Government-Sanctioned Pyramid Schemes

by Thomas Sowell, 2/22/2002

       If even half the things that Enron is charged with are true, then some of the company’s top brass should get a few decades behind bars to think over what a dirty thing they have done to so many other people, who trusted them and depended on them. But that is something for courts of law to sort out.
       In the meantime, the sight of politicians posturing and demagoguing at televised Congressional hearings cheapens our government, without doing anything to get at the facts or to prevent things like this from happening again. Worse yet, many of these same politicians have for years been doing what Enron is accused of doing—hiding debts off the books with accounting tricks.
       Social Security is a classic example. The Social Security taxes that people pay are used not only to pay current pensions but also to go into a so-called “trust fund” to pay future pensions. When the trust fund money is used to buy government bonds, that reduces the national debt—on paper. But only on paper.
       When $100 million in Social Security money is used to retire government bonds as they mature, this means that the public is owed $100 million less than before, which means that the national debt is reduced by that much. But of course the Social Security system is now owed $100 million dollars more than before.
       This is where the accounting tricks come in. Money owed by one government agency to another is not counted as part of the national debt. So $100 million in debt vanishes into thin air, simply by being transferred from where it is counted to where it is not counted.
       The government still owes the money. But it now owes it to the people to whom it has promised future Social Security pensions, even though technically it owes it only to another government agency.
       What has happened is that the Social Security taxes that were supposed to go into a trust fund have in fact been spent by the politicians. The government bonds turned over to the Social Security system in exchange for this money change absolutely nothing. These bonds are just claims on future general tax revenues.
       If the bonds never existed, future general tax revenues would still have to pay for Social Security pensions for the baby boomers, over and above the inadequate amounts that will be coming in from younger workers when the baby boomers retire. That is what will happen anyway.
       The only purpose served by the bonds is to make numbers look good when the reality is very different. Just like Enron. Debts are being hidden, rather than paid. Social Security is a much bigger operation than Enron and even more people are depending on it for their retirement money. How much they will be cheated out of depends on how artfully future politicians can manage it.
       The easiest way to cheat retirees out of what they were promised is to raise the retirement age. It sounds as if you will get the same money, only later. But, if your pension starts two years later, you have been permanently cheated out of two years’ worth of pensions, since your life span is not going to increase by two years just because the retirement age was raised.
       Politicians may decide to give Social Security pensions with one hand and take back part of it with the other hand in higher taxes. Or they could jack up the Social Security taxes on the working population. Or they may do some combination of these things.
       What they will not do is tell you that Social Security was a lie from day one. Your taxes were never being put aside in some “trust fund” and there cannot be any “lock box” for these non-existent funds, for Congress has the power to spend every dime that reaches Washington—and can borrow more on top of that.
       Social Security has been a pyramid scheme from the beginning. Those who paid in first received money from those who paid in second—and so on, generation after generation. This was great so long as the small generation when Social Security began was being supported by larger generations resulting from the baby boom.
       But, like all pyramid schemes, the whole thing is in big trouble once the pyramid stops growing. When the baby boomers retire, that will be the moment of truth—or of more artful lies. Just like Enron.