Is Social Security a "Ponzi scheme"?
September 9, 2011
At the Republican nominee debates the other evening, Gov Rick Perry said that Social Security was a "Ponzi scheme" and a "monstrous lie". Radio talk shows and TV news reporters have made a big issue of this and NPR yesterday had an interview in which this notion was flatly denied and the concept scoffed at. So I wonder if there is any truth in what the Gov says.
Ponzi schemes bring to mind Bernie Madoff, so I thought to look at what he did and compare.
Madoff convinced people to give him money for which he promised a return. He then proceeded to pay that return out of new investments, presumably because he was not generating the returns he had promised. Of course as he kept paying out returns in excess of what he was making, his deficits were getting bigger and bigger, so he was having to fund those deficits with even more investors, until ultimately it got too big, the stream of new investors slowed and his scheme fell apart.
Social Security takes money from people via FICA taxes and promises them a pension, or in other words, a return many years later when they retire. The only difference at this stage of the comparism is that Social Security is a more daring proposal to the contributor because instead of giving you a return in the short term, the government forces you to wait 40 years to get your return. Forecasts published in the media say that Social Security will be running at a huge deficit in the not too distant future. Anecdotely, there are many reports of how people have drawn far more out of social security than they ever contributed, which would explain the future deficit. This deficit is being funded by new contributions, or investments, being made by younger entrants to the work force. Eventually the deficit will get so big that there will not be enough new contributions and the structure will collapse, leaving all the new contributors with no return and a loss on their investments (i.e. no pension).
This was the fate of the investors in Madoff's Ponzi scheme, so the paralells are definately there. Madoff employed a vast organization, as does Social Security, so no distinction there.
Social Security, however, is obviously not a "scheme". It is a well meaning, social program that seeks to provide for people in their retirement. Because it is a "tax", there is no single mastermind out there conning people, so it does not have the apparent evil agenda Madoff had.
Anyone who cares to think it through for just a moment has to realize that Social Security has the same effect as Madoff's Ponzi scheme, take from the new contributors to pay the old. That it means well is a big difference, but small comfort for the new contributors who are beginning to question whether they will ever see their "return".
US Credit will restored in time
July 27, 2011
Let's recognise some good from the debt ceiling ISSUE
The discussion going on now in the USA is the same discussions that Greece and Italy have been having - the only difference is that Greece and Italy have no option but to cut deficits they really are broke!
We in the US, on the other hand, have created our own deadline by using the Debt Limit Increase vote, something that would normally have been a formality. Sure, it would have been better to have agreed to a plan to reduce the deficit without having to take the USA's fiscal credibility down this precarious path, but given record spending, a lack of leadership from the White House, and a refusal to accept the hard economic facts by the leadership (a deficit of around $1,5 Trillion - in just this year!), any voluntary solution to the problem was probably not on the cards.
I find it hard to believe that the credit rating agencies are not taking into account the beneficial aspects of the US successfully reducing spending and deficits ("austerity measures" as they call them in Europe) as a result of this crisis. They know, as we do, that the US will not "default" because it is not worthy of the credit to pay its debts; it will default because of a technical "brake" put in place for good reason. The US has national debt at approximately 70% of GDP, not bad by European standards. Is this not much the same as having not having a budget approved - what happened under President Clinton when there was government shut down? That's not called a :default", but in the same way as is predicted now, bills don't get paid until a budget is approved. Minnesota has just gone through this.
Cutting spending is not fun, but cutting expenses never is. Most of commercial America had to do this two years ago when the economy crashed, so why should government do it also? The lesson is, like taking off a Band Aid, rip it off quickly and you'll feel better sooner.
In time we'll look back at this time, if the deficit really is reduced, and credit will be given to the US for taking pro-active steps to avoid real default like what is happening in Europe now.
Washington politics at its worst, and its best!
July 23, 2011
Got to love the debt ceiling talks in Washington right now - I reckon it'll get higher ratings that Big Brother!
The President of going off pop about the Republicans not able to agree to anything, and with such passion and vitriol. Quite something for national television. His whole point, as I heard it, was how fair and comprising he and his fellow Democrats were being by, if I heard correctly, agreeing to $1,6 Trillion in spending cuts, while those ungrateful Republicans were not satisfied with a mere $1,2 Trillion increase in Revenue. Of course if he had his way, the entire $2,8 Trillion deficit cut this would generate should be taken from the wealthy and big business via tax increases and the removal of legal tax deductions.
What he failed to tell the nation was that up until the day before, everyone seemed to be close to an agreement at $800 Billion in increased Revenues, but on Friday morning he had come into the negotiations with a new demand for a 50% increase in this target, somehow expecting everyone to swallow it and move on. This, in my books, is a material non-discIosure and is more like a partisan political speech than coming from the head of the Executive and our President. I have read this morning that a possible explanation for this change in the goalpost was that the increased Revenues put forward in the Group of 6 plan were substantially higher than what the President had agreed to at $800 Billion, so he had to move quickly to save face.
Whatever the reason, the issue remains unresolved, but that is a position that the anti-spending folks can live with. I guess that's what the debt ceiling is there for in the first place, to stop the government spending too much!
Deficit spending, debt and democracy
July 13, 2011
I am blown away with the ongoing deficit and debt discussions!
What is there to discuss, our credit limit is up! There is no more money to borrow!
So how come our government is still talking about spending money it does not have! And don't give me that tax on the wealthy stuff, as if that justifies this protracted grandstanding. If anyone is serious about getting the country's deficit in order, and avoiding further debt, they would not waste time on the miniscule revenue gains from increased tax rates on a fraction of the population. It was not long ago that the budget was balanced. We know the painful cuts that have to be made; Paul Ryan's plan has made a very reasonable effort at doing just that (without throwing Granny under the bus I might add).
Don't be misguided by the debt level and the debate around increasing the limit. Warren Buffet was quite critical of using this issue because of the damage it does to the country's reputation. However, the debt limit is the only stick Congress has to extract some sense of economic responsibility from an administration that has run amuck with taxpayer's money and investor's bonds. The real issue is that a country, like a business or a family, cannot simply carry on spending more that it takes in.
President Clinton put it very well when he said he was justing putting the math back in the budget. Simply put spend less than you earn and you will not run a deficit. Anyone who now claims anything except meaningful and substantial spending cuts as the solution to the deficit is either delusional or deceitful.
Campaign spending paybacks?
June 7, 2011
This thought popped into my head this morning: If Obama raised $650 million for his 2008 campaign and paid his contributors back with the multi - Billion dollar Stimulus bill, I dread to think what the payback will be if he raises $1 Billion for his re-election bid in 2012.
Just think about it, why would you contribute to a political campaign if you are a business or union (i.e. you are accountable for other peoples' money, be it investors' funds or union dues)? The most obvious reason is that you want, and expect, a return; if not you are in breach of your fiduciary duty. You're effectively taking a chance that your guy will get in and you'll get your money back, usually via some legislative advantage granted your organisation or a program that your business or union are key players in. In Obama's case, it is quite clear now (although we predicted it at the time) that the Stimulus plan was a useless plan of un-focussed spending that has singularly failed in improving employment or the economy. Instead of being a waste of money, I submit, it was in fact part of a plan to payback the corporate and union contributors to his campaign in various ways designed to obfuscate and confuse the public.
Just imagine what the payback for a $1 Billion campaign will be? There seems to be no effort at all to cut spending in this administration, and the thought of another 4 years of the same, with increased pressure from an extravagant election campaign, is more than this country can tolerate. Surely there should be limits on spending during such campaigns?
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