Wake up morons, The Government Ponzi Scheme is about to collapse

[George Whorewell]

U.S. Is Bankrupt and We Don't Even Know It: Laurence Kotlikoff
By Laurence Kotlikoff - Aug 10, 2010 9:00 PM ET

Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.
What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.

Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

(Laurence J. Kotlikoff is a professor of economics at Boston University and author of “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.” The opinions expressed are his own.)

To contact the writer of this column: Laurence Kotlikoff at kotlikoff@bu.edu

[Soul Crusher]

I just read a book by this guy called "The Coming Generational Storm" about the true state of finances of this nation. 

I have been saying these things for a few years and the kneepadders like blacken, mons, et al spout off the garbage like "we are the richest nation in the world and can afford . . . . . . "

[Soul Crusher]

Charles Krauthammer: Social Security is broke
By CHARLES KRAUTHAMMER
2011-03-10 16:25:42
 http://www.ocregister.com/common/printer/view.php?db=ocregister&id=291694

________________________ ____


 

Everyone knows that the U.S. budget is being devoured by entitlements. Everyone also knows that of the Big Three – Medicare, Medicaid and Social Security – Social Security is the most solvable.

Back-of-an-envelope solvable: Raise the retirement age, tweak the indexing formula (from wage inflation to price inflation) and means-test so that Warren Buffett's check gets redirected to a senior in need.

The relative ease of the fix is what makes the Obama administration's Social Security strategy so shocking. The new line from the White House is: no need to fix it because there is no problem. As Office of Management and Budget director Jack Lew wrote in USA Today just a few weeks ago, the trust fund is solvent until 2037. Therefore, Social Security is now off the table in debt-reduction talks.

This claim is a breathtaking fraud. The pretense is that a flush trust fund will pay retirees for the next 26 years. Lovely, except for one thing: The Social Security trust fund is a fiction.

If you don't believe me, listen to the OMB's own explanation (in the Clinton administration budget for fiscal year 2000 under then-Director Jack Lew, the very same). The OMB explained that these trust fund "balances" are nothing more than a "bookkeeping" device. "They do not consist of real economic assets that can be drawn down in the future to fund benefits."

In other words, the Social Security trust fund contains – nothing.

Here's why. When your FICA tax is taken out of your paycheck, it does not get squirreled away in some lockbox in West Virginia where it's kept until you and your contemporaries retire. Most goes out immediately to pay current retirees, and the rest (say, $100) goes to the U.S. Treasury – and is spent. On roads, bridges, national defense, public television, whatever – spent, gone.

In return for that $100, the Treasury sends the Social Security Administration a piece of paper that says: IOU $100. There are countless such pieces of paper in the lockbox. They are called "special issue" bonds.

Special they are: They are worthless. As the OMB explained, they are nothing more than "claims on the Treasury (i.e., promises) that, when redeemed (when you retire and are awaiting your check), will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures." That's what it means to have a so-called trust fund with no "real economic assets." When you retire, the "trust fund" will have to go to the Treasury for the money for your Social Security check. Bottom line? The OMB again: "The existence of large trust fund balances, therefore, does not, by itself, have any impact on the government's ability to pay benefits." No impact: The lockbox, the balances, the little pieces of paper amount to nothing.

So that when Jack Lew tells you that there are trillions in this lockbox that keep the system solvent until 2037, he is perpetrating a fiction certified as such by his own OMB. What happens when you retire? Your Social Security will come out of the taxes and borrowing of that fiscal year. Why is this a problem? Because as of 2010, the pay-as-you-go Social Security system is in the red. For decades it had been in the black, taking in more in FICA taxes than it sent out in Social Security benefits. The surplus, scooped up by the Treasury, reduced the federal debt by tens of billions. But demography is destiny. The ratio of workers to retirees is shrinking year by year. Instead of Social Security producing annual surpluses that reduce the federal deficit, it is now producing shortfalls that increase the federal deficit – $37 billion in 2010. It will only get worse as the baby boomers retire.

That's what makes this administration's claim that Social Security is solvent so cynical. The Republicans have said that their April budget will contain real entitlement reform. President Obama is preparing the ground to demagogue Social Security right through the 2012 elections. The ad writes itself: Those heartless Republicans don't just want to throw granny in the snow, they want to throw granny in the snow to solve a problem that doesn't even exist! Vote Obama.

On Tuesday, Democratic Sen. Joe Manchin of West Virginia denounced Obama for lack of leadership on the debt. It's worse than that. Obama is showing leadership. With Lew's preposterous claim that Social Security is solvent for 26 years, Obama is preparing to lead the charge against entitlement reform as his ticket to re-election.

[whork25]

I just read a book by this guy called "The Coming Generational Storm" about the true state of finances of this nation. 

I have been saying these things for a few years and the kneepadders like blacken, mons, et al spout off the garbage like "we are the richest nation in the world and can afford . . . . . . "

You have some good insight thats for sure its your Obama obsession that makes people think you are a little insane

[Soul Crusher]

You have some good insight thats for sure its your Obama obsession that makes people think you are a little insane

Nothing wrong with that.  Keeps people on their toes.        

[whork25]

Nothing wrong with that.  Keeps people on their toes.        

 

[andreisdaman]

U.S. Is Bankrupt and We Don't Even Know It: Laurence Kotlikoff
By Laurence Kotlikoff - Aug 10, 2010 9:00 PM ET

Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.
What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.

Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

(Laurence J. Kotlikoff is a professor of economics at Boston University and author of “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.” The opinions expressed are his own.)

To contact the writer of this column: Laurence Kotlikoff at kotlikoff@bu.edu

Nice article....I don't know if our politicians have the will to do whats necessary....I hope so....

[Soul Crusher]

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A Ponzi Scheme? That's Not the Point
Townhall.com ^ | September 6, 2011 | Jeff Jacoby
Posted on September 6, 2011 9:20:43 PM EDT by Kaslin

Charles Ponzi was a Boston swindler who in 1920 bilked thousands of people out of millions of dollars by selling them bonds that guaranteed a fabulous rate of return -- 100 percent in just 90 days. The funds entrusted to Ponzi were never invested in legitimate enterprises. Instead, they were deployed in a classic pyramid scam: The first few investors were paid off with money collected from a larger, second round of investors, whose bonds were in turn paid off with money from a still larger group of investors who came after them. Like all pyramid swindles, which depend on a steadily expanding population of new investors, Ponzi's scheme was unsustainable. It collapsed within months. Ponzi went to prison, and his victims lost most of their principal.

Is Social Security just another Ponzi scheme? Texas Governor Rick Perry is only the latest public figure to make that claim. It's an analogy that provokes heated debate -- not surprising, given Social Security's powerful emotional and philosophical resonance. That might not be a bad thing, if the debate moved Americans closer to solving the program's long-term problems. But it doesn't.

For years, notable voices -- from the late economist Milton Friedman to Senator John McCain to former Slate editor Michael Kinsley -- have warned that Ponzi's ripoff was no different in principle from Social Security. Just as Ponzi's scheme — or the more recent fraud by Bernard Madoff — eventually crumbled when there weren't enough new investors to fund the payouts to the earlier investors, critics argue, Social Security will also fall apart as taxes paid into the system are outstripped by the benefits paid out.

That's the point Perry was making last month, when he called it "a monstrous lie" that younger workers paying into Social Security today can rely on collecting benefits when they retire. "It is a Ponzi scheme for these young people," he told an audience in Iowa. In interviews last fall, he made the same comparison.

But every analogy goes only so far, and there are flaws in this one too. Boston University journalism professor (and former Globe reporter) Mitchell Zukoff, who in 2005 published the definitive history of the Ponzi scandal, notes the dissimilarities. Ponzi's scheme was a deliberate swindle that lured its victims with bald lies and get-rich-quick promises, Zuckoff has written, whereas Social Security fully discloses its operations and makes no promise of huge returns. Ponzi schemes are intended to defraud; Social Security was designed to be a social safety net for the old.

The Social Security Administration itself tackles the issue in a 2,400-word essay that not surprisingly concludes that there is no comparison between a pyramid scheme like Ponzi's and the government's 75-year-old pay-as-you-go pension program. The key difference: The former depends on a never-ending geometric increase in the number of participants, whereas Social Security is simply a financial "pipeline" that transfers income from current workers to current retirees. "As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out, the system can continue forever."

Ah, but that's the key question: Can that "rough balance" be maintained? When Social Security began, there were dozens of workers paying taxes into the system for every retiree who was taking benefits out of it. By 1950, the ratio had slipped to 16.5-to-1. Now it is a little less than 3-to-1, and continuing to shrink. When the last of the baby boomers retire, there will be just two working taxpayers for every beneficiary. In the face of such a demographic tide, isn't Social Security ultimately as doomed as any pyramid scheme?

And yet whole furor over Social Security's "Ponzi-ness" has mostly served as a giant distraction. Back and forth the arguments go -- one side notes with alarm the exploding number of retirees, while the other side says Social Security taxes and benefits can always be adjusted. One side warns that Social Security's future unfunded liabilities already amount to a staggering $20 trillion; the other side points to its huge current surpluses.

But fighting over an analogy gives both sides too easy an out. What Americans should really be wrestling with is not whether Social Security is or isn't a Ponzi scheme, but whether its all-important surpluses are wisely invested. Or whether, to be precise, they are invested at all.

[240 is Back]

Obama wants to HUGELY reduce our troops in Iraq, down to 3000.

People are mad because "it could lead to chaos in iraq".

They aren't concerned that blowing that kind of $ over there, would lead to chaos - HERE!

[Fury]

Congrats on that Hail Mary with the troops, Obama! Won't do shit for your polling numbers, br0.