The Largest Financial Scam in History

All the talk of Reagan's legacy along with the dire warnings that we need to make "cuts" in programs like Social Security have made it impossible for me to ignore this any longer. Those of us who have been paying into Social Security for the last 30 years have been ripped off. Or at least we will if some have their way....

A $2.5 Trillion Broken Promise?

We are the victims of the largest financial scam in history, "the Social Security Trust Fund," or as it's called by politicians who oppose Social Security "an accounting fiction." I support Social Security, so you might expect me to disagree with them, but look at it this way. If I lend someone money based on a promise to pay me back and then a week later, they call that promise "meaningless" I might start to suspect that they've just ripped me off, no? So we can agree to call the promise "meaningless" -- just with slightly different perspectives depending on which side of the promise we're on.

You see, if these assets are just an accounting fiction, then so is a portion of the money that came out of your paycheck for "Social Security" over the last 30 years. That's odd. It sure didn't feel like an "accounting fiction" when they were subtracting it from my paycheck or when I was paying even more as a self-employment tax.

"Social Security is a Ponzi Scheme"

The opponents of Social Security like to say that it's a Ponzi Scheme. It's not, exactly. Some just use the term loosely, but I prefer to use such specific terms correctly. A Ponzi Scheme claims to be an investment fund, but instead of investing the money, the steward just takes the money. If more people are joining the fund than leaving, those leaving can take their original money with "gains" that are actually only given to create an illusion of a fund that is earning money. Social Security, at it's core is not an investment fund. It's an insurance system. People pay premiums into the system, and if they reach the condition they are insuring for, they make claims and take the payout. As it was originally structured, the system did not hold on to a savings fund, it just payed claims from it's income.

But the system ran into trouble in the Reagan era, requiring changes in premiums, benefit levels, and/or benefit eligibility [e.g. retirement age]. Recognizing another such bump down the road, Greenspan and Reagan created a financial device to help prepare for it. They increased premiums in advance to "save" money for the future in the form of specialty treasure bonds designed just for this purpose.

You could say it that way. Or...

Or, you could say they thought it was a shame to have such a massive stream of money flowing through the system with no mechanism for the private sector to skim money off the top, so they engineered a way to steal trillions of dollars from it. Of course, those trillions weren't just stolen outright -- they went to pay for important government expenses, like no-bid contracts for Halliburton, or foreign aid to help other countries develop their own no-bid contracts for Halliburton. You could call it a Ponzi scheme speaking very loosely, but on the other hand, this money actually is held in treasury bonds, so the only real fraud is in on the part of those politicians who have no intention of letting those bonds be redeemed.

What Does It Even Mean to "Cut" Social Security

So Social Security is an insurance system that generally pays "claims" (aka benefits) with the "premiums" (aka taxes) it takes in for that specific purpose. They collect those taxes separately from the other taxes we pay, so you can see it for yourself! They keep their accounts separate, too. Now it also has a big pile of treasury bonds it's accumulated with the hope of cashing them in to pay benefits. So what does it mean to make "cuts" in the program? Reduce benefits? I suppose so, but obviously not below the amount that can be covered by incoming premiums, right? Well, the government has become accustomed to using the money it borrows from Social Security, so maybe they do mean that low. No. In theory, it could give higher benefits than are covered by incoming premiums since it has this $2.5 trillion in savings it collected from working baby boomers ... collected specifically to cover their benefits when they reached retirement ... as many now are. So what does it MEAN to "cut" Social Security?

"Cut" normally just means reducing the amount of money spent, but it's not so simple in this case. The system has always been self-sufficient, and in the last 30 years it's actually brought in more money than it spent. So what does it mean? In this case, "cut" means breaking the promise to allow social security to redeem those treasury bonds it holds as was the plan we were sold when we started issuing those bonds. In a sense it is a cut, but it' s not a cut from spending a certain amount on the program to spending less on it. Legally and financially, it's a "cut in spending" the same way it's a "cut in spending" for me to stop making the car payments I owe to the bank.

It Hasn't Happened Yet

In theory, this hypothetical largest financial scam in history hasn't actually happened yet. Congress has not formally voided those bonds, and the national debt still includes the money owed to Social Security. I will remind you again that that money was payed specifically TO Social Security, so it's not just an "opinion" that Social Security should get that money. Perhaps you are opposed to Social Security in principle. Suppose they created a separate tax specifically for a program you support, but then they borrowed some of that money for programs you don't support. Then suppose they decided they didn't need to pay that money back. It hasn't really happened yet. What has happened recently is that the Social Security taxes were reduced, moving up [to right about now] the date when the inevitable showdown occurs. So here it is. A showdown is over whether those bonds represent money that we really owe to Social Security or "just an accounting fiction" [aka a legally binding financial savings instrument] that we can void whenever we are ready to be "honest" [aka dishonest] about Social Security.

The optimist in me hopes that the left in Washington [who am I kidding, they are centrists at best] let the payroll tax come down last year so they could have this showdown in a more favorable political environment (such as shortly after Obama's re-election campaign or perhaps as a campaign talking point). If this country slips much further into this dumbed-down far-right reactionary stupor, they will not only get enough people to enthusiastically support the elimination of Social Security, they will get away with it. And hardly anyone will have noticed the largest financial scam in history.