Archive for the ‘off-budget spending’ Category

FinancialStatusOfSocialSecurity_Part2   <– PDF version

Some analysts and economists have claimed that the Social Security system is nothing more than a Ponzi scheme.  I believe I can show that there are enough differences between the two to demonstrate that this claim is incorrect.

Let’s begin by reviewing what Ponzi scheme is.  It was named for Carlo Ponzi, a Boston businessman who talked people into investing in a plan to earn a profit through arbitrage of international reply coupons (IRC).  An IRC is an international agreement by which nations agree to deliver mail from other nations within their postal system.  Ponzi’s plan was to take advantage of the difference in postal rates among the various nations participating in the IRC treaty.  His plan fell through with great losses because the overhead on each transaction was too high.  Ponzi’s plan started as a legitimate enterprise, but he turned it into a fraud when he started realizing losses.  He then diverted money provided by new investors by using it to pay off the original investors, while also taking a cut for himself.  In honor of Mr. Ponzi, any investment plan in which early investors are paid off with funds provided by new investors instead of profits is now called a Ponzi scheme.  Instead of earning money by wise investing, the fund managers camouflage their losses by sending out false financial statements.  When necessary, they make payments to the original investors by robbing the newer investors.  This continues until the management runs out of new investors, or the operators steal everything they can.  Normally, Ponzi schemes attract investors by claiming to have invented some secret stock market advantage, or by claiming to have discovered some hidden trading tactic that is always profitable. With that background in mind, here are five reasons why Social Security is not a Ponzi scheme.

1.  “Investing” in a Ponzi scheme is voluntary, “investing” in Social Security is not.  If you are working, whether for wages or in business for yourself, you are inducted into the system except for some very narrow exceptions (usually involving employment by a religious institution).

2.  A Ponzi scheme, although fraudulent, is ultimately subject to Securities regulation, thus incurring a legal obligation to conduct the business honestly (although they have no intention of doing so). Social Security is not subject to any regulation; the Social Security Administration is under no legal obligation to pay benefits: it operates solely on the whim of Congress.

3.  Because a Ponzi scheme is set up to be nominally subject to regulation, an investor can demand to get his money back at any time.  However, no one can get their Social Security “investment” back until they meet age or disability requirements set by Congress.

4.  A Ponzi scheme is based on attracting a small number of wealthy people to invest in it; thus it robs the rich when it fails.  Social Security is based on forcing a large number of poor and middle class people to participate; thus it will rob the poor and middle class when it fails.

5.  Ponzi scheme managers send out false financial statements to give the illusion that it is solvent in the short run.  The Social Security Administration publishes honest financial statements that prove that it is insolvent in the long run.


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The Financial Status of Social Security, Part 1

FinancialStatusOfSocialSecurity_Part1  <– PDF version

Dear readers:

This is the first in a series about the true financial status of the Social Security Trust Fund.   There are several useful charts showing the historical state of the Trust Fund since 1937; for that reason it is available only in PDF format.

Thanks for reading,


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On a Balanced Budget Amendment

On_A_Balanced_Budget_Amendment <== PDF version

The idea of adding an amendment to the U. S. Constitution requiring a federal balanced budget has been circulating since the Reagan era.  Although it was proposed a few times in Congress over the years, it was never able to attain the required two-thirds affirmation in either House of Congress, which is necessary before any proposed amendment can be sent to the States for consideration.  But with the large budget deficits of the past 5 years or so, this concept is coming into fashion again.  A recent poll [1] shows that a large majority of Americans now favor such an amendment.  Advocates for a federal balanced budget amendment argue two points. First, they point out that most states have this requirement; the logic being, what is good for the states is good for the federal government.  Their second argument is that the Congress would be forced to prioritize spending and balance those priorities with tax policies necessary to meet the revenue requirements.  It is this lack of restraint, they say, that caused Congress to run up large deficits in nearly every year since the Carter administration.  Generally the advocates allow two exceptions to the balanced budget rule: a) when the nation is in a state of war or some emergency; and b) by a supermajority of both Houses of Congress.

It appears to me that a balanced budget amendment is a bad idea whose time has come.  First, there is no reason to believe that what is good for the states is necessarily good for the federal government, since they have inherently different duties.  States do not have a role in foreign policy; they do not manage wars; they do not manage the currency.  All of these pertain to situations relegated to the federal department because they represent existential threats; the cost of combating these, should it ever become necessary, must be paid.  More than that, they must be paid regardless of any budget deals made by Congress.  As for the stated exceptions, they will either be too restrictive (and thus potentially deadly), or so loose and subject to interpretation as to result in more talk than action.  The great fallacy in the whole concept of exceptions is that no mention is made of who shall determine the conditions under which an exception applies consistent with the separation of powers between the President and the Congress.  Shall conflicting claims of emergencies be arbitrated by the Supreme Court?  If so, we would surrender our fiscal situation to robed masters who may not even understand the question, or who might impose their ideology on the budget.  If not, we are back to the usual rhetoric between the President and the Congress — all pain, no gain.

As to the advocates second line of reasoning, I doubt it will actually restrain Congress.  Keep in mind that a considerable portion of the federal government’s spending is considered “off-budget”.  In this context, “off-budget” refers to expenditures that are not called out on any budget document, including, at the present time, a) Social Security, b) the Postal Service, c) some funding for the wars in Iraq, Afghanistan, and Libya, and d) all of the bailouts.  Fortunately, both on-budget and off-budget status is included when calculating the impact on the national debt.  But under the proposed amendment, balancing the “budget” will be easy: Congress can simply relocate all the excesses to new categories of “off-budget” spending.  It will not force Congress to set priorities in the normal sense of the word.

If any “balanced budget amendment” is to be considered, it must first specify that all revenue and all expenditures by the federal government must be included in the definition of “budget”.  Otherwise, Congress will simply continue to expand the fiscal deceptions and fail to make progress on achieving fiscal stability.  In order to force Congress to face the actual facts, we should require, if anything, a “zero-deficit” amendment rather than a “balanced budget” amendment.

[1]        Sachs/Mason-Dixon, 27 May 2011.  The results indicated that a balanced budget amendment is favored by Republicans and Independents by 81% and 68% respectively; even Democrats favored it by 45%.

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