A Politician’s Version Of Ponzi Scheme

Democracy and Power 104: Future Debt Burden

A government debt is a government claim against personal income and private property – an unpaid tax bill. – Hans F. Sennholz

All democracies institute programs for current voters and shift the debt to future workers, even the unborn.  Social Security, Medicare, prescriptions drug benefits for seniors are prime examples in America.

A Politician’s Version Of Ponzi Scheme 

Steve Malanga of Real Clear Markets describes Social Security’s political Ponzi scheme in the following exerp:

… it does seem to resemble what I call the politicians’ version of a Ponzi scheme, that is, a spending program whose long-term unsustainability is clear early on and often in subsequent years, but whose advocates leave it to some future generation of political leaders to do the tough (and politically unpopular) job of fixing it.

Interestingly, when Social Security was initiated in the 1930’s many of the demographic estimates were correct.  The birth rate was dropping and a greater number of people were predicted to live longer.

As usual, though, the problem lies with politicians.  Invariably, they raid any possible source of money for their immediate use.  In the 1960’s, government changed budget practices allowing the confiscation of Social Security surpluses:

… changes to federal budget practices in the late 1960s essentially mean that there is no real surplus sitting anywhere waiting to be used. The federal government has spent the money on other programs and replaced it with IOUs.

Today, with three workers supporting every one retiree, Social Security is receiving less revenue than is being paid out.  Social Security promises should be honored, but there are no longer dedicated funds to fullfill those promises.  The IOUs are simply a piece of paper saying the government owes the Social Security Administration money.

As Social Security pays out more than it takes in from payroll taxes, the federal government has to start paying back those IOUs out of its budget.

Thus, future workers are stuck with the tax bill created by long-gone politicians.  Malanga points out yet another defect in his piece,  which is the surplus and its  illusion of abundance, which allows for additional spending.

Even worse, academic research suggests that the practice of spending the Social Security surplus on other programs and replacing it with IOUs has probably encouraged increases in federal spending by creating the illusion that there was more money to go around.

Politicians make promises and put the burden on future workers.

This habit of promising big benefit-programs and then ignoring the day of reckoning is common. For instance, we have all witnessed how state and local politicians designed pension systems for public employees and hid the true taxpayer costs of these pensions.  Those costs then only became apparent when millions of public-sector workers, who already earned their benefits, demanded to be paid out years later. 

If our policymakers understood the demographic implications in the 1930’s, surely by the mid-1960’s they had an inkling of what that same transition would do to the cost of a new, health care program for the elderly, which is Medicare.

The habit of pleasing today’s voters and sticking the monetary burden on future workers is the greatest source of debt in all democracies – Europe, America and the States.  Unfortunately, this “habit” is actually a character-defect – elected politicians buy votes today at the expense of future generations.

As the public becomes more aware of this flaw, there will be more debate as to its solution.  In America, many voters are calling for a Cut, Cap and Balance (CCB).  [Read: http://www.freedomworks.org/blog/teda/cut-cap-balance]

Cut:  The deficit must be cut immediately.  Latest year’s deficit was $1.6 trillion.  It must be cut by 50% this year.

 Cap:  Federal spending must be capped at 18% of GDP – the historical rate. 

Balance Budget Amendment: Congress and the President must balance the budget with the exception of emergencies.

Structural changes are the only methods that will prevent politicians from manipulating and misusing the money of working Americans.  Among the necessary restraints are personal accounts for retirement and medical needs.  Only through workers’ controlling their own retirment and medical accounts will politicians stop promising, taxing, raiding and manipulating the money of today’s workers as well as future workers.


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