Ramblings

As everyone knows, and as everyone except very left-leaning politicians will admit, Social Security is doomed unless it undergoes significant reform.  As everyone also knows, and the majority of us will admit, a significant fraction  of all “discussions” of Social Security reform really boil down to emotional diatribes.  Devious politicians, extreme left partisans, and diminished capacity citizens own the Social Security hot button outright; they have patented, copyrighted and trademarked Social Security Reform®.  With this body of expertise, vested interest and irrational passion dedicated to prohibiting any discussion of Social Security futures, there is no human being of sufficient stature, strength and persistence to bring about the “adult conversation” so desperately needed.  Except one:  Bernard Madoff.

Bernie Madoff’s business model was identical to that of our Social Security system—in all respects save one.  Social Security is legal, only because a number of Representatives and Senators, and a President, made it legal, irrespective of ethical or right-and-wrong considerations.

Charles Ponzi, although not the originator of the business model used by Madoff, is the person who became notorious for his 1920 large-scale use of it.  Today’s slang for that business model would be  “scam” or “con”; but in Ponzi’s time the word used was “scheme”.  Ponzi’s error, we now know, was that he failed to assemble sufficient Congressional conspirators and then provide adequate incentives for the President to sign a bill into law.

The Wickipedia describes a Ponzi scheme:  “A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. … The system is destined to collapse because the earnings, if any, are less than the payments to investors”.

The Social Security Administration angrily denies that there is anything other than a superficial resemblance of Social Security to Ponzi schemes.  The difference they point out is that a Ponzi scheme operator must find a never-ending stream of new sucker-investors in order to provide sufficient funds for the periodic payments to earlier investors.  Social Security, in contrast, (they say, somewhat gleefully) has an absolutely endless supply of U. S. tax dollars;  Congress and the President will simply increase tax rates—right up to 100% and beyond—as necessary.

Bernie Madoff pushed the envelope of his Ponzi scheme farther than anyone in history.  The best guess of U. S. prosecutors is that Madoff bilked his investors out of $25 billion directly, and about $40 billion in lost potential earnings.  Like all Ponzi operators, Madoff made periodic “investment earnings” payments to his earlier account holders, using cash just received from later, newer investors.  Was any of the money from Bernie’s clients actually invested?  Not a penny.  Was any of the $25 billion recovered and returned to those who had been swindled?  Not really (although assets from Bernie’s extravagant lifestyle were seized, sold, and provided a tiny fraction of restitution).  Have investigators figured out where the money went?  If they have, that information has not been released.

I wouldn’t presume to know more than the Social Security administrators, so I’ll take their word for it that the National Ponzi Scheme is not a Ponzi scheme.  Social Security income is withheld from each worker’s paycheck; that seems OK.  In addition, an equal amount must be added by the worker’s employer; that seems odd (like not telling the employee that his witholding is actually double), but I guess that’s OK also.  Every quarter employers remit that money collected for Social Security.  For some number of years there was, as one would expect, more than enough money coming in to make payments to the early enrolled beneficiaries and have some left to be building a fund for future retirees.

Has any of the money ever been invested?  That’s an interesting question, and all answers seem to have significant political philosophy content.  However, there are no common, income-producing  investments like stocks, bonds, real estate mortgages, etc.  But with a combination of government accounting methods and a dash of political philosophy, one might stretch a little and use the word “investments” (which look to us ignoranti like the government moving money from one pocket to another and then claiming interest from the first pocket).

If there was an excess of revenues over expenditures in previous years, does anyone know where it all went?  Actually, yes.  As an accounting gimmick to obscure the government’s ever-increasing expenditures, it was “loaned” to various government agencies.  But it is to wonder where any agency could get the money to “repay” its loans back to the non-existent “Social Security Trust Fund”.  But not to worry.

Bernie Madoff to the rescue!

Bernard Madoff proved to the world that he is a genius at stealth accounting methods, clever and innovative bookkeeping, and navigating around auditing reefs and barriers.  In short, he showed us that he is more than a match for those like the gang of evil geniuses who forged the stealthy and convoluted “Health Care Reform Bill” (in 3000 or so pages).

The President should parole Mr. Madoff, on condition that he will lead a Presidential Social Security Reform Commission. The Commission’s charter will be to develop, and describe the details of, a true reform to the present Social Security system.  Orders to the Commission  must be clear and simple:

1.     The reformed system  must not resemble a Ponzi scheme whatsoever

2.    The system must use Defined-Contribution instead of Defined-Benefits

3.    Tax monies will not be used to pay any normal retirement benefits

4.     The system must be actuarially sound

5.     Implementation must be designed for minimal-to-no impact on current retirees and tolerable impact on near-term future retirees

Madoff will select one third of the Commission  members; the Republican and Democratic leaders of the House will each select one of the remaining thirds.

The President should dip into his slush funds as deep as necessary to adequately fund this Commission, enabling it to seek out highly qualified experts to participate as necessary in the effort.

When the Commission successfully completes its mission, the President can commute Bernie’s sentence.  Congress, in gratitude for the solution to the United States’ most serious existential problem, could appropriate $65 billion to make all of Madoff’s victims whole ($65 billion is pocket change compared to the multi-trillion dollar liability of the old Social Security system).

What then, for Madoff?  He may be free at that point; but Bernie must continue serving a life sentence of having to live like the rest of us non-billionaires.