Was federal tax revenue spent more wisely in 1955 than now?

Cecil's Columns/Staff Reports
1

Hey Cecil,
How bad is Social Security actually doing and how much is really being spent on this government program? It seems to me that the federal government hides some debt of late by masking it as the cost of Social Security. I thought Social Security holds so many of the government bonds that Social Security is actually in posession of the greatest amount of debt in the United States. I would wonder how much of our current spending on Social Security is on program itself and how much to pay it back in recent years? I have always seen this as a way of stealing from the future to make the present seem better, am I wrong?

M. R. Gior

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MODERATOR SPEAKETH:
Welcome to the Straight Dope Message Boards, M.r.Gior, we’re glad you found us. For future ref: when starting a thread, it’s helpful to other readers to provide a link to the column in question. Saves search time and helps keep us (mostly) on the same page. No biggie, you’ll know for next time, and you did give the thread title, so the link is: Was federal tax revenue spent more wisely in 1955 than now? - The Straight Dope

Your question is really about Social Security, rather than the column, so it might do better in another forum. I’m going to leave it here for new, we’ll see what response you get, and if responses are few or limited, I’ll move it to where it will get more exposure. OK?

And, as I say, welcome!

3

No you’re not wrong, it’s been happening for many, many years, and now the bills are coming due.

In 2014 Qtr 1 inflow was 208.8 billion: Outflow was 211.1 billion: meaning they used -2.3 billion from the trust fund: currently there is 2,762.2 billion in the trust fund.

Currently the fund invests in special issue treasury notes can be redeemed at any time at face value.

The problem is that Social Security “invests” in treasury notes, that is the government borrowed the money from Social Security and spent it. That has been happening for many, many years, and all is well and good as long as the “income” exceeds the “outgo”. But now the outgo is less then the income and Social Security needs to cash in some the notes.

The long and short of it is, you are taxed to pay for social security, and now you need to be taxed again to pay for the benefits.

Perhaps the best way to explain this is, you put in $2,000 a year in a retirement fund, but you borrow that money with the promise of paying interest and principal at some future date. You do this every year until you’re 65, you on paper have a million dollars in your retirement fund but in reality you have a bunch of IOU’s and can’t afford to retire.

4

It’s actually very simple. You could have that money in the Social Security Trust Fund sit in coffee cans under the ground, or it could be invested in something. The safest investment happens to be U.S. Treasuries.

In fact, under the Clinton administration, when we looked like we would be paying off the U.S. deficit, There was a lot of concern exactly what would the Trust Fund do if it couldn’t purchase treasuries. This was one of the reasons that the Clinton administration was looking into a way to invest the Trust Fund into the stock market. The question became how you could invest a few gazillion dollars that the Trust Fund has without it affecting stock prices or the Trust Fund loosing its shirt.

There were dozens of papers written about what would happen if the U.S. actually paid off its debts and how it would affect the rest of the world. A few scholars blame the housing bubble on the inability of foreign citizens to invest in treasuries (at one time, the sale of 20 year treasuries was supended), and those investors found the next safest market to invest in – the U.S. housing market.

So, here’s the problem. What would you do with all of the money in the Social Security Trust Fund? Put in the nations’ sock draws? Invest it in a volatile market which may go down just when people are retiring, or invest it in something that pays some interest, but is generally recognized as a safe and secure investment?

As one economist told me, there might be a conflict of interest with one arm of the government lending money to another, but if you get to a point where U.S. treasuries are a risky investment, it doesn’t matter what you did with all of that Social Security money. You’re screwed. In the end, Social Security depends upon the trust that people have in dollars which is related to their trust in the U.S. economy. If people don’t trust dollars, your Social Security payments aren’t worth very much.

5

Isn’t that pretty much the same thing that happens with a savings account at a bank? You give them money, year after year, and then one day you go down to the bank and ask to see your pile of money and they patiently explain to you that the money isn’t there. They invested it and promise to put it back when you need it. Essentially, your bank statement is just a big IOU from the bank.

Come to think of it, aren’t dollar bills just IOUs themselves?

Our entire concept of money is based on IOUs and faith. Singling out the Social Security trust fund for criticism is unfair. That same criticism could easily be applied to every aspect of the world economy.

6

Read up on the term Ponzi Scheme and you have a perfect description of why SS is failing miserably.

7

Except it’s not a Ponzi Scheme. The Social Security System was setup as a pay-as-you-go system. That is current payments pay out current benefits. Nothing wrong with that until you have a baby boom generation that will end up requiring more benefits to be paid out than payments in.

This was handled by creating a Social Security surplus that will start paying out somewhere around 2020 to 2025. After the baby boomers …uh… exit the system, the surplus will be more or less gone, but the pay-as-you-go system will be restored. You can think of that baby boom bump in population as a glitch to the system. Once the baby boomers exit the system, there should be no need for the Social Security Trust Fund.

There are several issues with Social Security, but they really don’t have to do with its financial strength:

[ul]
[li] The Social Security Trust Fund which was created to hold the surplus is, for accounting purposes, an inter-government fund. Social Security payments into the fund are counted as payments to the balance of the government surplus and deficit. Thus, if the trust fund takes in a trillion dollars, that trillion is subtracted from the overall government deficit. Some people compare this to getting a cash advance on your credit card, and subtracting it from your current debt. The problem isn’t that the Trust Fund is buying treasuries. It’s the fact that the government doesn’t count these treasuries as part of the U.S. overall debt.[/li][li] Politics. People don’t want to be told that they’ll have to work longer at their dead end jobs in order to get benefits that belong to them. These people vote for the members of Congress who want to make these people happy. Thus, it took way too long to raise the retirement age. The retirement age is now about 66 for those now retiring. It will raise to 67 for those retiring in 2025. Early retirement is still 62. It really should have been raised to 69 or even 70 and early retirement to 65.[/li][li] Magic Money. During the last recession, the FICA rate was dropped in half. This is really a good thing to do. It cuts taxes to the poorest people who will spend that extra money on luxury goods like room and board. Unfortunately, the government paid for this by simply saying that the shortfall will come out of the general fund meaning that we still count the money as going into the Trust Fund (and thus a surplus) even though it never went into the fund.[/li][/ul]

Of course, if you still are concerned about the over all health of the Social Security system, you will know that almost all of the issues could be resolved if we had another 5 million extra workers paying into the system. There are over 5 million undocumented workers in this country not contributing to the Social Security system. I see a way to solve two major issues at once.

8

It’s not failing at all. SS has been very successful, and with a few tweaks will continue to be very successful for a century or more.

9

Dude, you just described a Ponzi scheme.

And SS is a Ponzi scheme, with the added perk that the government made it a legal Ponzi scheme and required everyone to be suckered by it. If you or I did something like this, we’d be in prison.

Good discussion: Social Security is Much Worse Than a Ponzi Scheme - and Here's How to End It

Another good discussion: Stock Portfolio Management & Tracker - Yahoo Finance

10

On the bright side, great job creation numbers over the past few months should help with SS revenues.

11

Except a Ponzi scheme involves lying about the investment opportunity. For example, Charles Ponzi stated he was buying Postal Reply Coupons. Madoff stated he was investing in small, but rapidly growing companies, and was able to mysteriously analyze the finances in order to only pick winners. Both were doing nothing of the sort. Otherwise, you could classify any investment where income is paid on future earnings as a Ponzi scheme.

What makes a Ponzi scheme fail is that promised income becomes unsustainable. Charles Ponzi promised doubling investor incomes every 90 days. Madoff’s investment managed to pay off more than possible in the market.

In order to sustain the lie, Ponzi schemes have to keep growing the pool of investors in order to pay off older investors. Charles Ponzi investment pool grew by leaps and bounds. He ended up buying a bank to help hide the fraud. Madoff’s fund started off as a closed fund with a tiny pool of investors. It started expanding so more and more investors could be pulled in. It collapsed when no new investors could be pulled in.

The Social Security system does none of this. There’s no magic investment going on. There’s no constant need to keep expanding the base. No one is trying to bring in Mexico and Brazil into the our Social Security system in order to keep it going.

Instead of wild promised, Social Security benefits are more or less match what is paid into the system by those beneficiaries. The major challenge to Social Security’s pay-as-you-go system is the baby boom generation’s population bump. This means more baby boomers will be retiring than people who are working. This is a problem with a pay-as-you-go system.

To handle this, the Social Security Trust fund was setup. As the baby boomers work, they pay way more into Social Security than needs to be paid out. This builds up a fund to help payout their benefits when they do retire. Around 2020 to 2025, the Trust fund will reach its maximum amount as people from 1960 start to retire. The trust fund will be drawn down until 2050 to 2060 when the last of the baby boom generation exits the Social Security system. After that, Social Security will once again be sustainable as a pay-as-you-go system.

If there is an issue, it’s the way the U.S. government uses the Social Security Trust Fund to hide its account deficit. The U.S. government counts payments into this fund as revenue can can subtract it from the current deficit. This helps hide the actual size of the deficit.

12

No, one of the defining characteristics of a Ponzi scheme is that the promised returns can only be satisfied by a continued and ultimately impossible expansion in the pool of investors.

That is demonstrably inapplicable to Social Security.

13

Actually, that is precisely how Social Security was supposed to work. The earliest Social Security recipients paid nothing into the system. Their Social Security was paid out of the contributions of a larger pool of workers. The system has always depended on the pool of workers increasing faster than the number of retirees. This was destined to fail, just like any other Ponzi scheme. We are now in a state where the pool of workers is actually shrinking relative to the number of retirees. We are approaching a point where every two workers is having to support a retiree. That is demonstrably impossible.

14

@sbunny8

It’s not quite the same, the government is lending the money to itself, where as the bank is lending it to others, and the government is expecting YOU to pay back the lone, the bank is expecting the other person to pay back the lone. So my analogy holds up.

"Our entire concept of money is based on IOUs and faith. Singling out the Social Security trust fund for criticism is unfair. That same criticism could easily be applied to every aspect of the world economy. "

Money is basically labor in a convenient form, if you think about it, in the past we would barter, but if I don’t have something you want I have to trade with someone else to get what you want so I can get what I want, messy at best. With money I can “trade” my goods/labor for your goods/labor and you can trade that for what you want without either of us jumping and trading with a bunch of different people. Yes, it’s build on faith, because there is really nothing backing it but since we all basically agree to use it there is no real problem. Now if everyone decided silver and gold was how we were going to do everything from now on, then money would become worthless.

15

sorry that should be loan not lone,

16

I long was a proponent of increasing the retirement age, but I’ve seen it pointed out that working to 70 isn’t feasible enough for enough people to make it the full retirement age.

Just because they’re undocumented doesn’t mean they are getting paid under the table. And if they’re getting paid legitimately, their employer is withholding FICA tax.
Powers &8^]

17

The number of full-time jobs dropped 500K in June. I wouldn’t call that great.

18

Pay as you go:

So there are four roommates who share an apartment. As an agreement, each pays his share of money for rent and utilities into a single account. One of the roommates (or a rotating set, or whatever) then pays the bills from that account. Each roommate contributes his share from his paycheck on a set schedule based on his salary and when he gets paid, so Tommy gets paid weekly and contributes weekly, but Eddie is paid every two weeks and so contributes every two weeks. Whatever.

As long as everyone pays on schedule, the money is in the joint account and gets paid for the bills and everything breaks even.

And then summer hits, the temps spike, there are brownouts in California, and electricity rates spike. Suddenly the utility payment is three times expected. DOH!

Okay, so each person has been contributing a set extra amount through the winter months to build up a surplus. That surplus can then be used in the summer when the electricity rates go up. Brilliant, still pay as you go, no ponzi.

Except Eddie, who handles the bills for the group, decides he’s going to spend the surplus on snacks for movie night and whatnot for the group. He’ll just put in an IOU, and then take it from money collected some other time for snacks in the snack fund. The snack fund nobody actually sets up.

Then summer rolls around, and the utility bills spike, and the surplus fund has been spent on snacks, and there isn’t a snack fund, and now Eddie has to hit everyone up for an extra contribution to pay back the IOU.

It’s not really a Ponzi scheme, it’s just bad bookkeeping.

Extending the analogy, Eddie decides instead of hitting everyone up for an extra payback for the IOU, he’ll just pay it out of his pocket/savings, then pay himself back the next couple months from the surplus. Still not Ponzi, just really bad bookkeeping.

Ponzi scheme:

Eddie and Tommy decide to get an apartment together. They decide to share bills. Eddie collects some from both of them, but it isn’t enough to cover the rent and utilities. So Eddie asks Johnny to move in, and Johnny has to contribute. He uses Johnny’s pay in to pay off last month’s bills. Utilities go up slightly, and they need more money, so Eddie asks Dave to move in and contribute, so he uses Dave’s payment to pay off the previous month’s bills. The landlord catches wind that there are now 4 people in the apartment, and makes them change the rental agreement/get a second apartment. Now their rent doubled, but the contributions haven’t gone up. So Eddie goes off to find some other suckers to move in and share expenses, until the landlord catches on and tells them to get another apartment. Lather, rinse, repeat.

No person ever really contributes his full share, the money to pay off this month’s bills comes from the new guy moving in, and that only lasts until the landlord makes them pay more because there are more people living there. If they could put 4 people into one apartment, maybe the same contribution would cover the costs, but because they are only allowed 2 to an apartment, every time they increase the people, they have to increase the rent.