (which pensions I know are vanishing outside government for younger workers).
    Which would you rather have if your family has 90year old longevity in their genes….a pension of 30K a year or an IRA of 1 million dollars during a two percent stable principal time period? The 1 million IRA at 2% is $20,000 income per year and if you touch the principal, that
    declines. I’d take the IRA but you can see how incredibly good the old private pensions were and still are for a myriad of government workers. Teachers getting 60K a year pensions now is the equivalent of an IRA of three million dollars at 2% wherein the older person doesn’t touch the principal because now he fears nursing home costs taking what he wanted to leave to children and grandchildren.
    The Hoboken Bodega owner is just hoping to get through the day without three thugs with hoodies and glocks turning over his “We’re Closed” sign.

  • Bill,
    As you suggest few workers today have pensions outside the government. And government pensions are generally woefully underfunded due both to being too rich and to poor investment performance, just like everyone else this decade. The reason that corporations stopped giving pensions is simply that they could not accept the risk of underfunding. The only way to manage that risk was to overfund, but tax laws make that difficult for sound reasons, and over-funding makes US workers massively expensive. The more sensible option is for each family to accept its own financial responsiblity, but the reality is many don’t. For reasons beyond my understanding, many people are not as smart as squirrels, who notwithstanding their tiny squirrel brains manage to save nuts for each winter. There is some logic therefore in having a forced savings system, but such a social contract decision is best effectuated by government rather than private employers. Social Security could have been such a system, but it wasn’t because such a system would not have allowed for payouts to be made to workers who functionally never earned them. Your assumption that payouts for today’s retirees would have been better had employers retained our old defined benefit plan system (i.e., pensions) is false. Those payouts must be funded by the savings set aside by the companies, and such savings would be no more actuarily sound today than those set aside for state and local government workers, and for the same reasons. Like states and cities, companies would be stuck with massive underfunded liabilities and facing insolvency, except without the power to tax.
    It is true that some families do not make enough money to save for retirement, but studies confirm that the vast majority of families with inadequate savings are simply over-consuming. In most cases they will be fine in retirement (at least by sensible standards), though with a considerably reduced standard of living.
    And don’t get me started on our so-called underpaid teachers ….

  • Hmmm… in four middle aged men in the US right now are below the poverty level. I just think you might be overstating the size of the spendthrift wave runner crowd. We just had thousands of flooded homeowners from hurricane Irene incur large bills in NJ to repair homes they cannot sell because the hurricane showed their homes to be vulnerable beyond their expectations. It boggles my mind that government zoned these areas for residences….and then people like new Chinese friends of my daughter in law bought there/ repaired their house once already and now must do it again. And they are up the creek because they believed in the zoning wisdom of Caesar and they were new here from Taiwan. Now they have a permanent cross unless they take a Fed offer of buyout if their town is included. I agree with your values but we differ on the number of people who fall behind from prodigality. But stats cannot really answer the nuances. I hear stories of men who were divorced by their wives and fall very far down financially or women who were deserted with four children and receive no help thenceforth from the man. Stats may report them someday as insufficient savers without mentioning the descents they suffered. Near me by two miles on a subway station platform, a Merrill Lynch manager with a wife and three children at home waiting… stood waiting for a train and a schizophrenic ran up behind him and stabbed him multiple times with a kitchen meat cutting knife to death and poor people from that area chased the man down and held him for police. Think of the financial descent of the widow aside from the existential personal bereftment even if he had life insurance. She most probably had a large mortgage and large property taxes. Stats may one day report her as not having saved….without telling us she had three children to send to college alone.

  • We all have our stories and experiences, Bill, and while I have some responses to yours I have not the time. I’ve wasted too much today, which is why I’m still at work and will be for another couple hours. But I’m very skeptical of your one in four datum though. And by the way, I have a property in a hurricane zone and buy flood insurance (expensive!) since most hurricane damage is flood rather than wind. It would never occur to me to do otherwise.

  • Don

    Interesting facts about Social Security.

    The constitutionality of Title II of the Social Secury Act per se, the operating title, has never tried. Reportadly some one challenged it seriously enough that the government offered settlement so large the judge required them to accept it.


    The Social security commission that is in charge of the Social Security System consists of the Secrataries of Treasurey and Health and Human Services and the Commissioner who is also the executive head of the agency. All serve at the pleasure the President.

    There are multiple conflicts of interest in that arrangement. It is hjard to see how directors of a private fund with similar arrangements would not be continually fighing off civil suits and possible fraud and failure of duty criminal charges.


    SS was sold as a social Insurnce plan like a life insurance policy or non government retirement benefits.

    However it was set up form the beginning with no legal connection between the FICA tax and SS benefits. Paying FICA taxes does not give a property right to benefits. Legally benefits are an entitlement like welfare.


    When it was set up the interst rate paid to the SS trust fund was 0. In the fifties the Republicans forced and amendment to pay interest. But the interest rate is always below the average rate the government pays on it’s debt.

    One of the reasons I started blogging was to improve my writing. If you promise not to laugh to hard one of my first effors was on
    Saving Social Security.

    Hank’s Eclectic Meanderings

  • The closer you look at Social Security Hank, the worse it gets.

  • You like SS. You’re gonna love Obamacare.

  • SS is a Ponzi scheme in the same way that taxation is theft. If it were done by a private citizen, it would be illegal but it’s a legitimate government function. The “Ponzi scheme” designation does help to highlight the system’s poor design though.

    Talk of whether it’s technically “broke” isn’t very helpful. It’s unsustainable without reform. There are no easy solutions. Raise the retirement age? You want 69-year olds to find jobs? Their old job let them go at 65 because they’re hurting productivity. That life expectancy has increased doesn’t mean people can work that much longer. Never mind the fact that increasing the retirement age hurts the young as they’re crowded out of a job thanks to seniors working longer.

    I would roll all welfare programs including SS into a single means-tested tax credit. Reforming SS shouldn’t plunge anyone into poverty.

  • After reading these posts, I better start shopping for a good brand of dog food. Let’s use that SS money for a few more star war weapons. That will make the ultra-conservatives happy.

  • Classic Joe. You are going to be eating dog food because people realize social security is a scam. No Joe, you will get your welfare checks from the Government until you die, and it will be left for future generations to clean up the mess. You didn’t set the policy, you had no choice but to pay in, and you would be a fool not to take the money, but please do not deny the problem simply because you have the long end of the stick.

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Do The Wealthy Pay Their Share?

Monday, April 25, AD 2011

Having linked last week to some discussion on whether the US is really becoming “Of the 1%, by the 1%, for the 1%”, I was struck by this chart, which I saw a link to this morning, over at Carpe Diem, showing top marginal income tax rates versus percentage of income tax paid by the top 1% of earners since 1980.

However, I thought it would be a lot more interesting if the chart showed the percentage of total income earned by the top 1%, and also showed the total federal tax liability (including Social Security and Medicare) rather than the just the income tax. Luckily, all this information is available easily on line. (Percent of taxes paid. Percent of total income. Historical tax tables.)

Here’s the chart I produced with that data:

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6 Responses to Do The Wealthy Pay Their Share?

  • I thought only SS had a cap. Medicare does too?

  • Medicare does not have a cap — but it’s only about a third of what SS withholding is, so the amount of payroll tax on income above the SS cap is pretty low. (I should have been clearer on that.)

  • Employers (small businesses/rich people) match-pay employees’ SS taxes, probably also medicare taxes. Is that in the lines above?

    Here’s a tax where the (evil) wealthy are not paying their share: food/fuel inflation.

    Bastiat: “All taxes ultimately fall on the consumer.”

  • I don’t think 2.9% (Medicare tax) is pretty low. it may be relatively low, as compared to the 12.4% (10.4 in 2011) for so-called social security (OASDI), but it is still substantial. I am using the full amount, employee and employer confiscations, because that is the only honest way to look at it – this is the total cost of confiscation, whether or not it shows up on a paycheck or not.

    That is significant. There is absolutely no moral stance in charging people different rates for any reason. This is blatant discrimination! It is an outrage. It does not respect diversity. It is totally intolerant. it is unfair, unjust and just plain mean. In other words, it is the antithesis of the stated, so-called ‘liberal’ (progressive) dogma.

    When you go to a grocery store do they ask for your citizen identification number, aka SSN? Do the want a disclosure of your income, assets, liabilities, etc.? No. They don’t care. All they want to know is do you have $4 to purchase a gallon of milk or not. They don’t change the price or anything else based on your quintile. They just charge for the milk and if you want to leave with it, they expect the same exact payment they would from anyone else. Fair, non-discriminatory.

    If government is necessary, if it is good, if it is just, then it should cost us all the same. A flat fee, not a percentage.

    Does that mean I think the wealthier should not contribute more to their communities and for the benefit of those less materially fortunate than they? No. But that is Charity and not state taxation.

    So, do the wealthy pay their share? Some pay WAY MORE! Others, through political manipulation, like George Soros and Barack Obama, pay much less than they appropriate. Thieves can be very wealthy and even very poor, either way, they are violating God’s commandment against appropriating someone’s private property.

  • The top 1% of earners pay 40% of Federal income taxes. It seems some believe the top 1% steals 18% of aggreagte national income from undocumented migrants; poor, unwed mothers with three to six half-brothers/sisters who never met any one of their three to six fathers; ex-convicts; et al.

    You may gain graces through charitable (Corporal Works of Mercy) works paid with your money and your time. You may not gain graces by confiscating/taxing someone else’s money and giving it to your dependent voting blocs, sanctimonious Robin Hoods.

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Who's Gonna Grab the Third Rail?

Tuesday, August 10, AD 2010

That’s a line from a brief but astounding post by Kevin Williamson of NRO, which I’m reproducing in full here:

A little perspective from the debt commission:

“The commission leaders said that, at present, federal revenue is fully consumed by three programs: Social Security, Medicare and Medicaid. ‘The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans — the whole rest of the discretionary budget is being financed by China and other countries,’ [Alan] Simpson said.”

Three programs — Social Security, Medicare, and Medicaid — consume 100 percent of federal revenue, and everything else is paid for with borrowed money.  This is why we cannot balance the budget by cutting military spending, foreign aid, food stamps, etc. There is not going to be a serious project to address our deficit/debt problem without deep, painful entitlement reform, and the longer we wait to admit that fact and get going on it, the worse it is going to be.

So, who’s gonna grab that third rail? George W. Bush tried and got hammered — an example that few if any in Washington are eager to follow.

Indeed. I think if this is going to happen, it’s going to have to come from the people (tea parties, perhaps?), because it seems suicidal for any politician to take it on without considerable popular support.

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3 Responses to Who's Gonna Grab the Third Rail?

  • Really? So FICA and Medicare withholding represent the entire federal revenue stream? Whatever happened to the federal income tax and other revenue sources?

    The reality is that we are being set up. The federal government is looking for ways to default on what it owes and it will be far easier to default on what it owes its own people through social security than what it owes foreign banks. Defaulting on foreign loans will affect its credit rating and ability to further borrow while leaving retirees high and dry will just hurt retirees.

  • Finaly someone has outlined the major problem of our deficit spending..Without borrowed money in the term of t notes, we would be bankrupted in regards to income. IT IS TIME for means testing and benefits of those who really do not need SS survie. A cap on those with a certain substainable income need to be removed from SS and Medicare needs to have a schedule of benefits and of premium cost similar to the income tax tables based on 1040 results of income each year to determine premiums and benefits. There will be the normal hue and cry, but our representatives need the backbone to make it happen.

  • They will never solve anything.

    Nearly that entire first paragraph is incorrect. SS and Medicare are (even today) fully funded out of specific FICA and Medicare taxes, not out of general (personal and corporate income taxes, excise taxes, etc.) tax revenues. In fact, the SS surpluses are spent in vote-buying gov programs, and the SS trust fund gets in return nonpublic US debt instruments that can only be repaid from new taxes. The fit hits the shan when the SS taxes paid in are insufficient to pay SS (30,000,000 baby boomer) benefits and the guv needs to tax we the people to repay worthless debt to pay SS beneficiaries.

    I’m too depressed to continue.

Value Added Tax Will Not Solve Budgetary Woes

Tuesday, April 20, AD 2010

There has been a fair amount of useless discussion among pundits and Obama administration officials about a Value Added Tax, a National Sales Tax, the mainstay of the crumbling welfare states in Europe.  I say this discussion is useless, because Congress would never pass it, as the 85-13 vote in the Senate on an anti-Value Added Tax non-binding resolution indicates.

Today in the Washington Post Robert Samuelson explains why a VAT wouldn’t solve our budgetary woes:

The basic budget problem is simple. For decades, the expansion of Social Security, Medicare and Medicaid — programs mostly for the elderly — was financed mainly by shrinking defense spending. In 1970, defense accounted for 42 percent of the federal budget; Social Security, Medicare and Medicaid were 20 percent. By 2008, the shares were reversed: defense, 21 percent; the big retirement programs, 43 percent. But defense stopped falling after Sept. 11, 2001, while aging baby boomers and uncontrolled health costs keep retirement spending rising.

Left alone, government would grow larger. From 1970 to 2009, federal spending averaged 20.7 percent of the economy (gross domestic product). By 2020, it could reach 25.2 percent of GDP and would still be expanding, reckons the Congressional Budget Office’s estimate of President Obama’s budgets. In 2020, the deficit (assuming a healthy economy with 5 percent unemployment) would be 5.6 percent of GDP. To cover that, taxes would have to rise almost 30 percent.

A VAT could not painlessly fill this void. Applied to all consumption spending — about 70 percent of GDP — the required VAT rate would equal about 8 percent. But the actual increase might be closer to 16 percent because there would be huge pressures to exempt groceries, rent and housing, health care, education and charitable groups. Together, they account for nearly half of $10 trillion of consumer spending. There would also be other upward (and more technical) pressures on the VAT rate.

Does anyone believe that Americans wouldn’t notice 16 percent price increases for cars, televisions, airfares, gasoline — and much more — even if phased in? As for a VAT’s claimed benefits (simplicity, promotion of investment), these depend mainly on a VAT replacing the present complex income tax that discriminates against investment. That’s unlikely because it would require implausibly steep VAT rates. Chances are we’d pay both the income tax and the VAT, making the overall tax system more complicated.

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6 Responses to Value Added Tax Will Not Solve Budgetary Woes

  • As for a VAT’s claimed benefits (simplicity, promotion of investment), these depend mainly on a VAT replacing the present complex income tax that discriminates against investment

    And there’s the rub. I would have no objection to the VAT if it replaced income tax. But it never has – both the income tax and VAT have grown ever larger in European countries. The VAT simply allows a government addicted to spending to expand even further, like a junkie obtaining a new supplier.

  • A VAT wouldn’t replace the income tax, but it would replace income tax increases, which is the only other plausible source of the extra revenue we need.

  • If a political climate existed to pass a VAT BA, and if the Democrats can’t do it with the majorities they command now I find it difficult to imagine such a political climate, I guarantee you that the VAT taxes would ever increase, that the politicians would spend every cent raised in new spending and that reckless borrowing would continue. At least that has been the experience in Europe:

    “One trait of European VATs is that while their rates often start low, they rarely stay that way. Of the 10 major OECD nations with VATs or national sales taxes, only Canada has lowered its rate. Denmark has gone to 25% from 9%, Germany to 19% from 10%, and Italy to 20% from 12%. The nonpartisan Tax Foundation recently calculated that to balance the U.S. federal budget with a VAT would require a rate of at least 18%.

    Proponents also argue that a VAT would result in less federal government borrowing. But that, too, has rarely been true in Europe. From the 1980s through 2005, deficits were by and large higher in Europe than in the U.S. By 2005, debt averaged 50% of GDP in Europe, according to OECD data, compared to under 40% in the U.S.

    Thanks to the recession and the stimulus, U.S. federal debt held by the public has now reached about 63% of GDP and is headed higher, but the OECD forecasts that the 30 wealthiest nations will see debt burdens “exceed 100% of gross domestic product in 2011.” Debt levels in France, Germany, Spain and Italy are expected to have increased by 30 percentage points of GDP from 2008 to 2011. Greece has a VAT rate of 21%, but its debt as a share of GDP is 113%.

    The very efficiency of the VAT means that it throws off huge amounts of revenue that politicians eagerly spend. The VAT thus becomes an engine of even greater public spending. In Europe, average government spending was about 30.2% of GDP when VATs began to spread in the late 1960s. Today, those governments are more than 50% larger, with spending of 47.1% of GDP on average. By contrast, U.S. government spending (federal and state) rose to 35.3% from 28.3% as a share of GDP in the same period.”

  • I don’t think it’s likely but a VAT along with an income tax cut might be political feasible. You can probably massage the numbers and sell it as a net tax cut.

    I’d love to replace all or part of the income tax with a VAT but I have no faith in the government getting it right. I’ve become convinced that ever-increasing bureaucracy is what will bring America down.

  • If a political climate existed to pass a VAT BA . . . I guarantee you that the VAT taxes would ever increase, that the politicians would spend every cent raised in new spending and that reckless borrowing would continue. At least that has been the experience in Europe.

    Actually this *hasn’t* been the experience in Europe. It’s true that VAT rates has tended to go up after its introduced; however, this increase in revenue has been at least partially offset by reductions in taxes elsewhere. Thatcher, for example, raised the VAT to offset decreases in the income tax while simultaneously cutting spending. The same thing happened in New Zealand in the 1980s, Canada in the 1990s, and (to a lesser extent) Australia in the 2000s.

  • The very efficiency of the VAT means that it throws off huge amounts of revenue that politicians eagerly spend.

    This argument would apply equally to any kind of tax simplification, including the Flat Tax, the Fair Tax, the Reagan tax cuts, etc. It would also apply to income tax cuts to the extent that they are justified on supply side grounds.

Ronald Reagan Warns Against ObamaCare

Sunday, February 28, AD 2010

This is a clip of Ronald Reagan warning us of socialized medicine, the very same bill that President Obama and the Democratic Party are trying to ram through congress.

Reagan warns us of how people such as six-time presidential Socialist Party candidate Norman Thomas, and many others, explained how to move their agenda of achieving a socialist state by a Foot-in-the-Door policy of socialized medicine.  Which is eerily similar to what President Obama and the Democrats are doing, against the will of the people with their European socialized health care bill.

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40 Responses to Ronald Reagan Warns Against ObamaCare

  • I love that clip. It shows why Ronald Reagan will always be “The Great Communicator”. Clear, factual, and with his own depth of Philosophical belief. Unlike most politicians, what Reagan said, he believed.

    After watching the “Bipartisan Healthcare Summit” I was truly astounded at how poor Obama is at communicating without a pre-prepared speech and a teleprompter. The man is rude, cuts people off, stutters and stammers, and has trouble forming thoughts about his beliefs.

    Basically, to anyone who watched the BHS (no, not Barack Has to Stutter) this was a wake up call–Barry isn’t a good speaker, he is a good reader.

  • Is this a real or a parody post? If the latter, well the joke’s on me then…

    But assuming it isn’t – I assume you realize that Reagan was making all kinds of outlandish claims about Medicare, including that it tell doctors where they had to live? I think history had proved him a tint bit wrong – so much so that the party that now idolizes his memory is fighting tooth and nail against “cuts” in this very same Medicare..

    Oh, and as superior as single payer is (and Medicare is single payer by the way), the Obama bill retains the current system of privaet insurers. There is nothing “socialistic” about it. Of course, it attempts to regulate private insurers, including (by the way) how they must deal with abortion – something no Republican has ever supported.

  • MM,

    He was talking about the slow descent to socialism, or does this escape you?

    As for abortion, no matter your hollow arguments, you still voted for the most pro-abortion president in the history of the United States of America.

  • You need to study more on what Reagan actually predicted pertaining to Medicare. Also, tell me why his acolytes currently are its biggest defenders? Also, please tell me what abortion protections were put into the Republican-sponsored Medicare Advantage expansion? And please tell me what exactly is “socialist” in the HCR bill?

    Of course, having a policy debate would require moving past mindless slogans – “socialist”, “most pro-abortion president”. Of course, I could also point out to your that your own ideology is almost identical to the liberalism opposed by the Vatican for quite a long time.

  • Awesome Post!

    Reagan also signed the UN declaration against torture and his DOJ successfully tried and convicted a Texas sheriff for waterboarding prisoners, so I guess that he solved those current debates as well!

  • Oh No! But I just realized that Ronald Reagan might disagree with Friedrich von Hayek on this question, who wrote, in his Road to Serfdom, that “Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance, where, in short, we deal with genuinely insurable risks, the case for the state helping to organise a comprehensive system of social insurance is very strong.”

    And now I don’t know WHAT to think!?!

  • We could also say that Reagan raised taxes pretty much every year of his presidency, and pushed for a very ambitious arms control deal! The modern GOP would denounce him a “lib-uh-ral socialist”!

  • Here is the text of the speech:

    Reagan’s warnings have proven prescient. Medicare and Medicaid have grown and grown. We cannot pay for them just as we cannot pay for Obamacare. The government as an insurer has driven up the costs of medicine for all.

    Oh and Tony, the most pro-abortion President in our history isn’t a slogan, but a reality. You supported him and now you aren’t even going to get health care. He is also producing a political reaction which is going to sweep the Democrats from power in November in Congress and across the country. As a Republican I would like to thank you. Obama is the best thing that has happened to the GOP since Jimmy Carter!

  • “Reagan’s warnings have proven prescient. Medicare and Medicaid have grown and grown. We cannot pay for them just as we cannot pay for Obamacare.”

    As have Eisenhower’s regarding the military-industrial complex. But few “conservatives” seem to think that that is much of a problem.

    The point of all this, of course, is that it’s rather silly to think that the policy positions of American politicians–Republican or Democrat–should have any bearing on arguments (rather than sloganeering) about what is actually beneficial to the commonweal.

  • However plausible Reagan’s predictions may have been at the time, they have not been borne out by subsequent events. It’s been 45 years since Medicare was enacted, and it hasn’t led to a total government takeover of medicine. In fact, I think there’s a plausible argument to be made that Medicare is one of the main impediments to passing a universal health care plan today.

  • Instituting programs that we cannot pay for is not beneficial to the commonweal, but rather bankrupts the commonweal. As for Defense, that thing that gives you the freedom to comment on blogs, it took up 23% of the federal budget in 2009. Social Security took up 20% and Medicare and Medicaid 19%.

    Medicare and Medicaid are going to explode in costs over the next two decades and there is no clue how to pay for them other than for the government to continue to borrow until—well, I guess until we can’t borrow anymore or our economy collapses under the debt burden.

  • I’m not sure how mandating that people purchase something from the private sector constitutes “socialism”?

  • And that’s not even to say it is a good idea. This is strictly speaking toward definition.

  • Wj,

    If you think that Hayek quote is amazing, check out this one (from the Constitution of Liberty):

    Once it becomes the recognized duty of the public to provide for the extreme needs of old age, unemployment, sickness, etc., irrespective of whether the individuals could and ought to have made provision themselves and particularly once help is assured to such an extent that it is apt to reduce individuals’ efforts, it seems an obvious corollary to compel them to insure (or otherwise provide) against those common hazards of life. The justification in this case is not that people should be coerced to do what is in their individual interest but that, by neglecting to make provision, they would become a charge to the public. Similarly, we require motorists to insure against third-party risks, not in their interest but in the interest of others who might be harmed by their action.

    Finally, once the state requires everybody to make provisions of a kind which only some had made before, it seems reasonable enough that the state should also assist in the development of appropriate institutions . . .

    Up to this point the justification for the whole apparatus of “social security” can probably be accepted by the most consistent defenders of liberty. Though many may think it unwise to go so far, it cannot be said that this would be in conflict with the principles we have stated . . . It is only when the proponents of “social security” go a step further that the crucial issues arise. Even at the beginning state of “social insurance” in Germany in the 1880’s, individuals were not merely required to make provision against those risks which, if they did not, the state would have to provide for, but were compelled to obtain this protection through a unitary organization run by the government.

  • Reagan’s warnings have proven prescient. Medicare and Medicaid have grown and grown.

    Reagan was warning that eligibility for the programs would expand, not cost. That hasn’t happened.

  • “As for Defense, that thing that gives you the freedom to comment on blogs….”

    Funny, I thought that was the Constitution. Thanks for pointing out my ignorance!

  • Eric,

    The moment congress passes this bill, within a generation, we will no longer have what you refer to as the “private sector”.

  • The moment congress passes this bill, within a generation, we will no longer have what you refer to as the “private sector”.

    This strikes me as unlikely. What in the bill do you think will do away with private sector health care?

  • It’s not in the bill.

    But succeeding congresses will expand the bill to include a government option. Will ultimately be a single payer “option”.

    I probably should have said an incremental march towards the elimination of private health insurance.

  • Blackadder,

    Yes, that quote is amazing. I am always impressed by the clarity and nuance of Hayek’s thinking; if Republicans were more consistently Hayekian and Democrats were more consistently social democratic then we might have actual arguments about policy! We would also be living on another planet, of course.

  • Tito,

    Why do you think passing this bill now will make passing those bills in the future any more likely? Usually passing a bill on a subject makes it harder to revisit that subject legislatively, not easier.

  • BA,

    They would not necessarily pass more bills, but it can happen.

    They would also expand the power of said agencies that would squeeze the private sector more and more.

    Not to mention executive orders that can expand the powers of said agencies and restrict those of the private sector.

  • Well, what do you mean by “private sector” anyway?

  • Tito,

    Okay, but all that stuff could happen regardless of whether the current bill is passed. Why is this an argument against the current bill?

  • I ask because it seems that, in your mind, there are these two abstract entities–the “private sector” on the one hand, and “government” on the other–that are necessarily in opposition. But this over-simple characterization does not fit the *actual* way in which the health-care industry (and, for that matter, most other large industries) operates in America.

  • BA,

    Because it is a slippery slope of creeping government involvement in people’s lives.


    Please explain.

  • Can’t–going to bed; briefly, though, I understand your distinction to hold for small businesses, relatively local economies, etc. but not for huge corporate enterprises which sometimes enjoy monopolist status and have the clout to influence legislation in their interests; for such enterprises, any simple distinction like the one you draw seems inadequate for accounting for the facts on the ground.

  • “Funny, I thought that was the Constitution. Thanks for pointing out my ignorance!”

    You are welcome. Without military force to back it up, the Constitution is just another piece of paper.

  • As have Eisenhower’s regarding the military-industrial complex. But few “conservatives” seem to think that that is much of a problem.

    Perhaps becuase the allocation of available resources to military expenditure fluctuates up and down in response to external conditions and is lower now than was the case in 1960.

  • which sometimes enjoy monopolist status and have the clout to influence legislation in their interests;

    The only monopolists in our economy are gas and electric companies and (to some extent) the postal service.

  • (and, for that matter, most other large industries) operates in America.

    That’s just what we need, more crony capitalism.

  • Well, what do you mean by “private sector” anyway?

    Never mind.

  • We could also say that Reagan raised taxes pretty much every year of his presidency,

    You could say that, if you’ve forgotten that legislation is enacted by Congress and that legislative initiative in matters of taxation and appropriation rests with the lower house of Congress, and that the lower house of Congress was controlled by the political opposition for all eight years he was in office.

  • Of course, having a policy debate would require moving past mindless slogans – “socialist”, “most pro-abortion president”.

    Those are not slogans, those are characterizations (the latter quite accurate).

  • Tito: “we will no longer have what you refer to as the “private sector”…slippery slope of creeping government involvement in people’s lives.

    So, the government should not regulate anything that privaet insurers do? So you are fine with them covering abortion, I take it?

  • As for Defense, that thing that gives you the freedom to comment on blogs, it took up 23% of the federal budget in 2009.

    I’m reminded here of an old Lincoln quote:

    All the armies of Europe, Asia and Africa combined, with all the treasure of the earth (our own excepted) in their military chest; with a Buonaparte for a commander, could not by force, take a drink from the Ohio, or make a track on the Blue Ridge, in a trial of a thousand years.

    We don’t need to spend anywhere near 23% of the budget on defense to ensure freedom of blogging in the U.S.

  • Blackadder,

    You’re being much too reasonable to be taken seriously on this thread.

  • We don’t need to spend anywhere near 23% of the budget on defense to ensure freedom of blogging in the U.S.

    Just out of curiosity, do you have in mind a scenario of what occurs given particular levels of American military spending?

  • “All the armies of Europe, Asia and Africa combined, with all the treasure of the earth (our own excepted) in their military chest; with a Buonaparte for a commander, could not by force, take a drink from the Ohio, or make a track on the Blue Ridge, in a trial of a thousand years.”

    Considering how fearful Lincoln was during the Trent Affair of the possibility of British intervention, I doubt if he meant that statement literally. Additionally, in an age of ICBMs and the coming age of portable nukes by non-state terrorist groups, things have changed militarily a tad since Lincoln gave that speech.

  • Anyone who cannot see that Reagan was right about his beliefs needs to answer these questions:

    1. Did Medicare achieve the goals intended at the costs it promised? Further, is it almost broke now?

    2. Was Reagan right that Medicare was just a preemptive move to pass Socialized Healthcare?

    My answers for those questions are:

    1. No, it has exploded in size, cost, and is rife with Govt corruption and inefficiency.

    2. Obamacare anyone?