YES, VIRGINIA, IT REALLY IS A PONZI SCHEME

In a few years — sigh — I’ll be eligible for Social Security.  But Social Security could be broke before I receive any benefits.

The Social Security Trust Fund will be in the red by 2014, and by 2036 will be unable to pay all the benefits promised, Social Security’s trustees said in their annual report.

It’s worse than that, because there is no money in the Social Security Trust Fund.  The $2.6 trillion collected in payroll taxes since 1937 long since has been spent.

What there is in the Social Security Trust Fund are IOUs from the Treasury department, IOUs Treasury can’t possibly make good, because federal spending vastly exceeds all other tax revenues.  The Social Security Trust Fund is an accounting fiction.

This means that if Social Security isn’t put on a sound financial footing pronto, benefits will have to be cut a lot sooner than 2036.

How did we get into this mess?  And how do we get out of it?

In theory, our benefits are based on what we pay in payroll taxes.  In reality, benefits are paid by the taxes of those who are still working.  In the private sector, a plan in which initial investors are paid with funds from subsequent investors is called a Ponzi scheme.  As Texas Gov. Rick Perry has noted, Ponzi schemes are illegal, except for politicians.

Ponzi schemes fall apart when fewer suckers invest.  Something similar has happened in Social Security.  In 1940, there were 42 workers for each retiree.  Today, there are fewer than three.

This is partly because fewer people are entering the work force, more because people collect benefits for a lot longer.  When Social Security was created in 1935, average life expectancy was 61 years.  Today, it’s nearly 79 years.

This statistic overstates the problem, because back then more people died in infancy and childhood.  Life expectancy for those who’ve reached age 65 has increased by a little more than five years since 1940.

But that statistic understates the problem, because in 1940 only about 57 percent of Americans lived until age 65.  Today, about 78 percent do.

Demographic bulges and busts wouldn’t matter much if each of us had our own Social Security account, and our benefits were in fact based on what we contributed to it.  But then politicians couldn’t take our money and spend it on other things.

Benefits have increased a lot over the years, and have been extended to people who didn’t pay into the system.

But for many, Social Security taxes have gone up faster.  In 1937, the payroll tax was 2 percent, –1 percent paid by the worker and 1 percent by his or her employer — and was applied to just the first $3,000 of earnings.  Today the payroll tax is 12.4 percent, and it’s applied to incomes up to $106,800.

The rate of return most of us receive on what we pay into Social Security is frightfully low.  The Federal Reserve Bank of San Francisco estimated in 1999 that low paid workers get a 4-5 percent rate of return; middle income workers 1-2 percent, and high income workers — if they were born after 1975 — will get back less in benefits than they paid in taxes.

If your Social Security taxes had been invested in the stock market between 1945 and 1989, you’d have gotten a rate of return of 13.57 percent, the Cato Institute estimated.  Long term corporate bonds paid 5.42 percent during this period. Treasury bills paid 4.74 percent.

Because the SS trust fund is just an accounting gimmick, when — in 2014 or sooner — payouts for benefits exceed payroll tax revenues, Social Security will become a big contributor to our mammoth national debt.

Raising the payroll tax would hurt more than help.  It’s already a major barrier to job creation, and without more jobs, Social Security can never be put on a sound financial footing.

Two things could.  We could means test for benefits.  Some conservatives object to this, on the grounds it would convert Social Security into a welfare program, but that ship sailed a long time ago.

More important would be to raise, gradually, the retirement age to 70, to match the gain in life expectancy for those who’ve reached age 65.  This can be done without affecting those currently receiving benefits, or within five years of eligibility.

The kids would get screwed, again.  The kids always get screwed, because geezers vote, and they mostly don’t, and the geezer population is growing faster.

The kids expect to get screwed.  Polls indicate most don’t think Social Security will be there when it’s time for them to retire.  But if we make these reforms, maybe it would be.

And even better would be if Rick Perry’s advocating Skye’s solution:  pay off the Ponzi scheme victims by selling the scheme’s assets, namely the 650 million acres of federal land (30% of the US) in scheduled tranches.  That’s what the judge is doing with Bernie Madoff’s assets, right?

Jack Kelly is a former Marine and Green Beret and a former deputy assistant secretary of the Air Force in the Reagan administration. He is national security writer for the Pittsburgh Post-Gazette.