Friday, January 23, 2009

What’s the Difference Between Madoff and Social Security?

By Joseph Kellard

In the midst of our financial collapse, as well as in the wake of the Bernie Madoff case, I keep hearing and reading many people express this basic sentiment: “Can you imagine if we privatize Social Security, like President Bush tried to do, and we all had our life savings invested in the stock market?”

For example, here is commentary from the current New Yorker magazine: “To begin changing the [Social Security] system into one that allowed individual stock-market accounts (can you imagine how *that* would have worked out?) might have made it possible to realize the long-running conservative dream of a truly dominant Republican Party.”

The implication of the question here is that, to leave your life savings to the stock market is highly volatile – as the financial crisis has shown – so it’s good that government taxes us each paycheck and keeps that money safe and secure in the Social Security system, as well as guaranteed when we retire.

The problem with this illogic is that, while the stock market certainly has risks like many human endeavors (crossing the street safely is just one of them), the chance that one may lose their shirt in the stock market is made much more riskier because the government is so heavily involved in regulating the financial industry, including the stock market -- that is, keeping it unfree.

As I have argued elsewhere before, the economic meltdown was essentially caused by government intervention and regulations, not their lack thereof as the state interventionists always argue. For many years now, banking, housing and insurance have been the most regulated areas of the economy, not to mention the financial industry and stock market. While government bureaucrats are busy enforcing all kinds of non-objective laws that actually persecute innocent people, treating them as if they are guilty until proven innocent simply because they are pursuing profit (as any producer does), they actually did little or nothing of what government legitimately is supposed to do: Look out for defrauders. Thus, the Madoffs of America, large like him or on a much small scale, go undetected.

The saturation of government regulation in the economy is what increases the uncertainty and volatility of the financial industries, including the stock market, which greatly increases the risks that investors in it will lose their shirts.

Moreover, this government control over the financial industry is the essence of the Social Security system. If Madoff ran a Ponzi scheme, in which the money of some investors was taken to cover up and pay out the investments of other, usually earlier investors, while Madoff made off with their money, then Social Security, too, is also a Ponzi scheme destined to crash – as it already has.

At least with the stock market, an individual has the freedom to choose whether to invest their life savings in a single stock or a diversity of them. He may also forgo investing in his retirement, say, to pay for a house today that he expects one day to get a huge return on, only to turn and sell it when he retires and use that money for his senior years. In the end, if his choices and decisions work out or not, the responsibility for them ultimately lies with him, and only he gets hurt.

Social Security does not allow for such freedom. Government forces productive people to pay into its system through taxes, that is, by force. And the way the Ponzi scheme that is Social Security is set up, today’s producers who see a good portion of their taxes go to Social Security, are actually seeing it go to pay for today’s retirees whose own Social Security taxes were take out and used up by previous retirees. There comes a point that the money that is being thrown into the system runs out, and requires more and more taxes to keep it solvent.

Inevitably, one day, the Social Security system is going to completely crash, and if the mentality in Washington then remains as it is today, the politicians will seek a massive bailout of the system, paid of course by your taxes, which will only increase and leave you with less money to spend or invest on anything, including your retirement account.

There’s really no essential difference between the Madoff case and Social Security, except that Madoff allegedly committed his fraud without others realizing he was actually doing so. What is the government and American people’s excuse for the open Ponzi scheme that is Social Security?

Joseph Kellard is a journalist and commentator living in New York. Contact him at

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