A version of this article first appeared on November 10, 2016 in The Stansberry Digest, published by Stansberry & Associates Investment Research, an independent investment research firm. You can visit them at www.stansberryresearch.com.
Transfer payments which many wrongly understand as “insurance” are known as mandatory spending. The Pentagon and other government efforts (like building roads) are known as discretionary spending. We used those terms accurately.
The fact that we’re spending 70% of the government’s budget on mandatory transfer payments will greatly harm the government efforts to boost the economy. As I hope is obvious, borrowing even more money to steal from Peter and Paul won’t produce any lasting economic gains.
The government wants you to believe Social Security is a government-run Ponzi scheme and Medicare is an out-of-control welfare program. Both programs are funded by taxes that flow through the U.S. Treasury, like all other taxes.
And like all other government benefits, you have no legal right to Social Security or Medicare benefits. When I have explained this before, subscribers have always become furious with me, as if I was making this up or if it was my idea.
Don’t shoot the messenger. I’m merely telling you what every American taxpayer should already know. These issues have long since been decided by the Supreme Court, which ruled in 1937 that Social Security “contributions” were in fact taxes (Helvering v. Davis).
It then ruled in 1967 (Fleming v. Nestor) that Social Security isn’t an annuity and that you don’t have legal right to any benefits. Quoting from that decision: To engraft upon the Social Security system – a concept of “accrued property rights” – would deprive it of the flexibility and boldness in adjustment to ever changing conditions which it demands. It is apparent that the non-contractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments.
By the way, when the Supreme Court says deprive it of “flexibility,” what it really means is that in a Ponzi scheme, somebody always loses. And yes, the government can do whatever to whoever it wants. Folks who believe they will continue to receive meaningful Social Security payments for the next 20 years are the folks who are going to lose out.
If you doubt what I’m saying, just consider these numbers, which were published by the Social Security Administration – on average, a couple that retired in 1960 contributed $18,000 to Social Security and Medicare (in 2011 dollars). Total benefits received were $248,000 – a return of 1,277%. For a couple that retired in 1980, these same figures were $104,000 contributed and $512,000 in benefits – a return of 378%. By 2010, the returns had fallen considerably – now $352,000 in contributions that were worth only $798,000 in benefits, a 226% return.
Just like any other Ponzi scheme, the “returns” are amazing at first and then decline before collapsing. And in fact, the “returns” would have long since turned negative, except for the fact that Social Security taxes have increased 40 times since the program began. That was necessary, because today, only three workers must support each retiree (down from 16-to-1 in 1950).
By 2030, the numbers will fall to two workers supporting each retiree. Yes, the two retirees could still outvote the worker and vote themselves his wallet – but the worker will probably quit, as the nature of the scheme will become clear. (Remember game theory?)
Thus, the entire system will soon collapse. And folks who believe that these taxes are akin to an annuity are going to be grievously disappointed. Having been invited to a lovely dinner, they will be shocked to learn that they’re the main course.
The simple truth is, these programs redistribute wealth in a politically expedient way: “We’re going to tax folks who haven’t been born yet and give the money to you!” Like any other Ponzi scheme, it worked great at first.
Finally, if you want a sure way to find out if your Social Security “contribution” is a tax or not, just try not paying it. You’ll quickly find out what these programs are really all about – power.