Thursday, September 29, 2011

Is Social Security A Ponzi Scheme?

Few people attract so much notoriety that their name is coined into a new word. One interesting example is the word “hooker”, meaning a prostitute, which came to us from General Joseph Hooker during the Civil War who reportedly had so many women of ill-repute hanging around his headquarters that they became known as “hookers”.

Another example is “Ponzi scheme”.

Recently, a Presidential candidate said that Social Security is a Ponzi scheme. What was he talking about?

According to the Securities and Exchange Commission, a “Ponzi scheme” is an investment fraud that involves the payment of “returns” to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest their money in opportunities that are claimed to generate very high rates of return with little or no risk. In many Ponzi schemes, the perpetrators focus on attracting new money to make promised payments to earlier-stage investors and to siphon off for personal use, instead of engaging in any legitimate investment activity.

With little or no real earnings, the schemes require a consistent flow of new money from investors in order to remain in operation. Ponzi schemes collapse when it becomes difficult to recruit enough new investors or when a large number of existing investors ask to cash out.

The schemes are named after Charles Ponzi, who conned thousands of New England residents into investing in a postage stamp speculation scheme in 1916. At a time when the annual bank account interest rate was 5%, Ponzi promised investors that he could provide a 50% return in only 90 days. Ponzi initially bought international mail coupons in support of his scheme with the intent of reselling them in another country at a higher price, but he quickly switched to using new investors’ money to pay the promised high returns to earlier investors. Once Ponzi was no longer able to persuade enough investors to keep giving him additional money, his scheme collapsed. Ponzi didn’t invent this type of fraud, but he took in so much money that his was the first to become widely known in the U.S.

Under the Social Security (SS) system, employees and employers pay into the system, and employees receive a monthly pension upon retirement.

The payments to current SS recipients are taken from current incoming SS money. Any money that is not paid out is put into certain special U.S. Government bonds. That is, the SS system loans any left-over money to the rest of the government, which immediately spends it, as part of general revenues, on defense, the federal bureaucracy, other entitlements (Medicare, Medicaid), interest, and miscellaneous spending. None of the SS money taken in every year is saved, invested, put aside, or any such thing. The money is either paid out to SS recipients or used for other government spending.

There is no SS “lockbox”. There also is no SS “trust fund” in the sense of a bank account somewhere with money in it that can be drawn on as needed. The SS trust fund, or lockbox, consists solely of promises by the rest of the government to pay the SS system back someday. But since the entire federal government is operating at a deficit and there is a national debt, there is no reserve money with which the SS trust fund can be paid back. The only assurance that the SS system can ever get this money back is the full faith and credit of the U.S. government.

The very first SS recipient, one Ida Mae Fuller of Vermont, received her first check of $22.54 on January 1, 1940. She had paid only $44 in SS taxes over a three year period, but collected a total of $20,993 in benefits, since she lived to be 100. Such high returns were possible in the early years of SS since there were many people paying into the system and only a few taking benefits out. In 1950, there were 15 workers supporting every SS retiree. Today, there are just over three. By 2030, it’ll be down to two. The “baby boomers” are starting to retire and it’s swamping the system.

Another issue affecting SS negatively is that people are living longer and therefore collecting benefits longer. Data from the National Center for Health Statistics show that in 1900 the life expectancy was 47.3 years; 68.2 years in 1950; and 77.3 in 2002. When SS was first enacted in 1935, people didn’t live nearly as long as now, and so the system wasn’t designed to handle an aging population.

In 2010, annual SS costs (benefits paid out plus administration) exceeded non-interest income. However, from 2010 through 2022, total SS income including interest will be more than enough to cover costs. Beginning in 2023, SS assets (bonds and interest) will start to diminish until they are gone in 2036. At that time, there will be no more bonds to redeem or interest income from them, so SS will have only current tax revenues with which to pay benefits. Unless something is changed, that tax revenue stream will support benefits at a level of 77% of what has been promised, and the benefit level will gradually decline thereafter. In order to keep benefits at 100%, either SS taxes will have to be increased significantly or benefits will have to be reduced significantly, or some combination thereof.

Is Social Security a Ponzi scheme? No, because Congress can simply raise taxes and/or reduce benefits in order to keep the system solvent.

But SS does bear some disconcerting resemblance to a Ponzi scheme. Both pay early participants with money taken in from more recent participants. Both function best when there is a continual supply of many new participants. Both systems are unable to pay all participants the full benefits promised.

The key difference is that a Ponzi scheme is doomed to ultimate implosion since it cannot, by its nature, restructure itself. A Ponzi scheme can only keep on keepin’ on until the day of reckoning finally comes. SS will not collapse; it will be fundamentally modified, some day when Congress gets the will, into a sustainable program given today’s demographics.

Wednesday, September 21, 2011

Obama Wants More Taxes On The "Rich"

President Obama is worried about the "fairness" of the federal tax code. He says he wants changes to make sure millionaires are taxed at a higher rate than their secretaries. I guess he doesn't know that they already are.

On average, the wealthiest people in America pay a lot more taxes than the middle class or the poor, according to private and government data. They pay at a higher rate, and as a group, they contribute a much larger share of the overall taxes collected by the federal government.

This year, households making more than $1 million will pay an average of 29.1 % of their income in federal taxes, including income taxes, payroll taxes, and other taxes, according to the Tax Policy Center, a Washington think tank. Households making between $50,000 and $75,000 will pay an average of 15 % of their income in taxes. Households making between $20,000 and $30,000 will pay 5.7 %.

The latest IRS figures are from 2009 and are limited to federal income taxes; they show much the same thing. In 2009, taxpayers who made $1 million or more paid on average 24.4 % of their income in federal income taxes. Those making $100,000 to $125,000 paid on average 9.9 % in federal income taxes. Those making $50,000 to $60,000 paid an average of 6.3 %.

The Tax Policy Center estimates that 46% of households, mostly low- and medium-income households, will pay no federal income taxes at all this year, although they will pay other taxes.

If Obama wants to make the federal tax code "fair", he's barking up the wrong tree. As shown above through hard numbers, the "rich" already pay more than their "fair share". Obama needs to go after those 46 % of the people who pay not a dime in federal income tax. Wouldn't "fairness" require that everyone pay at least something?

Sunday, September 18, 2011

The King's Speech

It’s déjà vu all over again.

President Obama recently gave his umpteenth speech about the bleak situation we have with jobs and the economy and what needs to be done to make things better. That’ll solve our economic problems – another speech.

The next day, the stock market dropped three hundred points.

Obama proposed his latest and greatest plan to fix the economy, and it was for more of the same: massive government spending, throwing money at his favored groups, demonizing “the rich”, repairing the infrastructure, touting “green jobs” as the savior of the economy, demanding that Congress pass his proposal immediately, blah, blah, blah.

You may have detected that I am more than a little skeptical, which I am, because we have been down this road before with Obama. I’m sure you all remember the last stimulus, in 2009. It was twice as big as this one; we were told at the time that it would revive the economy and keep unemployment under eight percent. We were also told back then that that stimulus, like this one, had to be passed immediately in order to avoid financial calamity. Now, two years later, unemployment is stuck at over nine percent, the economy has flat lined, the housing market is non-existent, and there is almost no good economic news. Everything that Obama and crew told us the last stimulus would prevent has happened! So why would anybody still listen to these people when it comes to the economy and jobs? They are obviously clueless.

I actually read in the paper after Obama’s speech that an economist at Moody’s Analytics said this latest stimulus plan would reduce the unemployment rate to, you guessed it, eight percent!!

Of late, Obama has developed a new concern for the federal budget deficit, or at least he wants us to think so. In his speech, he said that the new spending called for in his current plan will not increase the deficit because everything in his bill will be “paid for”. He didn’t tell us how it would be paid for, though; he promised to do that later.

You can’t make this stuff up.

No matter which way one looks at Obama’s new plan, you find absurdities. Let’s start on a broad, overall scale and then work our way down to some of the specifics.

OK, from the 30,000 foot level, as they say, let’s look at this plan. It’s another government stimulus, much like the last one, only this one is smaller by half. It’s about half as big as the 2009 stimulus, and that one, by any objective measure, was a total failure. Here’s the absurdity: If a big stimulus has already failed, why will a smaller one now work? The only logical argument one could make is that the last stimulus failed because it wasn’t big enough, so now we need a larger one. But a smaller one --- ? Absurd.

Let’s go on to some of the specifics of the new plan.

It calls for government spending to keep teachers, firemen, and police on the job. But why do we only want to keep these groups employed? With the jobs picture being as bleak as it is, we need to do something to increase job creation across the board; we need to get everyone back to work. We need to create economic conditions such that all companies, large and small, in every industry, in every location, will be able to expand and start hiring. It makes no economic sense whatsoever to restrict job creation efforts to just some segments of the work force.

Now let’s look at the proposed tax breaks in Obama’s plan for companies that hire or increase wages.

I worked in the corporate world for over thirty years as an engineer and manager at various levels up to vice president. During that time, I must have hired literally hundreds of people. Never, not once, did I or anyone I knew or observed ever hire somebody because of a tax break, nor would we have. That’s not why businesses and companies hire.

Hiring is a serious matter to companies. It involves taking on a significant new expense that will be there far into the future. Note: I’m not talking about temporary or seasonal help here. Companies are looking out into the future, not just the short term. They don’t like to have to lay people off, so they only hire when they are convinced that they can afford it in the long term and that the additional sales will be there to pay for it. Hiring is a business decision, not a public service matter.

People are hired because the company has more work than it can handle, or because the company is confident that additional business is coming, or because they see a new business opportunity, or they want to do a better job of servicing customers. Those are the reasons that companies hire, certainly not because of some one time tax break or other such gimmick.

People who think that such short term tweaking of tax provisions here and there will stimulate broad scale hiring and reduce unemployment in the long term have absolutely no knowledge of how the business world operates. In the real world, that kind of an approach is pure nonsense.

Then there is the part of Obama’s new plan about giving a tax break to companies that increase workers’ wages. This is so idiotic it defies belief. How could increasing wages possibly spur hiring? If anything, such an action would have the opposite effect, since the more a company pays existing employees, the less money it has to hire new ones. Furthermore, the tax break is a, again, one-time thing, but the increased wages are permanent, so no business will pay the slightest attention to this provision of Obama’s new plan.

Obama wants to, once again, extend unemployment benefits. Regardless of the merits of this proposal on humanitarian grounds, as far as job creation is concerned, it’s another absurdity. Paying people not to work for an even longer period of time will obviously not get them a job. Our goal in this area shouldn’t be to keep people on the unemployment roles for a long time; or goal should be to get them off of unemployment because they have gone back to work. The unemployed don’t need another government handout; they need a job. Extending unemployment benefits will not get them onto somebody’s payroll; if anything, it might discourage them from looking hard.

I have a suggestion for President Obama: If you want to stimulate the economy and job creation across the board, stop doing those things that stymie that. Mr. Obama, you’re part of the problem, and if you truly care about job creation, here are some things you could stop doing.

First, stop demonizing “the rich”. We continually hear you talking about how the rich don’t pay their fair share, that they are greedy, that they got where they are because they won life’s lottery rather than due to their own hard work, etc. Why would anybody, such as a sole proprietor or a small business, who can afford to hire someone actually do it when they feel they are being targeted by the government? So just stop it, Mr. Obama.

Next Mr. Obama, stop punishing companies that you regard as unworthy or that your political cronies don’t like.
Your National Labor Relations Board recently sued Boeing for moving a factory from a unionized state to a right-to-work state, which was displeasing to your union buddies.

Gibson Guitar was raided by the government because of some obscure law about wood that they import from India.
Coal users and producers have been on your hit list for years. You famously stated that you want to bankrupt the coal industry, because you think they are polluters. Your EPA recently issued new emission standards for coal-fired power plants, which will result in the closing of plants and the loss of jobs.

You apparently don’t like oil drillers, either, as you have stopped any new offshore oil exploration or drilling, loosing potentially tens of thousands of high paying jobs.

Mr. Obama, if you really care about jobs, just stop this jihad against companies and businesses.

Once you have stopped you job-killing behavior, Mr. Obama, here are two positive actions and one attitude adjustment you could undertake. These alone would have a game-changing effect on the U.S. economy and job creation.

Number 1. The U.S. has the highest corporate income tax rate in the world – 35%. Cut it. You could follow the example of Canada, and use their 16% rate. With this one action, you’d see so much increased business activity and the hiring that goes along with it that your head would swim.

Next, take a machete to onerous government regulations on business. A good start would be to cut the EPA staff by, say, half, and then go from there on a rampage through other government regulators. Companies would save millions, which they would be more than glad to use on business development. This, too, would promote economic expansion and job creation in a significant fashion.

Finally, Mr. Obama, have an epiphany. Start looking at companies and businesses of all sizes as the drivers of our economic prosperity that they are. Come to realize that the private economy, not government, creates wealth. Celebrate our free enterprise system and the magnificent benefits we all receive from it.

Monday, September 12, 2011

Big Education

Radford University (RU) raised tuition by 8% this year, after an 11.3% increase last year. That’s a 19.3% increase in just two years. Other Virginia colleges and universities have had similar tuition increases in recent years, as have colleges around the country. One year of a college education now typically costs between $20,000 and $50,000, which comes out to $80,000 to $200,000 for the four years it normally takes to graduate.

My entire undergraduate education at the University of Virginia cost me a total of about 12 or $13,000 (that’s for tuition, fees, room, food, books, everything). Now at UVA, it’s going to cost you $25,000 a year, at least. That’s a 669% increase (since 1969).

Here is a test: Why do we not hear politicians, newspapers, TV talking heads, pundits, and all the chattering class fulminating about “big education” and price gouging and demanding investigations, and all that?