How to Destroy a Ponzi Scheme: Obamanomics

by: John Gray

Social Security is a Ponzi scheme. I’m not suggesting whether that’s wrong or right — I’m just stating the facts. It is a system championed by government, yet outlawed elsewhere. You get elected to Congress by protecting government Social Security and get sent to prison for running your own private Ponzi scheme. Ever heard of Bernie Madoff? He’s in prison for doing just that.

However, the government’s Ponzi scheme is bankrupt. According to the Social Security Administration, the program has a $10.7 trillion unfunded liability, which means that in order to pay benefits for the next 75 years, we need nearly $11 trillion in the bank today. Technically, Social Security does not run out of cash until 2034 — but that is also assuming the federal government can repay nearly $2.8 trillion it has in Social Security IOUs — that is, money it has borrowed from the taxpayer, via government bonds, to pay its current obligations.

Social Security IOUs aside, as soon as 2018 the Social Security Ponzi scheme will no longer be a profitable entity. Just two years from today, the Congressional Budget Office (CBO) predicts Social Security taxes will raise $1.005 trillion, yet Social Security payments will equal $1.008 trillion. By 2034, the Social Security IOUs that the government is supposed to pay back will run dry.

After 2034, everyone relying on Social Security will see their benefits reduced by 21 percent; by 2089 Social Security payments will be reduced by 48 percent. This is not my voodoo math. These figures come straight from the Social Security Administration.

Social Security the Ponzi Scheme

This comic really sums up Social Security.

Source: Townhall

In other words, the scheme is no different than what Bernie Madoff was doing with his investors’ money. To wit, you invest a dollar today; that dollar isn’t actually invested but is used to pay off someone else who is cashing in. By the time you retire, hopefully new investors will be available to cover the cost of you and your generation cashing in for your promised benefits. Social Security is a pay-as-you-go system. Otherwise known as a Ponzi Scheme.

And for a brief moment, this system worked. For example, in 1950, there were 17 workers helping support each retiree; everything was fine; when that retiree cashed in, there were 17 workers there to pay him out. But as soon as 1960, there were only five workers supporting each retiree. From there, the entire Social Security scheme began to falter; by 2035, there will only be 2.1 workers for each retiree. The actual data even looks like the Ponzi Scheme cartoon:

Of course, like any Ponzi scheme, benefits paid to the 59 million people who currently rely on Social Security come from workers continuing to pay into the system. Unlike a true retirement account, there is not a personal pot of money for each retiree that is earning interest or profits. Instead, if every worker disappeared tomorrow, Social Security would as well — or at least in a few years.

Washington bureaucrats admit that the financial situation for Social Security is dire. But what they don’t tell you is that Obama made the Ponzi scheme much worse. Let’s turn to that:

Bernie Madoff + Keynesian Economic = Obamanomics

Since 2008, Obama has dosed the economy with shots of Keynesian-style economics; in short, “Obamanomics.” Obama passed a $1 trillion stimulus spending bill; he put 47 million American on food stamps; and between 2008 and 2012, spent $530 billion on unemployment insurance.

Yet, the labor force has been crushed by Obamanomics. With a current unemployment rate of 4.9 percent, the labor statistics suggest that we’re nearing full employment. However, this number factors in the hoards of people who are only marginally attached to the work force, or have simply given up and left the workforce altogether. (Yes — when calculating the unemployment rate, DC bureaucrats only count the number of people looking for work. Not the people who have given up on searching, and simply lack jobs. So when workers leave the workforce, the unemployment numbers drop! That’s Washington math.

When analyzing true unemployment, a better metric to use is the labor force participation rates. This accounts for the percentage of abled-bodies workers who are in fact working, compared to the overall population. Economists will point out that labor force participation trends are projected to decline over time as a larger segment of the population — the Baby Boomers — retire. However, when you account for the prime-aged workers, ages 25 to 54, the trends since Obama became president are even more troubling. A smaller percentage of younger Americans who should be working are not; and it is these individuals Social Security relies on most.

When people are not working, they are not paying payroll tax and Social Security suffers. But the most troubling aspect is that the government flat out ignores this. Future projections for Social Security never actually assume that labor force participation rates decline. Rather, government models that predict the fate of Social Security — and thus, drive policy making — blissfully assume that past positive trends will continue on forever. This assumes more people paying more taxes now and into the future than is likely to actually materialize.

And consider this: based on an analysis by Social Security expert Peter Ferrara, if labor force participation rates of today become the new status quo — which many experts now suspect will be the case — Social Security revenues will be $290 billion to $450 billion less than projected over the next 10 years! And over the long-term, this trend will result in many trillions of dollars less.

In other words, Social Security will be bankrupt much sooner than 2034, and a $10.7 trillion unfunded liability is only the beginning.

But Obama’s failure to rebuild the structural integrity of the workforce is just one of Social Security’s problems.

Obama’s White Swan

When it comes to government economic forecasting in general, but in Obamanomics in particular, the economy is projected to be perfect: recessions never happen and unemployment is always low. It’s a fairy tale in a world of only “white swans.” White swans? Yes; it’s a play on the concept of black swans. And if you have ever read the work of statistical risk expert Nassim Taleb, then you know that the term “black swan” is used to describe rare events, like financial crises that “will never happen.” Let me explain.

The term “black swan” originated in 16thcentury London to explain seemingly impossible situations or events. After all, no one in London had ever seen anything other than white swans. The impossibility of the world having black swans, of course, changed with the discovery of black swans.

Today, the term has been used quite accurately to describe the financial crisis in 2008. No one predicted its possibility or saw it coming (except for a few, like Nassim Taleb). As you may remember, Wall Street risk “experts” and government modelers suggested that the chance of a major recession was so miniscule that it was nearly impossible — it was a black swan event that would never occur. But of course it did, and we all paid the price.

Social Security’s longevity and the ability for it to be available as a safety net is managed based on what the forecasts tell us. Yet, the data projected by the Social Security Administration suggest that even in a worst case scenario, the economy grows each and every year — forever. But when those models are wrong — such as when an unanticipated recession unfolds — we have problems.

Prior to the financial crisis, in 2007, government models predicted flawless economic growth (Fig. 3, right graph, blue line); GDP increased year after year. Part of the problem with models, however, is that it’s nearly impossible to do it any other way — no one can anticipate recessions in a model, nor how bad they will be. As Taleb is known to say, “The greatest risks are never the ones you can see and measure, but the ones you can’t see and therefore can never measure.”

In fact, economic growth did not continue to grow, but instead declined during the great recession and, subsequently, under Obama’s watch. As a result, the financial sustainability of Social Security was damaged by nearly $1.2 trillion in lost revenue (Fig. 3, left graph) versus what your financial advisor — the accountants at the Social Security Administration — estimated.

It’s time to consider what Obamanomics will continue to do to Social Security into the future. Economist Steve Moore looked at every recession since the Great Depression — there have been 11 in total. Moore concludes that Obamanomics has led to the worst recovery in the last 75 years, factoring in job creation, wage and income growth, economic growth and inequality.

Today, it takes an average of nearly 28 weeks for the unemployed to find a new job, a level not seen since the Great Depression. The labor force participation rate has remained depressed, at levels not seen since the 1970s. Obamanomics has failed to achieve average economic growth over the past 50 years, markets are volatile and commodities like oil are tanking, and most importantly, Obama has added more debt then all other presidents — combined.

The Social Security Administration is not about to revise their models to account for the black swans that might be caused by Obamanomics– even if such a prediction was possible. However, one should recognize this: a black swan event is only such to those who believe an event is extraordinarily rare or unlikely. This may not be the American public. In a January 2016 Gallup poll, most Americans believe the economy is “getting worse.” So, perhaps when the next recession hits we’ll be expecting it — but, will future retirees be prepared for what that likely means for their benefits?

Obama’s policies have failed to rebuild the structural integrity of the workforce, and because of it, the Social Security Ponzi scheme will have far fewer workers paying into the system than predicted. Furthermore, if Obamanomics fails us again, the positive economic growth that the government predicts will extend into perpetuity will once again be a fantasy — and Social Security revenues will get clobbered. Most Americans realize Social Security is in trouble, and reforms are needed to fix the $11 trillion Social Security deficit as well as provide answers prior to 2034. Sadly, this is an optimistic outlook; thanks to Obamanomics, Social Security’s finances are much more dire than the public recognizes or acknowledges. However, perhaps we can all recognize and acknowledge the irony that it is a liberal Democrat — those who rail against inequality — who would put the final nail the government’s last great government Ponzi scheme.

Originally published at