Are You Getting Ripped by Social Security?

What if all the money you have paid in Social Security taxes had been invested instead in a Standard and Poor's 500 index fund (such as the Vanguard index fund VFAIX or the Fidelity index fund FUSVX)?

How much money would you have had in retirement each year from age 66 through age 90?  How much will you get from Social Security instead?

To explore the answers to these questions, click this link.  I think you will be stunned how badly you will do with Social Security, compared to earnings from a broadly diversified portfolio like a Standard and Poor's 500 index fund.

The average annual rate of return on the Standard and Poor's 500 has been a bit higher than 9 percent over the span from 1871 to 2005.  Check it out here. 

Social Security is far worse than a Ponzi scheme.  At least with a Ponzi scheme, like the one Bernie Madoff ran for several years, some of the investors get good returns on their money.  Social Security is an equal opportunity rip off; no one gets a good return on investment.

It would be one thing if people had a choice about paying the Social Security tax.  Compulsory payment of the tax is simply socialized theft.

When the next federal election rolls around, just remember that any politician --- presidential or otherwise --- who supports the Social Security program is sanctioning the rip off that the calculator included in this post demonstrates.

Here's the deal:  you pay 12.4 percent of your income in a mandatory tax.  But when you start drawing social security benefits, you get anywhere from $15,000 to $35,000 per year --- instead of the $110,000 to $185,000 per year you could have enjoyed from a conservatively invested portfolio of stocks and bonds!

Don't take my word for it.  Play around with the Social Security calculator included in this post.  Do the math yourself.  We the People are getting hosed.

Is Social Security A Ponzi Scheme---Redux

More on Social Security and Mr. Ponzi here.

Something for nothing.  Sure.  Of course. 

Is Social Security A Ponzi Scheme

Is the Pope Catholic? 

Read here an interesting article that explains just why Texas Governor Rick Perry is correct.

Read here why Social Security is immoral.

Tell Us What You Would Do

Suppose, either by fabulous good luck or your own hard work and merit, you were the proud owner of $100 million in cold, hard cash; suppose you have that cash in a bank account at Bank of America, just to be concrete.

What would you do with that $100 million?  Would you start a new business to create new jobs?  Would you expand the business that you already own to create new jobs?  Would you hire back folks you laid off during the Great Recession?  What would you do; I mean, really?

Did BHO say anything last night in his address to a joint session of Congress that would give you confidence to start a new business and hire employees?  Did BHO say anything last night that would overcome the morass and tangle of regulations and taxes that you would face if you did start a new business?  Did BHO say anything at all last night that would lead you to want to expand your business?

I didn't think so either.

Just to be clear, it is the creation of new businesses or the expansion of existing ones that could increase employment and reduce unemployment.  New government jobs don't count, by the way.  Government jobs have to paid for by sucking more resources out of the private sector by force.


It seems quite unlikely that Congress will pass legislation called for in high rhetoric by BHO last night.  Next year, when the economy is still languishing with high unemployment, BHO will claim that the reason for our economic malaise is that Congress didn't do what he asked for in is "Jobs" speech.  Sadly enough, lots of people will buy that miserable claim and vote for BHO again.  Simply amazing.

Why Is the Economy Languishing Still?

Here, Robert P. Murphy, my favorite Austrian economist, explains why the economy continues to languish. I will add to Murphy's wonderful thought experiment of the gnomes with just a couple of additional ideas that I think Mr. Murphy might agree with.  But first, a little foundation.

A recession is a contraction of the rate of production of real goods and services.  To be called a recession, the contraction must go on long enough for the National Bureau of Economic Research to believe it is a sustained contraction.  By tradition, the NBER declares when recessions begin and end.

We measure production of real goods and services as the total dollar value of all final goods and services produced each year, otherwise known as GDP (Gross Domestic Product). These days, GDP for the United States is somewhere in the neighborhood of $15 trillion per year.

That's a lot of stuff.   That's enough stuff produced each year for every one of the 82 million families in the United States to have nearly $183,000 worth of stuff, if it were all distributed evenly.  Now that's a really, really large economy.  Contrary to what you may have heard, the United States still has the world's largest economy in total dollars by a substantial margin.  You can see the data on that here.   

GDP in the United States usually grows each year.  In fact, over the past 100 years or so, it has grown about 2% per year.  Even though media pundits and politicians might poo poo 2% growth per year, it's not chump change. Two percent of $15 trillion is $300 billion!  That's enough for each of the 82 million families in America to enjoy $3,600 more income per year.  That's why a growing economy is good and a shrinking economy is bad.

The Great Recession ended.  Our economy is growing again, just not very fast.  But even more important for several million people who are out of a paid job, lots of businesses are not hiring back people they laid of during the recession of 2008 and 2009.  Businesses are also not creating new jobs fast enough to keep up with normal population growth.

In earlier posts to EconoBlast, I offered up reasons for the continuing high unemployment rate and lack of new job creation.  You can read one of those earlier posts here.  The hard truth is that most of the people who have not been rehired to do jobs they were doing before the Great Recession will never be rehired to do those jobs. 

That message is not a comforting message, and certainly not a message politicians can deliver.  But comforting or not, politically expedient or not, the message is true.  America has developed a profound mismatch between skills and abilities businesses are willing and able to pay for, compared to the skills and abilities several million unemployed people have to offer.

How that mismatch came about is debatable.  My own perspective is that government intervention in markets of all kinds are the fundamental cause of the mismatch.  The housing debacle/bubble/crisis/etc. provides an excellent example.

Without the intervention of the federal government in mortgage markets, the proximate cause of the Great Recession would not have happened.  EconoBlast and many others have chronicled well the roles of Congress, the Fed, and financial regulators that brought about the housing bubble and its attendant mis-allocation of capital in the economy.

An important effect of misallocating capital is the attendant misallocation of labor skills and ability, which ends up in a long-run mismatch for part of the labor force.

For example, people who became skilled and able in building houses, financing houses, selling houses, insuring houses, inspecting houses, and so on, are now the proud owners of skills and abilities that businesses are unwilling and unable to hire.

It's as if the gnomes in Robert Murphy's thought experiment scattered a substantial part of the capital and labor in our economy in disparate places.  But it's actually more profound.  No one can simply move the capital and labor around to get things right again.

If you're expecting BHO to reveal this evening, when he addresses a joint session of Congress, compelling, useful, and novel ideas for getting new job creation underway in America your expectations will not be met.

Nothing the President will propose can overcome the mismatched skills and abilities of the labor force that have been induced by decades of laws, regulations, and tax incentives that got us where we are today.  It isn't about stimulating the economy.  It isn't about fiscal policy.  It isn't about monetary policy.  It's about the willingness and ability of businesses to hire labor they can't use.

Is there then no hope?  We can hope that those who would tell us what to do, when to do it, how to do it and what report to file about it will cease and desist.  We can hope that those who would take our income to give to someone else will stop.  We can hope that American citizens will return to a deep belief in being responsible for their own lives, abandoning the nanny state.

We can hope. 

Waffle House, Free Markes, and Government

Here, Doug French offers up a fascinating contrast between government solutions and free market solutions.

It's really all about human nature and incentives.  Voluntary exchange leads people to serve each other out of self interest.  Adam Smith writing in Wealth of Nations,  and   Bernard Mandeville wrting in Fable of the Bees even earlier explained it long ago.

It's simple, really.  I can't get what I want unless I figure out a way to give you what you want in return --- that is, unless I am able and willing to coerce you.  Government is more than happy to coerce us.  Sadly enough, government is also ever more empowered to coerce us day by day.

Raising the federal debt ceiling a few days further empowered the federal government to coerce you.  It did so by ensuring that the 545 could continue paying for the ability to coerce you, whether you agreed to give them additional taxes or not.

I know, that last paragraph was something of a non sequitur, but I mentioned the debt ceiling to demonstrate how it is that government is able to compel us. 

If  Waffle House doesn't offer people what they want, people can walk away.  If government doesn't offer us what we want, we are told to vote for someone else in the next election.  What a deal!  How has that voting thing been working out for you?

I like the opportunity to vote for or against Waffle House with my dollars day by day.  How about you?

Repudiate Federal Debt? What An Idea

Here, P F Cwik provides a really interesting perspective on what to do about U.S. Treasury debt.  Repudiate it!

What would happen if the Congress did repudiate all or part of outstanding U.S. Treasury debt?  Scratch your head for minute, think hard, then think some more.

First, by repudiating federal debt, Congress would be imposing an ex post tax on whoever holds the debt repudiated.  So, who is holding all that $14.3 trillion in federal debt these days?  A bit of information about that can be found here, but if you're expecting names, forget about it.

Through March 2011, we find that of the $14.270 trillion in outstanding federal debt, ownership of the securities was distributed as follows:

Federal Reserve Banks  --- $1.4 trillion
Federal Agencies ----------- $4.6 trillion
Foreigners ------------------- $4.5 trillion
Private Americans---------- $4.4 trillion
            Total -----------------$14.3 trillion or thereabouts

Every bit of the debt held by the Fed could be repudiated without removing a dime from any American citizen's pocket.  That part of the debt is utterly monetized.

Federal agencies that hold U.S. Treasury debt include the Social Security Trust Fund, the Medicare Trust Fund, the Federal Employees Retirement System, and so on.  Repudiation of this category of federal debt would mean that Congress would have to tax all citizens to pay future dollar benefits promised by these agencies, or that promised beneficiaries of future dollar benefits would get stiffed, thereby bearing the tax that federal debt repudiation would impose.

You can bet that Congress would never ever,  even in its wildest moment of recognition of stark reality, repudiate that portion of federal debt held by government agencies like the Social Security Trust Fund.  I don't have to tell you why; you already know why.

If Congress repudiated the portion of debt held by foreigners, be they individuals, businesses, or sovereign accounts, Congress would be imposing a tax on foreigners.  It's not hard to see that repudiation of foreign-held U.S. Treasury debt would have immediate and resounding consequences.

Central banks all around the globe hold substantial amounts of U.S. Treasury debt, which is an interest paying substitute for holding actual U.S. dollars.  Central banks around the world hold either U.S. Treasuries or U.S. dollars in substantial quantities, because the U.S. dollar is the world's reserve currency.  Central banks use a reserve currency to settle international currency exchange.

Currency exchange is critically important to international trade and capital flows.  If Congress repudiated federal debt held by foreigners, the U.S. dollar would immediately NOT be the world's reserve currency going forward.  Whether loss of the U.S. dollar continuing as the world's reserve currency would be a good thing, a bad thing, or an indifferent thing depends on so many factors, it's really hard to make any overarching summary statements about it.

The fact that the U.S. dollar is the world's reserve currency gives American kings and king makers considerable power and leverage around the world, since only the Federal Reserve can manufacture U.S. dollars, and since the Fed is controlled ultimately by America's kings and king makers.

If Congress repudiated that portion of federal debt held by ordinary U.S. citizens and businesses, Congress would be imposing a tax directly on those citizens and the owners of businesses that hold U.S. Treasuries.

This much can be said; if Congress repudiated part or all of the U.S. Treasury's debt, Congress would be imposing a tax on very identifiable individuals.  That's precisely why it seems unlikely that debt repudiation will occur.  Money creation is a much safer way for Congress, in concert with the Fed, to reduce the federal debt.  Inflation, and depreciation of the U.S. dollar around the world, quite effectively reduces the real burden of American federal debt.

A second, highly predictable consequence of federal debt repudiation would be an immediate unwillingness of people, sovereign states, central banks, and businesses to purchase U.S. Treasuries at current prices.  That is not to say that the Treasury could not sell additional debt.  It could, but the yield to maturity on that debt would likely be rather high --- perhaps somewhere around the level of credit card interest rates for college students in their early 20s.

The market rate of interest that federal debt would have to carry to be sold following debt repudiation cannot be predicted accurately, but we can be sure it would be much higher than it is today.  Yet, a dramatic increase in the price of using other people's money (i.e.,  Treasury interest rates or yields) would not be a bad thing, although it is certain that the 545 and the mainstream media would decry rising Treasury rates in loud voices.

Some weeks ago, I wrote in EconoBlast a solution to the federal debt issue.  You can read it here if you're interested.  Nothing important about the issue of federal debt has changed in the ensuing weeks of political gum flapping by members of Congress and the President about raising the debt ceiling.

Until Congress has a definite, unavoidable budget constraint --- just like you and I have --- federal spending will continue rise, both absolutely and perhaps as a percentage of GDP.  Why do we keep reelecting the  members of the 545 who keep increasing federal spending?  You will have to look into your own mind to answer that question. 

Obama's Lips Are Moving, Which Means ...

Last night in prime time, BHO used the bully pulpit, hoping to persuade millions of Americans that Congress must raise the federal debt ceiling to keep the U.S. Treasury from defaulting on debt already incurred.

The President also says taxes must be raised, but just for the"wealthiest Americans," the "biggest corporations," "corporate jet owners," and of course, "oil companies." 

The President began by saying,

"For the last decade, we have spent more money than we take in."

This much of what the President had to say is true, without a doubt.  Sadly enough, the same cannot be said for much else in the President's speech.
 
He went on to say,

"In the past, raising the debt ceiling was routine. Since the 1950s, Congress has always passed it, and every President has signed it. President Reagan did it 18 times. George W. Bush did it 7 times. And we have to do it by next Tuesday, August 2nd, or else we won’t be able to pay all of our bills."

Yet, in the same speech, Obama said,

"But if we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy. More of our tax dollars will go toward paying off the interest on our loans. Businesses will be less likely to open up shop and hire workers in a country that can’t balance its books. Interest rates could climb for everyone who borrows money – the homeowner with a mortgage, the student with a college loan, the corner store that wants to expand. And we won’t have enough money to make job-creating investments in things like education and infrastructure, or pay for vital programs like Medicare and Medicaid."

So, let me see if I have this right.  The President argues that Congress has been irresponsible for decades by financing federal spending with ever rising Treasury debt.  He then argues that if Congress continues to "spend more money than we take in," as he puts it, we face dire consequences that are ruinous for Americans and our economy.

Unless the rules of logic and rational thought have changed, the President's own arguments would add up to pleading that Congress NOT raise the debt ceiling, wouldn't they?  But that's not what BHO is asking Congress to do.  He is asking them to both raise the debt ceiling substantially and raise taxes, too.  He calls it a "balanced" approach.  His lips are moving, which means ...  

The President says,

"Keep in mind that under a balanced approach, the 98% of Americans who make under $250,000 would see no tax increases at all."

Either the President doesn't understand basic arithmetic, or he's lying knowingly.  The federal deficit cannot be closed, and certainly the federal debt cannot be paid down just by raising taxes on households that earn more than $250,000 per year.  Which is it?  Is he really that ignorant of math and the financial facts, or is he lying?  You decide.

The House already passed a bill that called for cutting federal spending, capping federal spending, and requiring a balanced federal budget going forward.  Obama, Harry Reid, and the Democrat controlled Senate rejected the bill out of hand.  Read about it here.  

If Obama is serious about reducing the federal deficit and paying down the federal debt, he would not reject the cut, cap, and balance bill already passed by the House.  Obama knows completely and absolutely that every dollar of tax revenue ever collected by the federal government has always been spent and will always be spent.  

Raising taxes will not reduce the annual deficit and will certainly not pay down existing federal debt, regardless of whether taxes are raised only for the wealthy or for all Americans.  Increased tax revenues will simply be spent by Congress, and the deficit will expand, nonetheless.  Thus it has always been. What would change that historical fact from being repeated now, unless the cut, cap, and balance bill passed by Congress becomes law? 

Put aside that BHO insulted you and most Americans by saying,

"Now, what makes today’s stalemate so dangerous is that it has been tied to something known as the debt ceiling – a term that most people outside of Washington have probably never heard of before."

I think pretty much all of us have heard of the "debt ceiling" before, Mr. President.

Obama also insults We the People by outright lying (or is it just ignorance) when he said,

"Understand – raising the debt ceiling does not allow Congress to spend more money. It simply gives our country the ability to pay the bills that Congress has already racked up"

The federal debt ceiling need not be raised one penny to pay for debts already incurred, or to pay for "bills that Congress has already racked up."  EconoBlast and others have explained that patiently and completely here.   Raising the debt ceiling serves only one purpose; that would be raising federal spending.  His lips are moving, which means ...


The President also noted,

"Republican House members have essentially said that the only way they’ll vote to prevent America’s first-ever default is if the rest of us agree to their deep, spending cuts-only approach."

Either the President needs to read more himself, or he needs to hire better advisors who read more history.  Even if the U.S. Treasury were to default on August 3rd, it would certainly not be the "first-ever" default.  Read about the truth here. Is he ignorant, or is he lying?

If he can't persuade Americans with logical reason, Obama resorts to scare tactics by making statements he knows are simply not true.  He says,

"If that happens (the debt ceiling is not raised before August 2nd), and we default, we would not have enough money to pay all of our bills – bills that include monthly Social Security checks, veterans’ benefits, and the government contracts we’ve signed with thousands of businesses."

What's actually true is that if Congress does not raise the debt ceiling, Congress will definitely have to decrease federal spending or raise taxes.  I repeat, raising the debt ceiling serves only one purpose --- enabling increased federal spending.

Obama said,

"For the first time in history, our country’s Triple A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet. Interest rates would skyrocket on credit cards, mortgages, and car loans, which amounts to a huge tax hike on the American people. We would risk sparking a deep economic crisis – one caused almost entirely by Washington."

Given the federal debt ($14.2 trillion and rising as I write) and the enormous unfunded future liability imposed by entitlements Congress has already legislated (Social Security, Medicare, Medicaid, and now Obamacare), America's credit rating should definitely not be AAA.  That's water under the bridge, though, not a prospect looming from not raising the federal debt ceiling.  Obama finally does say something that's true; the deep economic crisis has been "caused almost entirely by Washington."

 
Obama said last night,

"We know what we have to do to reduce our deficits; there’s no point in putting the economy at risk by kicking the can further down the road."

So, his conclusion is to ask Congress to raise the federal debt ceiling?  Incredible. 

Several weeks ago I wrote here in EconoBlast what to do about the federal deficit and federal debt.  The House-passed cut, cap, and balance act may not have been perfect, but the basic idea was certainly on target.  Obama, Reid, and the Democrat led Senate rejected the bill without consideration.

The President made his speech.  His lips moved, which means ...      You fill in the rest.

Can We Borrow Our Way Out of this Mess?

In a word, no.  But we can rip people off and otherwise hose'em by raising the debt limit.  Congress has been doing it for decades, as the article you'll find here explains.

The lies and distortions are heating up.  BHO is walking out of meetings.  The political breed is in dire straits with lots of eyes focused on them.  And in the end, it's so ridiculously simple.  I've said it so many times in this blog that I'm embarrassed to repeat it yet again, but repeat it I must.

You can't borrow what hasn't already been produced and saved.

So, when Congress raises the debt ceiling --- which it certainly will --- the Ponzi scheme will simply continue.  We the people will sigh with great relief, and we'll pass the old maid on, just like the Congress has done on several occasions in the past, as explained here.

What really happens when Congress raises the federal debt ceiling?  The answer is that somebody gets taxed, but just who that is becomes utterly obscured.  Just as Ben Franklin noted, default on debt is a tax.  But in less complicated times, it was clear who was getting taxed by the default on federal debt.

These days, the Fed will just manufacture new money to keep the Treasury from defaulting, as explained here.  Who will bear that tax?  No one can really say.  That's the great beauty of it, if you happen to be of the political breed.

If we the people keep voting for politicians that are wiling to raise the federal debt limit to fraudulently finance government spending, we deserve what we will eventually get.  Why is Greece coming to mind?

Raising the federal debt limit is defaulting on the outstanding debt; it's just that the burden of the default falls on people other than those who originally bought the U.S. Treasuries.  How's that, you say?

All the Fed has to do is purchase new U.S. Treasuries to roll over old Treasuries coming due.  No need to raise the debt ceiling for the Fed to do that.  But where will the Fed get the money to do that?  You already know; they Fed will simply manufacture the new money.  Of course, it isn't actually necessary to "print" the new money these days, but new money it will be.

So, even if investors around the globe are unwilling to buy U.S. Treasuries, the Fed can and will (to keep interest rates from rising through the roof).  The Treasury will continue to spend money it didn't tax away from Americans directly.  So who will bear the burden of this sort of under the table taxation?  You can't really say.  That's the beauty of it, just as I already noted.

Let me sum it all up:

1.  Congress will raise the federal debt limit, regardless of how long it takes to work out the political deal to keep all the right people from having too much loss of face.

2.  When Congress does raise the debt limit, that is equivalent to defaulting on previous debt, since interest payments on outstanding debt and new Treasuries sold to roll over previous debt will be financed with new money created by the Fed.

3.  Creating new money depreciates the purchasing power of existing money; that's why the dollar price of gold keeps rising.

4.  Somebody will bear the burden of the Ponzi scheme; just who can't be known for sure, but you can pretty much bet it won't be the kings or the king makers.

Bernie Madoff went to prison for his Ponzi scheme.  Our local politician just get reelected for theirs.  Everyone knows what's going on, so why does it continue?  I can think of no explanations that are particularly charitable for we the people. 

 

GM: The Bailout Worked, Right?

Wrong.  Read here a sober account of the bailout from Daniel J. Ikenson, unadorned by the Polly Anna, government-will-save-us philosophy of the progressive crowd and the current administration.

Frederic Bastiat taught us in the 19th Century that all forms of protectionism and government subsidy are nothing more than special pleading of the few to gain advantage over the many.  Bastiate showed us the absurdity of the facade of saving jobs more than 100 years ago.

Yes, the GM bailout saved jobs for some.  That's the part that is seen. That's the benefit side of the equation.  What is not seen is the cost side. Read Bastiat's "The Candlemakers' Petition" here for a classic parody of the bailout crowd.