The future of the Social Security system is a problem that requires a short term and long term fix.
Social Security has always been a Ponzi Scheme. “”a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.””
The demographics made it work since it was put in place since 1935. In 1950 there were 17 workers per retiree, in 1960 there were 5.1, in 2009 there were 3, in 2030 there are expected to be 2.2 workers per retiree. Our lives are getting longer and we are having fewer babies.
Money coming into the system from your FICA taxes exceeded benefits paid until 2010. This excess money was “invested” in the Social Security Trust Funds (the non-existent enterprise of a Ponzi scheme) whose only asset was “securities” (debt) guaranteed by the US Government. The SS Trust Funds are now owed $2.8 Trillion by the US Government, us. So, Social Security is owed $2.8 Trillion by an enterprise that is about $19 Trillion in debt. There was never a “Lock Box” for Social Security Funds and cannot be as long as the only asset of the Funds is US Government debt.
Now payments of SS benefits, that exceed income from FICA taxes, come from the Trust Funds. So the Government borrows money to pay the Trust Funds. They are a direct expense of the Federal Government general fund, our other Federal Taxes.
Current income into the SS funds must be increased or we are passing the burden of our retirement on to our fewer and fewer children. At some point they will resist politically.
SHORT TERM FIX
One of the reasons our economy has outperformed other developed countries until recently is the ease of changing a business’s workforce as conditions changed. Our businesses have no mandatory long term commitment to employees as they have by law in most of Europe and Japan. Pension plans are becoming a thing of the past as most companies shifted from defined benefit pension plans to 401K plans. A very large portion of the workforce does not have wages that allow significant contributions to 401K plans. The economic benefit of this workforce mobility helps us all. The price for this mobility is a National base retirement plan, Social Security. It should be funded in a manner that does not place a burden on our children, meaning we should pay for it as we go. We must increase income into the SS system to match benefit payments rather than let SS be a drain on the general fund. Currently FICA taxes are paid only on the first $118,500 of income. I would support lifting the income cap as required so that the SS system income matches the benefit payments.
LONG TERM FIX
Both George HW Bush and George W Bush are fine men. You could not ask for a better friend or neighbor. Unfortunately, they often had half of a good idea.
George W Bush’s idea to partially privatize Social Security was half of a good idea, but it does not work without the other half. The idea was to increase people’s retirement income over a base provided by Social Security by allowing them to invest part of their Social Security taxes in private investments – meaning the stock market. The stock market is being run like a Casino for the benefit of the insiders, benefits to the investors is a second priority. With the huge swings in value, the stock market cannot be the store of wealth for people whose assets are not sufficient to ride out the swings. For the insiders, the swings just make them richer, buying low and selling high.
We need to reign in the stock market, reducing volatility, to make it a reliable store of value for the small investor rather than a money machine for insiders. The stock market should be run for a simple clear purpose – To provide a market for businesses to raise capital, share risk and to share profits. Rules and procedures and mentality should discourage short term speculation. Trading based on insider information, should be more vigorously pursued.
Our stock market is the most popular in the world because it is very large and liquid and fairly honest compared to the rest. We need to make it much more honest before we can think about transitioning our retirement funds into personal investments.
The long term fix is to recognize the need for our retirement funds to be invested in real assets rather than government debt and to make a long term plan to transition to retirement funds being invested in a large, liquid store of value, the Stock Market.
I am for a gradual transition, over 10 to 20 years, to personal retirement accounts, ONLY AFTER THE STOCK MARKET HAS BEEN REFORMED. The retirement accounts would have limited discretion on the part of the individual. Choices would be limited to apportioning retirement funds between several diversified bundles of stocks.
The Stock market is the only “store of value” large enough and liquid enough to be used for our retirement funds, but it is being run like a casino. How is it rigged for the insiders? In addition to the ever popular insider trading, here are a few items:
- Program trading, where algorithms predict small price increases due to market trends and trade stocks by the millions of shares automatically holding the shares for seconds.
- Automatic front running. A trading organization sees a buy order for a large block of stocks, then due to it’s faster access to trading exchanges, buys the stock, raises the price and sells the stock to fulfill the order, all this in nanoseconds. This is legal but clearly unethical, taking advantage of being in a position to know of orders and having a faster connection to the exchange. This practice shows the mentality of the insiders in the stock exchange. Cheating is accepted.
- Trading derivatives and other poorly understood financial engineering products enriches a few and put many at risk they don’t know about. Dishonest trading of derivatives on home mortgages are basically what caused the stock market crash of 2008.
- Blatant stock price manipulation by insiders, such as Jim Cramer who on TV bragged about manipulating stock prices as a hedge fund manager. He said everybody does it and the SEC is too stupid to catch them.
HOW DO YOU FIX THE STOCK MARKET?
Make punishment for securities related crimes serious. No more huge cash settlements without admission of guilt. What we are talking about is theft by violations of trust by organizations whose chief asset is the trust of it’s customers. The remedy for this violation of trust is huge cash settlements, jailing of executives involved, disbanding the company and excommunication of all executives and traders involved in the dishonest activity. No more employment for them in the stock exchanges and kick them out of the revolving door between the stock exchanges, investment banks and the Securities and Exchange Commission. This is a people problem, a mentality problem at it’s root.
Make tax laws on securities trades that discourage short term speculation and insider trading. This would also eliminate program trading. Tax profits on trades depending upon how long the positions are held. Profit on any position held for less than 1 day should be taxed at 99%. Profit on any position held for less than 1 week should be taxed at 90%. Profit on any position held for less than 30 days should be 50%. Profit on any position held for 30 days or more should be taxed at 0%. If you are making money on positions held for less than 30 days then it is quite likely due to insider trading.
Make Automatic front running due to technical means, described above, illegal.
Make rules to eliminate most of the new products created by Financial Engineering. Go back to the KISS principal on what is a “security” – Keep It Simple, Stupid.
Use technical means, algorithms, to sweep stock market trading looking for patterns to detect market manipulation like Cramer’s.
This is an incomplete prescription for a solution to the problem, but you should be able to see where my head is at on this subject.
HOW WOULD YOU KEEP THE STOCK MARKET FIXED?
Immediately change the entire Pension Plan for Congress and the SEC to a 401k invested in a limited number of diversified bundles of stocks. That would make them interested in keeping the stock market honest and not too volatile.
Remove the revolving door between Wall Street and the Federal agencies regulating banking and the stock market. Pay the regulators very well and have bonuses dependent on fines their actions initiated.
Forbes Article on the topic. –“Why was Social Security Designed Like a Ponzi Scheme”. Describes the political reality and gives examples across the world.