2011-09-13 § Leave a comment

WHY DO THEY CALL IT A PONZI SCHEME

“Social Security is a Ponzi scheme”. This is such an obvious falsehood, we have to look at why it is being said. When a politician makes this claim, what is he or she trying to accomplish?

The answer: it’s a way to evade blame while we tear up Social Security obligations.

From 1940 to 1988, the Social Security tax rate changed year to year so that the taxes collected matched the benefits paid. It rose steadily from 1% to 7.6%.

In the 1990’s, there was a surplus. The economy was strong, unemployment was low, wages were stable. The demographics were favorable, with a large workforce: the baby boomers were still working. The tax rate could have been reduced at this time, but it wasn’t.

Instead of lowering the tax rate, the money was spent. To maintain the appearance of propriety, Treasury bills were deposited into the “Trust Fund”. This is not like the trust fund you might leave to your grandkids. It’s more like an escrow account, where year-to-year surpluses are collected and deficits are paid out, with T-bills used to smooth out the cash flow. It avoids the problem of retirees having a delay in their benefit check while the tax rates are being adjusted by Congress.

After 1990, it was no longer used this way. A steady flow of money was collected from employees and employers, and used for federal expenditures as it was received. The pile of T-bills in the Trust Fund grew wildly. This was very convenient because no buyers were needed — the funds were coming hand over fist. From 1998 to 2009, the surplus was never less than $100 billion each year.

The period of time from 1990-2010 was where people say the Trust Fund was “raided”. Don’t be misled, the mechanism didn’t change — it’s just that the size of the IOU’s were allowed to grow tremendously. Instead of thinking of Social Security as a pay-as-you-go social insurance program, Congress started using it as a source of general tax revenue and it’s been that way ever since. The federal budget came to depend on that extra $100 billion every year. It’s built in.

But demographics and economic changes were happening that would eventually bring this flow of money to a stop.

By 2011, the boomers had retired, the economy was in shambles, unemployment was high, and wages were low. Compounding this, the Obama administration cut the payroll tax rate for 2010-2012 in an effort to stimulate growth. Now, obligations to retirees are such that, instead of providing a steady flow of money that the government could tap, the Social Security system requires that the T-bills in the Trust Fund be redeemed. It’s time to pay the piper.

Suddenly, just as we are looking for any and all sources of revenue, the government cannot tap Social Security as a source of money; instead, money must go the other direction. If you’re a politician, what do you do? You need to raise taxes, but you can’t do that. Raising taxes simply does not happen in the new millenium. (We’re the country that issued and renewed tax CUTS in the face of massive deficits.) You’re going to look like a failure if you don’t come up with a bunch of money, but there is no money. The solution is….avoid blame! At all costs.

Because if you get the blame, you lose your job and all your influence. You might have to go back to selling insurance, or something.

How to shift blame? You can’t accuse your opponent, because he didn’t do anything. The damage started long ago, back in 1990.

Perry’s solution: talk your way out of it. Since Madoff, the word “Ponzi scheme” has supremely negative connotations. If you can convince enough people that Social Security is a Ponzi scheme, then you accomplish your damage-control goals. (A) You can reduce or stop paying benefits, and it looks to observers just like the catastrophic “blow-up” phase of a real Ponzi scheme. (B) You can throw that stack of specially-marked T-bills in the dustbin, and breathe a sigh of relief. You just defaulted without LOOKING like you defaulted, because (C) people are already convinced the scheme was doomed from the very beginning, that failure was inevitable. That’s what happens when people invest in a Ponzi scheme, right? Stupid, shortsighted people.

To recap:
– for 20 years, we’ve been collecting SS taxes in excess of what SS needed, and spending it all
– now, SS needs a tax rate hike; but AMERICAN POLITICIANS DO NOT RAISE TAXES. Period.
– one solution is to allow the system to collapse. We just need a fall guy.

Another way to extricate ourselves from this situation is to go further into debt: instead of today’s workers paying yesterday’s workers, we could make tomorrow’s workers pay yesterday’s workers. That seems a bit too cruel, since we’re already making tomorrow’s workers pay for today’s budget follies.

Or, we could….(drum roll)…..raise taxes, and balance the federal budget. But that would be too simple.

On the Structure of Religious Conversions

2011-09-11 § Leave a comment

If you’re a thinker and you’ve never read Kuhn’s “The Structure of Scientific Revolutions”, you should. It’s fascinating and worthwhile, and therefore widely cited in all manner of contexts both on the web and in print. Kuhn observes some actual scientific paradigm shifts that have occurred and draws conclusions about how such shifts occur in general. It helps us understand how we think, and how we can perhaps think better.

Earlier this summer, I had a paradigm shift that, in retrospect, was like a conversion experience. It’s the first one I’ve had in my life. Being an adherent to the same religion since early childhood, I never had a wholesale conversion where I had to jettison a bunch of prior beliefs and behaviors. I always wondered what that might feel like, and now I know.

After a decade of sedentary work and a progressively growing waistline, I found myself at least 30 pounds overweight, with noticeably pathological eating behaviors and attitudes toward food. I knew there was a problem but did essentially nothing about it. I tried to curb my intake, and get active when I could, but I didn’t approach it as a first-class problem to be solved, the way I would if my car stopped running or if the integrity of my house were threatened with an infestation of carpenter ants.

Along with awareness of the problem, which has been apparent for some time, this summer I was suddenly provided a solution and a reason to change over the course of just a few weeks. The solution came in two parts: (1) I joined a CSA, specifically the Root Connection organic farm in Woodinville, WA, and found myself with tons of leafy vegetables that needed eating; and (2) I watched Dr. Lustig’s video called “Sugar: The Bitter Truth“. The motivation also came in two parts, first reading books on industrial meat production such as Jonathan Safran Foer’s “Eating Animals”; then watching a family member enter the hospital with a heart condition. These caused me to re-evaluate almost everything about my diet. I wasn’t pleased with what I saw, but am pleased with the changes I made and with how things turned out.

That understates the case. What I found is that, after losing all my excess weight and arriving at a diet that works and is sustainable (in all senses of that word), I wanted to preach it to anyone who was interested. This is not at all like me. I used to hate the idea of blogging, but here I am. I think I see now why many who undergo religious conversions go on to become so devoted to the cause. They see people all around them who still have the same problems they had, and they want to share the solution they found. They want to help their fellow man, even if their fellow man would rather not hear about it.

If you’ve been worried about your weight, or have tried a few diet plans, you might be thinking “well, speak up. What’s your sustainable diet?” Pretty simple: mainly it consists of high-fiber, low-calorie vegetables such as lettuce, tomatoes, bell peppers, green beans, beets, carrots, jicama, bok choy, that kind of thing, with enough good-tasting stuff like olives, avocado, cheese, butter and mayonnaise to make it attractive. I eat fresh fruit all the time, whatever’s in season. I cut my intake of animal protein by about 70%. I still eat meat, but not often, and in small amounts. And I make oat-based granola, which I eat irregularly.

What got taken out? I drastically reduced calorie-dense carbohydrates like potatoes, bread, pasta, and rice — to probably 20% of my previous intake; and practically eliminated refined sweeteners (sugar, HFCS), any commercially produced foods that contain them, and high-fructose snacks like fruit juice (100% or otherwise). I stopped buying sugar-sweetened cereal (there is no other kind sold in stores — if you don’t believe me, go ahead and check. “Evaporated cane juice” is still sugar.)

This diet lets me eat as much as I want, whenever I want, and still maintain or lose weight depending on whether I choose to indulge in the occasional sandwich or pasta dish. Without sugar in the diet, I enjoy the food I eat just as much as I used to enjoy junk food. The instant I eat cereal, cookies, ice cream, cake, pastries, and peanut butter and jelly sandwiches, my metabolism changes and the sugar cravings come back. So I don’t do that very often, once or twice a week at most, and under controlled conditions. If I eat a heavy meal, I fast one or two the next day. Fasting is easy, where before it was difficult.

Notice this isn’t the Atkins diet. Taubes and many others claim we did wrong by embarking on a mass diet of carbohydrates in order to reduce fat, and to right the wrong, they claim we should eschew carbohydrates and go back to a high-fat diet. If the only goal is weight loss, this might work for a lot of people. It’s definitely better than eating a lot of sugar and flour, but it still isn’t an ideal long-term diet, because simple high-fiber carbohydrates are so much cheaper and (I believe) better for our cardiovascular health. Large quantities of animal proteins are not sustainable, because there is no way to produce them in a way that isn’t unconscionably abusive to the animals, and even if we develop a method to do that properly, as I think we should, the animals are still inefficient in terms of how much they consume. Lack of protein is not my problem. As for fruit, I like it way too much to give it up for no reason. If I found that I had to reduce my fruit intake (as Atkins urged) in order to control my weight, I’d do it; but fruits have a lot of useful nutrition and somehow, two or three oranges a day doesn’t seem to make any difference.

You’re noticing something by now: I am running on at the keyboard with details and strong opinions about diets. Before this year, I NEVER did diets. I read about them, but never actually tried them. I hoped that pure will power (eat less! exercise more!) would be enough. It wasn’t. So why do I sound like a food evangelist now?

It’s that conversion experience again. I constantly read about the obesity epidemic and I can see it all around me. I look at a fat person and think, “You’re fat. I used to be fat. If you want to change, I can help you. I can describe a solution in under an hour that will change your life, if you let it. And you should want to change, because being fat is so harmful, to you and to society. Is the pleasure you get from eating sweets really that important?” I don’t say any of this, because there is no inoffensive way to do so. But I sit in the lunchroom and munch lettuce, and I blog, and I ramble on about my diet to anyone who will listen.

So to go back to generalities: how did this conversion experience happen?

Did I decide, consciously, that I had to change? No.
Did I hear a voice from heaven, or on the TV, tell me what to do? No.
Did I wander into a desert, fast for 40 days, and come out thin and enlightened? No.

What actually happened was much more interesting, and in a way, even more mysterious, because I watched the process unfold. There was a confluence of need, desire, new information, and new conclusions based on things I already knew. Without explicitly trying to find a solution, I arrived at a set of beliefs that could be easily tested. Testing them bore out their validity, because they produced the results I desired. If they hadn’t, I could have arrived at a different set of beliefs that worked, because I had a reason to.

My previous diet model said a bunch of things, mostly implicit. I had never critically examined their validity. Many were wrong:

  • Sugar tastes good, so I will eat as much as I can get away with.
  • Desserts are not very good for me. I should avoid eating too many cookies from the vending machine, the leftover cake in the cafeteria, the ice cream that I love so much.
  • Meat is a staple part of my diet. Animals are a good source of high-quality protein. I need protein, so I should have some at every meal.
  • To lose weight, I need to replace fatty foods with whole grains. Or replace starchy foods with HDL’s. Or Omega-6’s. Or is it Omega-3’s? Something like that.
  • To lose weight, I should drink a lot of water.
  • I’m fat because I eat too much. To get thin, I need to eat less.

My new model is radically different at some points. At other points, it’s just a slight adjustment in mindset:

  • Sugar tastes good, but it’s slowly killing me. Since it is no more necessary than alcohol, I should use it the same way: infrequently and with caution, and if I can’t control it, not at all.
  • Dessert is NOT FOOD. Treat it like restaurant fare. It’s expensive entertainment for my taste buds, with costs way beyond the initial cash outlay. Even “free” junk food isn’t free, if it makes me diabetic.
  • I am carnivorous, but that doesn’t mean I have to eat animal flesh every day. A couple of times a week is more appropriate. And carefully sourced milk and eggs are much better than factory-farmed pork and chicken from an ethical perspective. I spend real money to stay on the right side of ethics in other areas of life, so why not in my eating?
  • Speaking of spending real money, joining a CSA is the Right Thing to Do.  Buying ConAgra flour at Costco is wrong in so many ways that it’s hard to count them all.
  • Speaking of protein — nuts, legumes and tofu are rich in protein and I like all of them.
  • To lose weight, I need to replace the extra fat calories and carbohydrates with fiber.
  • When I eat a lot of raw vegetables, I don’t need to drink much water. I’m well hydrated already.
  • I’m fat because I eat too much of the wrong thing. I can still eat, and feel full. I just have to eat the right things.

The real change in all of this was a change in the MIND. It has to do with information, education, decisions, motivation. You may make that change deliberately, or it may sneak up on you. Crucially, it leads to action: changes of habit, and visible behavioral changes. I don’t think going through the motions following a diet plan works for very many people. It’s equivalent to following the outward trappings of a religion without any change in the heart. It doesn’t work, at least not for long. You can’t follow a diet; you have to change your diet, permanently.

I can’t stress too much the significance of being off sugar. I sleep better, I never crave anything (honestly), and normal food (like raw vegetables) actually taste good. This seems like the way my body was intended to work. I like this. And this is part of the conversion, part of the epiphany. I NEVER REALIZED what effect it was having, until I did without it. Since I was a 6-year-old boy, I have never questioned it. “A spoonful of sugar helps the medicine go down,” and all that. Some people say you will eat the right amount, and the right foods, if you only listen to your body. This works when your body chemistry is right, but it doesn’t work at all when you eat a lot of sugar. The signals are all wrong.

If I sound like a true believer, sorry. I am. I’ve always been strongly religious, so I’m comfortable feeling like I’ve got a secret that everyone should know about. The difference is, now, I’ve had an actual epiphany. How strange that it should be over something as mundane as sugar?

Is Social Security a “Ponzi Scheme”?

2011-09-09 § Leave a comment

I see many stories in the news making the claim that Social Security is a Ponzi scheme, or reporting on politicians who make this claim.

It’s clear from the comments that many people agree with Perry’s negative outlook. But what are the hallmarks of a Ponzi scheme, and in what way is Social Security similar?

Hallmark 1: the expected profit is markedly higher than other investments, so it is attractive to investors and makes them want to keep their money parked in the scheme or even add to their “investment”
Hallmark 2: new money pays the gains on previous “investments” to convince early investors that the scheme works
Hallmark 3: some mechanism is touted as generating a profit, sufficient to pay the promised return with low or zero risk
Hallmark 4: managers claim paper profits, but there is no actual income, or not enough to support stated returns. Therefore the scheme must fail sooner or later. It cannot continue indefinitely.
Hallmark 5: managers take funds for their own use
Hallmark 6: managers have no intention to pay obligations, except as needed to maintain the fiction

The first two are the essential elements. These are what convince people to join. The other main feature of a Ponzi scheme is that it is fraudulent, detailed in hallmarks 4 through 6. Hallmark 3 is just a story, part of the con, but isn’t strictly necessary. Mostly what is needed is a lot of gullible investors with money to lose.

So how does the Social Security system stack up? Let’s pose some questions.

Question: Is it an investment? Or does it look like an investment, as mentioned in Hallmarks 1 and 2? No. It is not an investment at all, and isn’t claimed to be. For the individual, it appears much more like a defined-benefit pension fund. Those who participate do not choose it, so there is no need for a high stated “rate of return” to keep you invested, nor is there even any way to “withdraw” your principal. To the extent that there is a principal, it isn’t yours. It belongs to the system. If you and your immediate family die, your estate gets nothing.

Question: Is it fraudulent? The two main answers are no, and no. Are the books cooked? No, in fact you can see for yourself what was done with the money. Do the managers extract money from the system and use it for unrelated purposes, without reporting the activity to participants and regulators? No. In fact Social Security has extremely low management overhead, compared to such things as mutual funds and annuities.

Question: Is the system doomed to fail at some point? No, it is not doomed. There is every reason to believe that obligations will be paid fully, both next year and a decade from now, even if no action is taken. With small modifications, there is no reason it won’t continue indefinitely, as long as no lasting financial catastrophes befall the American economy. (This would require a REAL calamity — such as a war that kills half our current workers and leaves existing retirees drawing benefits. The global financial crisis of 2008, while painful, is nowhere near the scale of crisis that could affect the viability of the Social Security system.) It certainly will not implode in the next 20 years, unless it is made to do so through purposeful legislative action.

So why the hullaballoo? Well, there are two ways in which it DOES resemble a Ponzi scheme.

First, current payments support current benefits, similar to Hallmark 2. Social Security is largely a “pay as you go” mechanism, with current payroll taxes used to pay benefits to past workers. If there were fraud involved, this is the part that would fool people into believing that the system works. But there is no fraud. We don’t just pay money to retirees who are suspicious about the safety of the money, we pay EVERYBODY who is entitled to benefits. We have always done so, every month for over half a century.

Second, similar to Hallmark 3, we hear about a “Trust Fund” stuffed full of safe investments whose promised return will help fund future benefits. This is really what has people worried, and gives grist to the mill of politicians who call the Social Security system’s viability into question. So it is important to understand it. Given what’s said above, it’s clear that Social Security is NOT a Ponzi scheme. But is it possible that there is some sleight of hand going on with the Trust Fund? Let’s find out.

The Trust Fund is the name given to all the money collected that has not been used to pay benefits and overhead expenses. It’s a lot of money — $2.6 trillion as of 2010 — and it’s what’s expected to make the Social Security system solvent for the next couple of decades as retirees live longer and the payroll tax base shrinks. It grew rapidly between 2000-2008, but will start shrinking soon. That means that, instead of having excess every year to put into the Fund, we’ll have to start taking money out. Where is the money, and how will it be retrieved to pay retirement benefits?

The answer is simple: it’s all in Treasury bills. Unlike, say, Norway, which invests its state pension fund surplus back into its own economy, the United States long ago chose to spend the surplus and pay it back later, with interest, from general tax revenue. This is not new. It first came to the attention of many people in the early 1980’s when  the fund became sizable (it rose above $100 billion for the first time in 1988). Even then, paying back $100 billion or so over the course of several years in some distant future seemed doable. Now, it doesn’t seem so easy. Where are we going to come up with $2.6 trillion over the next 20 years? That’s a lot of money, and in an economy like today’s, it will mean real pain.

If you were around in 1990, you heard a lot about “raiding the Trust Fund.” There was a lot of press, and recriminations all around. No significant changes were made, because then as now, our politicians could not keep their hands off such a large, sweet pot of money. Still, the answers to all the pertinent questions are simple, even if they are unpleasant:
Question: If the money is already spent, doesn’t that mean it IS all a Ponzi scheme after all? A massive fraud? No, it still isn’t. It wasn’t spent fraudulently or in secret. We all knew it was happening, even if we (and especially our elected representatives) preferred to pretend otherwise.
Question: If the money wasn’t invested in anything, doesn’t that mean the coffers are empty? No. Well, no more than they’ve ever been since the US has been in debt in a sizable way (which it has been since before 1940). The coffers are full of paper that is backed by the “full faith and credit” of the United States. That’s just another way of saying that future taxpayers will be forced to supply the money, like they will on the rest of the public debt, unless the US defaults.

It’s clear we will have to use government revenue from sources beyond payroll taxes in order to meet Social Security obligations in the near future — this is the taxpayer footing the bill for bonds that have already been issued, the same as all other government bonds. The only reason this might not occur is if Congress continues deficit spending AND they choose not to raise the debt limit. This has never happened, and need never happen, though it has been threatened.

If Congress does nothing to change the system, within about 20 years the supply of T-bills in the Trust Fund will be gone. At that point, the system MUST be changed, either with higher payroll taxes or reduced benefits or both. Even then, it will not fail in a way that resembles a Ponzi scheme. The system won’t be suddenly revealed to be empty and nonfunctional. It will just have to be adjusted, with a later retirement age and a higher payroll tax rate, perhaps 8% instead of 6%. If we make reasonable adjustments over the next 10 years, it need not seem like a crisis to anyone.

On the other hand, if Congress decides to dismantle the system and refuse to pay benefits, it will seem very much like a Ponzi scheme to those who paid payroll taxes throughout their working lives. This would require the proverbial act of Congress to achieve, though — a much more drastic action than just deciding to go the other way and fix the system.

The upshot, then, is that Social Security is a Ponzi scheme exactly to the extent that the US treasury is a Ponzi scheme. Anyone who claims it is, questions the faith and credit of the US government. Let us hope no one with that mindset gets into Congress or the White House.

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