Franklin D. Ponzi's Scheme

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On Sunday
morning, March 21, I saw what I never expected to see. The lead
story on the "Sunday Morning" news show was on the future
of Social Security/Medicare: "Cloudy
Future For Retirees
."

Charles Osgood,
the show’s host, introduced the segment by saying that Social
Security is the third rail of American politics: "Touch it,
and you die." This is a familiar slogan, based on an analogy
with the New York City subway system’s electrical power supply.
The slogan goes back to the Goldwater campaign, but it’s nonetheless
true. Yet the show basically called for Congress to touch the
rail.

Not one politician
appeared on-screen to comment on the segment’s details. This came
as no surprise.

The on-line
version’s text of the segment does not match what was shown on-screen.
First, the segment began with a verbal comparison: Social Security
as a Ponzi scheme. There was no explanation of what a Ponzi scheme
is: a fraud by which early investors are paid above-market returns
out of funds provided by later investors. The system goes bankrupt
when new investors are too few to pay off previous investors.
The system always dies.

Second, the
screen displayed the estimated shortfall, or net unfunded liability,
of both programs: $50 trillion.

I could hardly
believe my eyes and my ears. Here was a mainstream news show,
broadcast on a network, that admitted the truth. Never before
had I seen this with respect to Social Security/Medicare. The
show was saying what I was saying publicly back in 1976. That’s
a time delay of a mere 28 years. But I was hardly the first to
say it. My high school civics teacher told us back in 1959. Here
was CBS News letting the public know the truth after a mere 45
years delay. It’s a new world!

The show
even had a photo of Ida Fuller. I had written about her in 1976.
As I recall the statistics, she paid in $22, retired, and lived
to be a hundred. She collected $22,000. Here is what the on-line
script says: $22.54 to $22,000. On-screen, there was an update:
$24.75 to $22,888. I’ll go by the revision.

About 77
million children were born between 1946 and 1964. At Woodstock
years later, some danced and others skinny-dipped.

But in
four short years, those kids, who are now adults, will start
collecting Social Security.

If some of
them take the early retirement option, they can start collecting
in 2004. Most of them will choose to wait until 2012. I’m eligible
for full benefits in 2008. Those who were born in 1946 will have
to wait another four years . . . if the law isn’t changed again.

The show’s
director added some great footage of Woodstock attendees — long
hair, peace signs, and Salvation Army clothes that had been donated
by the Amish. At least they were wearing clothes.

Given what
is going to happen to Social Security/Medicare, I hope they saved
some of those clothes.

A PERFECT
STORM

The director
must have seen George Clooney’s movie.

It may
seem like it’s hyperbolic to say there is a huge storm coming.
But, CBS News Correspondent Joie Chen explains, the facts are
really irrefutable.

Economist
Lawrence Kotlikoff says "Baby Boomers" will hit the
Social Security system the way a giant wave hit the boat Andrea
Gale in the movie "The
Perfect Storm
."

At this point,
there was a great screen shot of the movie, when the wave capsizes
the little boat.

"The
entire country is getting older," says Kotlikoff. "In
30 years, we’re going to have 100 percent more old people, and
only 18 percent more young people to pay their benefits."

The script
immediately got worse.

"In
30 years, the entire country is going to be older than Florida
is today," explains Kotlikoff. "In 50 years, we’re
going to have enough people over 100 to fill up Washington,
D.C. We’ll have enough people over 85 to fill up New York City,
Los Angeles, Chicago, Houston and a couple of major other cities.
We’re talking about very, very old."

Then we were
treated to screen shots of geezers who looked really old, even
to me.

All I could
think of was this: "I hope I’ll be in one of those cities.
Maybe I’ll even make it to Washington, D.C."

Then we got
the Ida May Fuller photo and the story of the earliest big winner
on the Ponzi scheme. Those days are long gone. The early birds
got the really fat worms.

But in
1940, there were 42 workers paying into the system for every
Ida May Fuller — every retiree — taking money out. Not any more!

By 1950,
there were only 16. Today, there are barely three. And in 2030,
when most "Boomers" are retired, it will be down to
two.

All I can
say is that the two I get had better be willing to hustle, because
I’m not going to tolerate any K-Mart retirement program.

LIVE
LONG AND PROSPER

Moses wrote
this, 3,500 years ago:

The days
of our years are threescore years and ten; and if by reason
of strength they be fourscore years, yet is their strength labour
and sorrow; for it is soon cut off, and we fly away (Psalms
90:10).

As we approach
Moses’ limit, the system’s finances will get into deep trouble.

Also, retirees
are living longer. In 1940, life expectancy was in the 60s.
Today, it’s in the 70s and soon will be approaching 80.

Eighty? Only
80? Not this would-be retiree. I expect science to get its act
together. The gerontology brigade owes me for all the tax money
I shelled out to keep them in government grants.

Add it
all up and the United States has a problem. In 14 years, Social
Security will begin running at a deficit. By 2042, the shortage
will cause an automatic 27 percent cut in benefits. In about
70 years, Social Security could be short $24 trillion.

In 2042,
I’ll be a hundred, and living in Washington, D.C. Don’t talk to
me about any 27 percent cut! If you do, I’ll vote your upper-middle-class
tail out of office, and so will my peers, who will have more votes
than any equally well-fed, well-organized special interest group
that you ever heard of. Keep your finger off that third rail,
sonny, or you’ll pay dearly for it. I know my rights! You’re just
going to have to find a way to make up that shortfall, or else
your career will have a long fall. Get my drift?

Looking
to the future, Federal Reserve Board’s Alan Greenspan said in
a report, "Our problem essentially is we have been making
commitments without focusing on our capability of meeting them."

Look, Greenspan,
I don’t want to hear about our problem and our capability. I want
to hear about THEIR problem and THEIR capability. My ship is about
to come in. I’m about to get out of "our" group. I’ve
been in it too long.

BELLYACHERS

Hart McIntyre
says, "It’s something you put money into, and you look at
your check every week and you go: u2018Hey,
I’m putting money into this. It’s mine. When do I ever get it
back? Am I going to get it back?’"

Look, Hart,
quit bellyaching. So, maybe you got into Franklin D. Ponzi’s scheme
a little late. That’s the luck of the genetic draw. Win some,
lose some. You’ll just have to get your two workers to fork over
a little more than they presently plan.

Hart and
Phyllis McIntyre are both in their late 40s — the heart of the
"Baby Boom." They live in Parkland, Fla. He owns a
small company. She’s a schoolteacher. They have three children.
And, they’re saving on their own for retirement.

"We
look at Social Security as something that will be sort of icing
on the cake," says Hart McIntyre. "To depend on Social
Security, we don’t think that will meet the lifestyle we want
to live as we move into retirement."

That’s the
right attitude, Hart! You, too, Phyllis. Stay in the game. Earn
more money. I want you folks to be my two workers. Do you think
you can you find the third one, who thinks just like you do?

To pay
for those Social Security checks, Chairman Greenspan has two
ideas: raise the retirement age or cut the annual cost-of-living
adjustment.

"We’re
in the midst of raising the age [of retirement] from 65 to 67,"
says David Certner, director of Federal Affairs for the AARP.

Not yet!
Not yet! Wait six years. Then it’s OK. But don’t rush into this.
Take your time. Appoint another committee to study this.

Certner
says the decision to raise the retirement age to 67 for everyone
born after 1959 was made in 1983 by a commission chaired by
Alan Greenspan. The director says America shouldn’t go back
to the same well for more money.

You tell
‘em, Certner. Find another well.

"A
lot of people just don’t have the physical or health ability
to continue to work," says Certner. "It’s a lot different
if you’re working in a nice office behind a computer or you’re
really out doing — real hard labor."

What do you
mean? Computer work is really hard work. You can’t begin to know.
I just hope I can make it for another four years. You hear that,
Hart? You hear that, Phyllis? I’m old. I’m tired. I need help.
You’ve got to stay in the game.

Back in
1940, workers paid 1 percent of their salaries into Social Security,
up to $3,000.

Over the
years, the tax has gone up. Each worker now pays 6.2 percent,
up to about $89,000. Employers pay an additional 6.2 percent
for each worker. AARP favors raising that — arguing the hit would
be felt mostly by the most well-off.

You hear
that, Hart? You got that, Phyllis? AARP knows what’s good for
the system. You’ve got to get your income up. Both of you.

That idea
does not sit well with Phyllis McInytyre:
"I think, probably in general, people would say, u2018Why should
I put more in if I’m not even guaranteed I’m going to get what
I have now.’"

Phyllis,
you’re beginning to sound like a slacker. Stop that. If you start
funnelling money out of your fair share of Social Security into
your own private retirement fund, the system will go into the
red earlier than 14 years from now. Don’t even think about trying
to weasel out at this late date.

"The
more and more you change Social Security to increase taxes on
one class of people, and provide greater benefits to another
class of people when those payments and benefits are not linked,
it does, at its core, change to a welfare program and not a
public pension program."

Phyllis,
Phyllis, Phyllis: it was never a public pension program. It was
always a welfare program. It was packaged as a pension program
by President Ponzi, but he knew better. This is all about politics.
It’s about votes. How many votes do you have, Phyllis? Sure, you
youngsters could gang up on us, but we can guilt-manipulate most
of your peers. We always have. Also, if pressed, we’ll use this
argument: "Cut Social Security, and your in-laws will have
to move in with you." Try to match that, Phyllis!

"I’d
rather have the option of taking money and putting it into other
types of investments rather than putting it into Social Security,"
says McIntyre. "We’re taxed enough as it is. We’re taxed
too much."

Hart, you’re
beginning to sound like Phyllis. That’s not the right attitude.
You see, we owe it to each other. Does that sound right? No? Well,
how about this one? "If old folks don’t have money to spend,
the economy will go into recession." You don’t believe in
all that supply-side nonsense, do you? That someone’s demand should
be related to his prior production? We know better. Demand is
what drives this economy. I plan to do a whole lot of demanding.
People my age are really skilled in the demand side of economics.
In the domestic division of labor, we have specialized in demand.
Don’t mess with us. And that includes your friend, Eugene Stuerle.

"We’ve
largely succeeded in giving fairly good health and many years
of retirement to an elderly population," Stuerle says.
"It now turns out that we have other needs of society,
such as children who are generally poorer than the elderly population."

He’s right.
More than 16 percent of those under 18 currently live in poverty,
compared to about 10 percent of the elderly.

If they are
poor, then it’s because they aren’t working. Let’s get the supply-side
equation correct: young people work, old people demand. These
grade-school slackers need to get jobs and pay taxes. They need
to make contributions into the program. I love that word: "contributions."
It makes working people feel really good about themselves. I feel
good about them, too, just so long as they quit bellyaching.

If you
retired in 1970, you could expect about $300,000 in lifetime
retirement benefits, including Medicare. In the year 2000, it
was $650,000. By 2030, it will be more than a million dollars.

So, my advice
is for people who expect to retire in 2070 to aim high. You can
do it! Don’t quit now!

Currently,
children are the poor parts of our population. And so the question
arises, shouldn’t Americans be putting more money to children
and perhaps a little less to the elderly?

A story
about older Americans takes on a different perspective when
it’s looked at from the eyes of those who will have to pay for
the Boomers — today’s kids.

Kids should
be seen and not heard. Remember this: kids don’t vote. Old people
vote. Got that, Congress?

There are
fewer of them because the Boomers had fewer children. Time spent
climbing the corporate ladder, along with high rates of divorce,
cut down the time to have that second or third baby.

There, you
see? Old people are the wave of the political future, not a bunch
of kids. When you’re talking "constituency of the future,"
you’re talking old people.

"If
we current adults don’t accept a higher tax liability or accept
lower expenditures on our behalf, we’re going to try to dump
the entire problem into the laps of our kids," says Kotlikoff.
"That’s not really possible for the kids to handle, because
it would require doubling their lifetime taxes, compared to
what we’re facing."

You know
what I say? I say, "When the going gets tough, the tough
get going." That slogan was on the wall of my high school
dressing room. It moved me deeply. It made a great impression.
Anyone who balks at this late date is going to get swats.

No one
suggests the checks of current or soon-to-be
retirees are in jeopardy. So, David Certner of AARP says he
doesn’t expect it to be a burning issue in the presidential
election.

"It’s
a political year. People don’t want to deliver bad news to people,"
says Certner. "There is no consensus right now about what
is to be done for Social Security."

He’s got
that right! John Kerry is not going to hold George Bush’s feet
to this particular fire, let me tell you. So, this problem can
be delayed again. For at least four more years. Maybe eight. Maybe
fourteen.

But there
is the knowledge, the longer we wait, the worse it will be.
To paraphrase an old television commercial: "You can pay
me now, or you can pay me later."

OK, pay me
later. Keep paying me later. I plan to be here for a long time.

March
24, 2004

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.freebooks.com.
For a free subscription to Gary North’s newsletter on gold, click
here
.

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