Social Security and Medicare Are Broke

What is Social Security?

Social Security is a payroll tax.  Over 70 years ago, right after Social Security became law, a suit was filed that went to the US Supreme Court to see if the program was insurance.  It isn’t.  The  money you pay into the system is a PAYROLL TAX.  When you get old enough (the age of eligibility can be adjusted anytime by the government) and there is no national emergency to stop the payment (as determined by the government) and if there is no spike in disability payments (as determined by the government) then, yes, you get a social security check each month.  Those monthly checks are MIDDLE CLASS WELFARE payments, not insurance that you “paid for,” because a payroll tax is not an insurance payment.  And the federal government is not legally responsible for your financial future as an insurance contract would imply.

The link below describes three Supreme Court cases in the 1930s re Social Security:

http://www.ssa.gov/history/court.html

and there was another important case, Fleming vs Nestor, in 1960:

http://www.ssa.gov/history/nestor.html

The money you paid into the payroll tax was already spent when the government received it.  Of course, the government wrote an IOU to the Social Security Administration for these funds, which can only be turned into actual money by future tax revenue or by using the government’s printing press.  This is a “Ponzi scheme.”  It’s financially unsound but can survive for a while if more people continue to come through the door and pay into it.

“A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme.

“The scheme is named after Charles Ponzi, who became notorious for using the technique in 1920.  The idea present in novels (for example, Charles Dickens' 1844 novel Martin Chuzzlewit and 1857 novel Little Dorrit each described such a scheme), was actually performed in real life by Ponzi who with his operation took in so much money that it was the first to become known throughout the United States. Ponzi's original scheme was based on the arbitrage of international reply coupons for postage stamps; however, he soon diverted investors' money to make payments to earlier investors and himself.”

  -- http://en.wikipedia.org/wiki/Ponzi_scheme

Even PBS has covered Kotlikoff’s argument that Social Security is broke:

http://www.pbs.org/newshour/making-sense/americas-ponzi-scheme-why-social-security-needs-to-retire/

How do we know that Social Security and Medicare are Ponzi schemes?  Because the net unfunded debt of Social Security exceeds $20 trillion and the net unfunded debt of Medicare exceeds $25 trillion:

“It seems unbelievable to hard-working American taxpayers that our nation could have over fifty five trillion dollars in debt and unfunded liabilities ($55,000,000,000,000), and yet it does. Deriving this figure requires just a minimal understanding of three important financial calculations: 1) the actuarial statistics behind an insurance plan (such as Social Security & Medicare); 2) the concept of adequately funding such a plan using a calculation tool called "net present value"; and 3) the "accrual" accounting method that accounts for the net present value of liabilities. These financial tools inform an insurance manager as to how much money he needs to have parked in an account earning a return today in order to fund a stream estimated future liabilities. This is the way any solvent insurance plan works, but unfortunately it's not the method used by our national retirement system (SS, Medicare, & Medicaid).

“Instead of funding our retirement system we have relied on current taxpayers to pay for current retirees. Most Americans have no idea that their FICA taxes (a form of insurance premium) [not according to the Supreme Court!] are not fully saved and invested for their future retirement but instead pay for CURRENT retirees and general Federal expenses. Because the ratio of workers to retirees is falling, this method has been actuarially unwise for over a generation. However, because this crisis has been "a long way in the future" and requires tough decisions, it's simply been ignored. It is conveniently hidden out of sight in Federal accounting that does not use the same "accrual" method of accounting for liabilities that is required of every publicly-listed American corporation. Time has now run out. Decades of neglect have brought the U.S.A. to the brink of financial insolvency and without public initiative our elected officials cannot solve the problem.

“This financial crisis has many causes and proposed solutions. But no progress can be made until a critical mass of American people first recognize the problem and agree to resolve it. The specific solutions can be arrived at after vigorous debate and review of our options. This process will take time and will be politically challenging.”

  --  http://fiscalsolvency.com/ (this link leads to further detailed expanations)

Note by the Blog Author

It is true that the USA has engaged in pointless military adventures since 1945 with no rational endgame for conclusion of the conflicts.  But the quagmires of Korea, Vietnam, Iran, Afghanistan and elsewhere are minor financial events that aren’t bankrupting America.  Social Security, Medicare and Medicaid are financially unsustainable.  They must be sunsetted by a country whose cash-basis debt ($17 trillion) exceeds its gross domestic product (just over $15 trillion).  The American welfare state must be frozen and then reduced drastically.