Proof (well…circumstantial evidence) Social Security Implemented As Stealth Income Tax

A while back I wrote a post titled Uncle Madoff Sam’s “Social Security Trust Fund” which was a tongue in cheek look at Social Securities Ponzi beginnings… excerpt below

Bernie Madoff Sr. 1935 (BM) : Ok everybody step right up. Have I got a deal for you today!! All you have to do is give me 15% of your paycheck from the day you turn 18 until the day you turn 62, 65, 67, 70?? In exchange for this modest contribution, I will, at my sole discretion, give you a meager monthly benefit until the day you die.

To back up a bit, it has been a hypothesis of mine that Social Security was invented not as a program to help the all the poor widows living in poverty like the history books say, but instead, as a disguise to pass a broad income tax that would (at least temporarily) bring in far more revenue than outlays, allowing the government to spend that revenue wherever they wanted, leaving future elected officials to worry about the promises being made.

The story line kind of fits….right in the middle of the depression, people are generally unhappy with the government and probably not in the mood for a tax hike. However, revenues are depressed, and outlays are surging….what to do? Create a fake program to help widows and the elderly and a broad based tax to pay for it. Then…set the retirement age so high…most people will die before they are old enough to collect and voila!! It’s not like the public could download the data into excel and crunch the numbers themselves back then, who was gonna know the difference?

So that has been my hypothesis, but I never had any raw data to correlate with it…until now. Over at I found a neat little table showing Social Security’s  annual cash inflows and outflows…all the way back to 1937. Then, at I found the total US government historical revenues and outlays. Put them together, and the evidence is pretty convincing.

First, lets set the backdrop…From 1920 to 1930, the government ran 11 consecutive surpluses averaging $4.3B in revenues and $3.5B in outlays. Just scaling that up to 2012, that would have been like pulling in $4.7T of revenues on 3.9T of outlays…good for a $900B annual surplus….instead of the $1.1T deficit we actually recorded. Then…just do that 11 years in a row.

Then…the Depression hits. Revenues fall more than half from $4.1B in 2030 to $2.0B in 2032. Outlays…$3.3B in 2030 grow 40% to 4.7B by 2032, on their way to 8.2B in 1936. All of a sudden, after more than a decade of healthy surpluses, the government is spending more than twice what it brings in. By the end of 1934, the surpluses of 1920-1930 have been more than wiped out, with nothing but huge deficits on the horizon. They can only issue so much debt (Quantitative Easing hadn’t been invented yet)…they desperately need a new revenue stream, but raising taxes on a pissed off population doesn’t always end well. Enter Social Security. Passed in 1935….implemented in 1937.

So…anyone want to guess what the payout in year one was? Today it’s roughly 1:1. in 1937, according to the SSA, the SS tax brought in $737M of revenue..a full 14% of the federal government’s $5.4B total revenues in 1937. That would be equivalent to today, a $420B per year tax hike. Does anyone think Obama could get that passed? Total Social Security outlays that year… $1M. That’s right…they brought in 737M, and paid out $1M.

Ok…maybe it was just a fluke, maybe you had to wait a year or something, and Y1 only had admin expenses. Let’s look at Y2. $10M paid out on $375M of revenues…2.3% payout. Between 1937 and 1950, SS brought in $18.1B of revenues, and paid out $4.4B…paying out less than 25% of revenues. Not exactly what you expect from a Ponzi pay as you go program to help widows. No…Social security was designed from the start to be a broad based income tax to fund general government, and on the side (as a cover)… they would use a very small % of proceeds to take care of the few who managed to live to retirement age and fill out the right paperwork (typically before dying a few months later)

After a great start… by 1957 (Damn you FDR!!!), the math was starting to catch up and Social Security was running a deficit. And so it started. Taxes were raised… problem solved for a few years, until the math caught up again. Rinse, repeat, and here we are again… What will we do with the “Little Ponzi Scheme That Could”?

Hell if I know!! How do you tell 40M voting seniors and 60M  near retirement Boomers they’ve been paying into a Ponzi scheme 10,000X bigger than Bernie Madoff’s for their entire lives. The money is gone, and the only way to continue it is to screw over the younger generation even more than they already did with Obamacare. Also…they(the young) are young and stupid…you are old and frail…. (so it’s even right 🙂 ) I don’t know how it ends, but I am sure it’s gonna be bad for someone.

For Every Debit….A Credit (somewhere) – Accounting For Stock Gains

I always get a kick out of this type of article “Dow Will Hit 60,000 In 20 Years“. Hooray…we’re all saved right….all you have to do is keep pouring 5-10% of your income into your 401k, and we will all retire like kings…say the current kings…happy to get rich skimming a bit off the top.

So…let’s imagine for just a moment that we woke up tomorrow, and the DOW…along with the rest of the stock market pulled a clean quadruple…and we hit Dow 60,000. Hooray…we’re all rich. We can all hire maids, nannies, gardener’s, and best of all, a couple Bugatti Veyrons to park in the garage of our fancy new houses. Right??

That sound great, and kinda makes sense, but to the accountant in me…I’m always wondering…what’s the other side of the entry, because for every debit, there must be a credit. So let’s think our way through it. We wake up in the morning, and the stock market has quadrupled, but nothing else has changed. We still have the same factories, machinery, buildings and shops. The stock of tangible assets is the same.

So….let’s look at two nearly identical families who have made different investment decisions. Family A has decided to invest their savings in real estate, owning free and clear a $250k home. Family B, on the other hand, has decided to invest their savings in the stock market…also $250k.

When these families wake up the next morning….they suddenly find themselves very unequal. Family A more or less feels the same….for now. Family B, on the other hand feels like they have won the lottery…just like every other owner of stock. Family B’s wealth is now 4X of Family A….all else equal. On this, I think we can agree. What may not be so apparent is that while Family A’s wealth…as measured in dollars appears to have stayed the same, the truth is, their wealth has been severely diminished by the rise in the stock market.

Lets step back and look at the economy as a whole. Assume that before the stock market quadrupled, there was $20T of wealth…$10T tangible (physical assets), and $10T intangible (stocks) After the event, the measured wealth is $50T…$40T intangible, and $10T tangible. At least…measured in dollars. But currency is…as a measuring tool, a pretty piss poor device. Over time, a secondary reallocation event will occur, making it crystal clear that no new wealth has been created. The spike in the stock market simply results in a transfer of real wealth to stock owners, at the expense of non stock owners.

Let me present another similar example…lets go back to the 2003-2008 time period…where the price of oil went from $30-150 (and ultimately back to $30) Economists and pundits screamed as each milestone was broken. $40, $50, $100, $125…. They would go on and on about how this hurt the consumer, and was hurting the economy. They obviously hadn’t been to Houston. I was in oil and gas at the time, and while the pain the consumers were seeing were real….there is a debit for every credit. As the price of oil rose…consumers saw their wealth decreasing….it took more hours of work to pay for the same amount of fuel. The oil business saw the other side of the equation….Our work was suddenly valued more…the one bbl of oil that used to only buy a dinner at Chili’s with the missus….could now buy dinner and booze at the nicest steakhouse in town. Wealth had been transferred from one large diverse population…consumers, to producers of oil. Ignoring the international aspect and looking globally….I would say that more or less…no wealth was created or destroyed. Wealth remained the same, but was reallocated among the”winners” and “losers”

Now, our two examples have used very large divergances…the price of oil going from $30 to $150 and a theoretical quadrupling of the stock market to illustrate the mechanism of what is going on at a much smaller scale all day every day….prices of everything are constantly in flux….both against the dollar (which itself changes), and more importantly, against each other. All of these result in small, and typically invisible transfers in wealth from the losers to the winners.

So…let me wrap this up and try to make my point. I guess I am saying that from a global perspective….it makes absolutely no difference what the stock market does….certainly not in the short run, and probably not in the long run. Today…the stock market is up about 0.5%. So owners of stock are obviously a little bit richer, and not so obviously non stock owners are a little bit poorer. If tomorrow stocks are down 0.5%…the exact opposite will happen. This is a completely different reality than the market myth that has been perpetuated for nearly a century….that a rising stock market creates genuine wealth for all. It doesn’t, it never has, and it never will. Economists, like most homo sapiens are quick to count the debit they can see while ignoring the credit just out of sight. The truth is, the stock market is just like the horse track, only the race never ends. Every day, there are winners and losers, but they all net to zero.

Virgin Mobile Galaxy S3

Some background…I have been a Virgin Mobile customer for almost 2 years…. I picked up two Motorola Triumph’s (one for my wife and one for me) when they came out and signed them up for the $25/month plan, which gave me 300 minutes of voice, unlimited text, and theoretically unlimited data.

I crunched the numbers, figuring I would get 2 years out of the phone, making my monthly cost a little less that $35 each for a bone fide smart phone with a decent size screen (for 2 years ago) Not too bad for what I consider to mostly just be a toy, and significantly less than what the other providers had at the time. I’ve been fairly satisfied that I am getting what I am paying for (not a lot) so I really can’t complain that the voice quality is bad…especially in my house, and that the connection speed is pretty slow…sometimes painfully slow. The phone itself gets the job done, but compared to some other phones I have had a chance to play with, it is kind of primitive. My primary complaint is the keyboard. After 2 years….I still can barely type out a text without misspelling half of the words, and it’s not like I have fat fingers or anything….just dainty/clean accountant fingers. Also, battery life is abysmal, even after getting a new battery, and half the time, a fully charged phone will be completely dead by morning (but sometimes completely full). Finally, on my phone, it thinks that it has headphones hooked up to it 24/7….thus disabling the speakers…for, calls ect…

So, I decided it was time to get new phones…..just one problem. VM had a price increase on my plan from $25 to $35 and upgrading new phone cancels the grandfathered plan and bumps you up to the higher rate. So I was looking at $120 per year x 2 phones extra, not even counting the cost of a new phone. Doh!! So I put it off as long as I could, but with my phone near death, and the recent release of the Galaxy S3 on VM, I decided to stick my toe in the water. I purchased one S3 about a week ago for my wife, and switched her Triumph to my number.

Here are my first thoughts….the $400 S3, compared to the Triumph is an amazing device. The camera takes good pictures, on demand…no 5-10 second wait between. Also…it automatically uploads pics to my amazon cloud drive, so no worries about backups or sharing. The keyboard is a 10X improvement over the triumph….I played with it for a little bit and felt like I could write an essay on the thing….it was extremely precise. Other than that, it was fast, battery life is great, no issues on the device.

That said….I expected a huge increase in my connection performance, but I actually think it has declined. The Triumph runs off of the 3G network, my understanding is that the S3 would have the ability to run on either the 4G Wimax or the 4GLTE network. According to the VM coverage map, my home should have good coverage for both. WRONG!! In my home, the phone occasionally has no connection at all. Now, it’s on wifi, so it is primarily being used for text at the house….but it is extremely annoying when texts are not received or sent out timely because this is one of our primary communication channels during the day when I am at work and my wife is at home. An OMW isn’t that helpful if it is received after I actually get home, and it doesn’t help to get an item added to my grocery list when I am already  loading up the car.

But it’s not just inside the house….nowhere in my neighborhood have I observed the phone connecting to 4G. It will connect to 4G a few miles away, but the coverage map clearly shows 4GLTE for about a 10 mile radius around my house. A few nights ago, late at night after watching The Lone Ranger, I did a speed test on my two phones. The S3 on 4G clocked 250kb download speeds compared to the Triumph’s 200kb. Both are good enough to download a website in a few seconds, but nothing fast about either one. I’m not going to cry about it, but have decided to just hold onto my crappy 3G triumph until it dies.

Bottom line…the S3 is a huge improvement over the Triumph, but at least in my Houston suburb, the VM/Sprint network pretty much (still) sucks. Honestly, I had hoped to post a good review, because even at $35/month, VM is a great deal, and I  think the whole subsidized phone programs run by the big guys are just a huge scam. I honestly think just about everyone who can add and subtract should go prepaid, but at this time, depending on your needs, I can’t say that VM is the provider you should go with.

Fannie/Freddie Make $66B Payment to Treasury

Multiple news outlets are reporting that Fannie Mae did in fact make the $60B payment we’ve been discussing on and off…no surprises here….when we add Freddie into the picture, the total was $66B. Most of what I’ve read is just news clips…but this one  by Daniel Gross at the Daily Beast takes the cake.

“That payment of $59.3 billion is real money—equal to about 2 percent of all expected federal revenues for the current fiscal year. And it all goes to deficit reduction.”

It’s a nice Kumbaya kind of article…Everything is getting better…the bailouts worked……. But it’s all bull$#@%…. as I documented here. I never know any more if the journalists are really just that ignorant, or if they are just lying SOB’s. Quick…Somebody flip a coin.

So…let’s take another look at what has really happened here. Fannie Mae is essentially a government run operation., so whatever “profits” they make get handed over to the government.  So…let’s just say that in a given year, they make $10B before tax profit  They would send in $3.5B to the Treasury as “corporate taxes” and $6.5B as a dividend payment.

Now…say they have a “tax asset” based on past losses that basically shields all of their income from income taxation. So…this time around, they make the same $10B…and send it all to treasury as a dividend. Hopefully the point is clear…the very idea of one government entity paying “taxes” to another is a bit silly…am I right? The cake is still the same size, no matter how you want to slice it. Tax assets are of no value to government owned entities….

Back to Fannie….I think we can agree from the above example that taxes are irrelevant to the future cash flows they will generate for treasury. Despite this….Fannie Mae…not doubt prodded by Treasury, decided to write up the value of previously written off tax assets (from when they actually were kinda sorta a public company) back up….recognizing an immediate $50B gain. It’s kind of neat…you should try it. So open up your personal balance sheet….and where you have the value of your 10 year old car at $3k…..just write it all the way back up to whatever you paid for it, say $33k. Instant $30k gain. Don’t you feel richer now? Didn’t think so.

After writing up their imaginary assets that are pointless for what is in reality not a public company…then…They went out and got a loan for the full amount….then wrote a check to Treasury on their “earnings” This is actually kind of what everybody was accusing Mitt Romney and his band of corporate raiders of doing back in the day. Take over a business….then lard it up on debt and use the cash to pay yourself big cash bonuses. Then, you take the company public again… and a few years later the whole thing goes bankrupt because they can’t pay the outrageous amount of debt they have.

When it comes down to it…from a cash flow perspective, all Treasury has done is pull forward future cash to today….trading a bigger cash payment today for smaller future payments. I don’t know what kind of interest rates Fannie will pay on $60B of debt, but it’s probably a lot higher than treasury would have.

Finally, I just want to take a minute to clear up one other thing I thought was silly, but is often repeated. Gross mentions that Fannie has now paid back $95B of the $116B they took in bailout money. I have no reason to doubt the numbers, but I feel it misses an important point. If you lent somebody $1000 back in 1980….and they came back in 2013 and said…here’s the $ I owe you. Technically, yes…they paid you all back. Obviously you are happy to get it, but in saying you are even forgets a very important component…opportunity cost. You could have invested that $1000 over the last 33 years, getting say 5%, and ended up with over $5k.

Now, 33 years haven’t passed, but this simplistic analysis by Mr. Gross is either amateur or just plain misleading. Treasury had to go out and issue an additional $116B of debt, and pay to service it for the last five years…And who knows how much cost they incurred printing up those pretty annual reports. At least twitter is free, so it didn’t cost them any money at all to announce their $66B funny money scheme to the world.

For more info on the shenanigans…check out my original post here. It’s a lot of trouble for perhaps…three weeks worth of deficit relief?

Finally…just some thoughts on the value of Fannie Mae. Let’s just ignore all of the other $3T of debt Fannie has, and pretend for a moment that as of 6/27, Fannie Mae was generating a bonafide $20B of cash per year, and that the market would value this cash flow at say 10X, for a total value of $200B. Just pretend that this is what treasury could sell Fannie Mae to a buyer for.

Now…it is 7/1, and the facts have changed a bit. They are more or less the same, but now they have $60B of unsecured debt. How much would somebody pay for them now? Probably about $140B or so. So…you see, Treasury hasn’t managed to pull money out of thin air like they want you to believe…all they have done is get a payday loan, and diminish whatever value Fannie Mae had by another $60B and I’m not sure if it was positive to begin with….



Just wanted to say…you can make an honest case that the budget deficit has improved a lot over the last 6 months, or even the last couple of years. Now…I would argue that it’s temporary, but facts are facts, and there is no denying that after topping out in 2009 at $1.6T, the deficit has steadily dropped and will probably end 2013 between $700B and $800B…huge numbers still, but clearly dramatic improvement. Fine…make that case. What pisses me off though, is someone using these Fannie Mae payments as evidence of deficit improvement, despite the completely shady way the payment came about.

Social Security-Annual Change In Retired Workers

I know it was just yesterday I did a post on Social Security. Today…the SSA released  the June updates…among other things revealing that the number of people in the Retired Worker program increased  97k to 37.4M. This is not unexpected, though there is seasonality involved (more people seem to retire in Jan-Feb) 100k per month in additions is about where we are…though the trend is headed up. Just for fun…I charted the YOY additions (which eliminates the seasonality…and it shows a very interesting picture.

06-26-Social Security Beneficiaries

We start all the way back in 1995 adding about 350k people to the SS rolls a year. It moves around between  a 200 and 400k pace before spiking right around the dotcom  bust. After that it drops back around 350k before heading steadily up to about 600k per year in June 2008. Then…it takes off like a rocket topping out in December 2009 at an over 1.2M rate before declining back to about 1M at the end of 2011. Since then, we have seen a steady increase in the rate…likely driven by the demographics of Boomer retirement.

So the question is….what will this chart look like at the end of 2015? As we chug along in 2013 with a not so terrible economy, we are adding to the program at record rates and the demographics only get worse from here. Even a mild recession could cause a huge spike in early retirement…so just as revenues are being squeezed, we would start adding huge numbers to the Social security program. Just some quick math, adding 1.2M retirees, at $1,267 per month is about $18B per year. (I know yesterday we said $60B…that’s the entire program…not just retirees, and it includes the annual COLA on the entire population.) Each retiree… assuming the same $1267 payment and 20 years on the program….will draw in $304k of payments…ignoring inflation/COLA ect…

So… lets go out on a limb, and assume that of the current population of 37.4M, the average life expectancy is 13 years. (wild ass guess…got some 62 year olds and some 95 year olds). Pencil that out, and if we eliminated SS (retirement only) tomorrow for everyone not on it….we would still be on the hook for $7.4T…roughly (still ignoring inflation).Someday I’ll add in the rest of the population. But as we know…it won’t be eliminated….and there are 60M boomers waiting in the wings.