Tuesday, November 20, 2012

Setting the hook

If you want to fully understand why we can't believe anything the government says about various proposals, one need only look at how Social Security was sold to the public in the 1930s:
After the first 3 years--that is to say, beginning in 1940--you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year. This will be the tax for 3 years, and then, beginning in 1943, you will pay 2 cents, and so will your employer, for every dollar you earn for the next 3 years. After that, you and your employer will each pay half a cent more for 3 years, and finally, beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.
Meanwhile, the Old-Age Reserve fund in the United States Treasury is drawing interest, and the Government guarantees it will never earn less than 3 percent. This means that 3 cents will be added to every dollar in the fund each year.
There are a couple of instructive things about looking back at these quaint 'promises.'  First is the common reminder how much smaller the dollar figures involved were seventy years ago -- before the Fed destroyed over 90% of its value.  Second is that, even with exponentially more dollars floating around, the government couldn't make its ponzi scheme work at the low, low rate of three percent.  Employees today pay 4.2 percent (nearly 50% more than "the most you will ever pay!"), and employers pay 6.2 percent.  Adding insult to entrepreneurial injury, those who strike out on their own as self-employed have to hand Uncle Sam 10.4 percent of everything they earn.  And that's in addition to income taxes.

Rounding out the breach of faith, of course, there is NO "reserve fund." 
Despite the formal separation of Social Security from the rest of the budget, budget debates in Congress and the media focus mainly on the unified budget balance, that is, the combined balance of Social Security and the rest of government. Many argue that the Social Security surplus consequently masks the true deficit of the federal government. In the more than two decades that Social Security has been off-budget, the rest of government has run a surplus in only two years: 1999 and 2000.

Because the rest of the federal government is, in effect, borrowing from Social Security to finance part of its deficit, some accuse the rest of government of "stealing" from Social Security. In fact, Social Security trust funds invest their surplus in Treasury securities bearing the full faith and credit of the United States. The interest rate on these securities is determined by a formula that reflects market interest rates. The rest of government is no more stealing from Social Security than it is from an individual who invests some of his or her pension fund in U.S. Treasury securities.
I beg to differ.  If an individual chooses to lend money to Uncle Sam via Treasury securities, that's their choice.  An unwise one, I would argue, but their choice nonetheless.  Social Security, though, has become a shell game under which millions of Americans are being forced to loan money to the government.  Most believe their Social Security contributions are socked away somewhere for future payout (hence the infamous "lock box" debates in 2000).  Rereading the 1936 circular, it's not hard to understand why they think that.  In reality, receipts are immediately paid out to current beneficiaries, with any surplus converted to Treasuries (a nice trick that then allows Uncle Sam to use the money however he chooses).  The danger is this involves a future promise to pay that money back... which is NOT the same thing as depositing it in an interest-bearing account.  The process creates liabilities, not assets.  Given Uncle Sam's increasing current account deficit does anyone really believe they can meet these future liabilities?

Social Security was just a foot in the door, getting government further established in our everyday lives.  Just imagine what government-run health care will do...

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