Looking under the veil of Social Security

I have recently been involved in a couple conversations that made me realize the level of understanding about Social Security is alarmingly lacking. One of the major misconceptions is that the government has a stash of cash with your name on it, waiting for you to retire and extract monthly payments from that account. That couldn’t be further from the truth.

We all see a line-item tax deduction labeled FICA (Federal Insurance Contributions Act) on our payroll stubs. The key to understanding this deduction is to realize it is a tax.

Social Security is a pay-as-you-go system. It is, and has always been, an inter-generational transfer of wealth. The deductions being withheld today are used to pay the benefits of those already retired and receiving monthly checks. When we reach retirement age, our retirement benefits will be paid from the contributions of those still working and paying FICA taxes. In effect, it is a Ponzi scheme.

What is a Ponzi scheme? It is a fraudulent investment game where returns are paid to investors from the money received from new investors, rather than from profit earned through using those investments to create wealth. As long as there are new investors, the fraud can continue. The minute there are not enough new investors to cover the payments to the old investors, the scheme collapses. Bernie Madoff was sentenced to 150 years in prison for perpetrating a Ponzi scheme, yet our politicians from Franklin Roosevelt until now are complicit in the same type of fraud and are applauded for it.

Ask yourself these questions. Would you invest in a system that makes promises to pay you benefits in the future but has no provision to save, invest, and accrue legitimate gains needed to finance those benefits? Would you agree to take part in a system knowing that the promise of benefits depends on future taxpayers without knowing what the future economy or demographics might look like? Are you happy with a retirement system, and the taxes you pay to support it, based on the same techniques that Bernie Madoff used to scam his investors?

Perhaps a little Social Security history is in order to understand how we ended up with this albatross. There is no provision in the Constitution that permits the federal government to create and perpetuate a forced publically funded retirement system. In fact, the only way the Social Security Act was not struck down as unconstitutional by the Supreme Court was Franklin Roosevelt, a leftist progressive, threatened to pack the court with like-minded leftist activist judges and the court folded like a cheap suit. The Senate at the time had between 70 and 75 Democrats (74th and 75th Congress) so there was no chance FDR would be impeached for his unconstitutional acts.

Roosevelt got public support for this unconstitutional endeavor because what was not to like about a program that in 1935 that promised to give something for nothing? The tax rate in the original law was 2% on the first $3,000 of earnings. The worker-to-beneficiary ratio was 42 to 1. The first beneficiaries had paid nothing into the system yet were eligible for payments. Even those who retired in the mid-1960s, received about seven times more from Social Security than they paid in payroll taxes from that lopsided worker-to-beneficiary ratio.

As we all know, those statistics are far from the reality of today. We now contribute 15.3 percent of our wages into the fund. The worker-to-beneficiary ratio is less than 3. The average worker who will retire today, must live over 20 years to break even with their contributions. And pushing the projections out beyond that is fruitless as the system is on track to collapse under its own weight unless the 15.3 percent is dramatically increased or the shortfall is added to the ever increasing national debt.

So what about the trust fund that we always hear about? Good question. The Social Security defenders have assured us that Social Security is fully funded. Contributions over benefits over the past 80 years (the trust fund) should have a balance of $2.6 trillion. If there are real assets in the trust fund, then Social Security can mail checks regardless of the pending contribution shortfall and what Congress does about its yearly budget.

Let us take a look at some evidence. July of 2011, Barack Obama stated about the budget impasse, “I cannot guarantee that those checks (Social Security) go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it.” Treasury Secretary Timothy Geithner echoed the warning implying that if a budget deal isn’t reached, seniors might not get their Social Security checks.

How can that be? Either both Obama and Geithner were lying to us or they and all defenders of the Social Security have been lying to us for decades. The total monthly benefits payout is about $70 million. Where is the $2.6 trillion? There is a simple answer, the government spent it!

There is no cash in the Social Security trust fund. The Social Security trust fund is filled with IOUs from the federal government (government bonds) that future taxpayers are on the hook for. So not only have you been paying into a system all your working life, to provide you with benefits your children will have to pay double (FICA and the income taxes to repay the government IOUs to the trust fund).

To recap. The Social Security system was designed as a pay-as-you-go system with no saving, no investment and no way to assure benefit payments in the future. As of 2010, Social Security’s cash expenditures have exceeded its cash receipts. The dollars collected in the years that revenues exceeded the payouts were folded into the general fund and squandered by greedy politicians using the money to buy your votes.

So the next time you want to support a big government, tax and spend politician just remember Social Security and what these so called public servants have done to it and to you. It seems the Democrats are always accusing the Republicans of wanting to push grandma over the cliff by talking about changing the Social Security system. If something isn’t done soon to reform Social Security, the future grandmas and grandpas, who are depending on Social Security, may be driven over the cliff in droves by a system that failed to keep the promises made by politicians who cared only about their reelection. These politicians don’t need to depend on Social Security because of their lavish retirement pensions and the wealth they have accumulated by misusing their position of power. Social Security is going to change. It will be changed now in a systematic controlled fashion or in the future as it implodes leaving many retirees out in the cold.

Area resident Jack Loesch is a longtime teacher at the University of Akron whose columns appear periodically in the Salem News. Read his website at www.TorchnFork.info. He may be reached at: TorchNFork@frontier.com