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Townhall...
Ponzi Schemes
By John C. Goodman
Jack Lew is lucky he isn’t in prison. Were he representing a private
pension fund and if he made the sort of statements he made in USA Today
the other day, he might well be sharing a cell with Bernie Madoff.
So who is Jack Lew? And what did he say?
Lew is the Director of the federal Office of Management and Budget.
About Social Security, he wrote: “Taxes are placed in a trust fund
dedicated to paying benefits owed to current and future beneficiaries.
When more taxes are collected than are needed to pay benefits, funds
are converted to Treasury bonds — backed with the full faith and credit
of the U.S. government.” As a result of these investments, the Social
Security trust fund will be able “to pay full benefits for the next 26
years.” Not only is this preposterous, Charles Krauthammer called it a
“breathtaking fraud.”
Before dissecting Lew, let’s consider why Bernie Madoff is in the
hoosegow. Madoff told investors he was investing their funds in real
assets, when in fact he was not. He secretly used their funds for
personal consumption and to pay off other investors. Either
figuratively or imaginatively, Madoff wrote IOUs to himself, all backed
by the full faith and credit of Bernie Madoff. Maybe in the beginning
he fully intended to pay off. But that’s beside the point. Inducing
people to give you money with this sort of lie is criminal fraud. It’s
against the law.
Like most government-sponsored retirement programs in the world today,
our Social Security system is pay-as-you-go. All payroll tax revenues
are spent — the very minute, the very hour, the very day they are
received by the U.S. Treasury. Most of these revenues are spent on
benefits for current retirees. Any additional amount is spent in other
ways.
But there is no funding of future benefits. No money is being stashed
away in bank vaults. No investments are made in real assets.
Most pay-as-you-go systems do not have trust funds, since there are no
investments for the trust funds to make. In the U.S., we have trust
funds — but they serve an accounting function, not a financial
function. For example, the trust funds do not collect taxes. Nor do
they disburse benefits. Every payroll tax check sent to Washington is
written to the U.S. Treasury. Every Social Security benefit check is
written on the U.S. Treasury.
The trust funds do not buy bonds. That’s because they do not buy
anything. But they do create special pieces of paper which are misnamed
“government bonds.” They are misnamed because — unlike other bonds —
these bonds were never bought or sold. They are literally IOUs the
government writes to itself. For Social Security, they are created on a
typewriter. For Medicare, they are created electronically.
Technically, the trust fund bonds represent the cumulative surplus
(payroll tax collections minus benefit payments). But these bonds are
only important for accounting purposes. They are like bookkeeping
entries, without any market value. The annual reports of the Social
Security trustees list the yields and maturity dates of these bonds.
But the special-issue bonds are not the same as the bonds held by the
public. They are not part of the official outstanding debt of the U.S.
government. They cannot be sold on Wall Street or to any foreign
investors. And they cannot be used to pay benefits.
The technical issuer of the bonds (the U.S. Treasury) and the holder of
the bonds (the Social Security trust fund) are both agencies of the
U.S. government. Moreover every asset of the trust fund is a liability
of the Treasury. Summing over both government agencies, the balance is
zero.
For Social Security, the trust fund’s special issue bonds are paper
certificates held in government filing cabinets in Parkersburg, W.Va.
If a fire were to burn down the building tomorrow, or if thieves were
to take the filing cabinets away, there would be no harmful
consequences for retirees. Similarly, if the trust funds themselves
were simply abolished, real economic activity would be unaffected. The
government would not be relieved of any of its existing obligations or
commitments. Or, as the late economist Robert Eisner suggested — with
the stroke of a pen, we could double or even triple the number of IOUs
the trust fund holds. Eisner’s idea would allow us to dispense with
artificial crises (“trust fund running out of money!!”) and address the
real problem: How is the Treasury going to pay the government’s bills?
Read it at Townhall
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