Privatizing Social Security is a Ponzi Scheme

Ponzi Scheme Etymology: Charles A. Ponzi died 1949 American (Italian-born) swindler : an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks.

Much of the average US worker's retirement is already invested in the stock market - not by them, but by their employer. Employers, particularly local and state governments, used to invest in bonds and treasury bills. Then they started investing in the stock market. To millions of middle income folks indirectly invested in the market via employers and group plans, to those directly invested through 401K and other vehicles, the crash of 2000 through 2002 wiped out any hope of retiring soon. Others learned how they could go broke with companies - such as ENRON - who ate through their retirement savings in highly profitable schemes (for top executives and big shareholders) and then became insolvent.

Maybe coming from the lower class has tainted me forever on the "values of the market" and investment in it. My totally non-technical definition of stock is that companies sell pieces if paper for a certain amount which then is worth what a variety of folks you don't know say that it is worth. The company can then use the money from the stock directly, as well as get more cash assets by getting loans. A bunch of middlemen can then extract more cash from investors and from companies issuing stocks. The stock market becomes a form of legalized gambling driven by the pitch of pundits and the emotional response of investors.

I believe that drawing in the money of middle income investors and otherwise stable retirement funds was (and is) yet another scheme to extract wealth from the masses. Getting the "little person" into the market serves an interesting purpose in the class mythology of the United States. One of the supporting mythologies of social class has been to get lower classes to operate against their own self interests by making people believe that they have a vested interest in helping those at the top. When that fails you have a fall back mythology that protecting the interests of those at the top is ultimately in our self-interest because one day we might be one of those at the top.

Let me pass along two interesting quotes from the 2000 Joint Economic Committee Study of the US Congress on The Roots of Broadened Stock Ownership.

Recent data released by the Federal Reserve shows that nearly half of all U.S. households are stockholders. In the last decade alone, the number of stockholders has jumped by over fifty percent. According to one observer, this explosion in stock ownership has been "one of the great social movements of the 1990s."1 The shift of many individuals from wage earners to worker capitalists has stimulated discussion on the implications of this economic shift.

A market analyst quoted in the report states: You can have no inflation and earnings up 25 percent, but if you don't have money [from investors] forget it…The liquidity has come from you and me and our neighbors, who have been putting money into mutual funds to the tune of $20 billion to $25 billion a month.2

So here you have a strategy for strengthening the perception of a vested self-interest by turning folks into "worker capitalists," for the purpose of pumping extra money into company coffers.

Almost everyone lauds the market as a wealth generator, and for some that may be true. However, there is no guarantee of gain from stock ownership for the masses, and many people's ability to intelligently participate is limited by several factors. First, they are not directly invested. If they are "in the market" through group retirement accounts, they may have little or no control over the investments of the account holder/manager. They may not even know that they are indirectly holding stock. Second, for most wage earners, their investment is so low that they 1) can't take actions to protect themselves such as diversifying their investments; 2) don't own enough stock to see significant increases in wealth; 3) do not have enough stock to benefit from instruments to protect what earnings they may make; 4) do not have enough stock to get preferential treatment or information to leverage greater earnings out of their stock.

Small investors were attracted (or "motivated") into the market by structured economic changes which had left them with few incentives to save, and a promise of return on investment beyond their wildest dreams. Workers were faced by stagnant (or declining) wages; steady inflation; decreasing or vanishing job opportunities (off-shoring, out-sourcing, downsizing), and a plummeting of interest rates on savings. In short there was less to save, and one might as well hide savings in the mattress as place it in a savings account.

A 2001 article (US stock market slide: a turning point in American and world politics) from the World Socialist Web Site argues:

It is hard to overstate the implications of this colossal financial liquidation for the American working class and middle class. Of the $4.6 trillion already vaporized—and trillions more which are at risk—much of it constitutes the life savings of tens of million of working people. Millions are discovering that their 401(k) plans, which have become a widespread substitute for guaranteed pensions, will no longer sustain them in a decent retirement. Three-quarters of the funds held by 401(k) plans, about $1.7 trillion, are invested in the stock market. Other people have lost savings set aside to buy a new home, finance their children's college education, or protect against the threat of a major illness.

An article from the 2/25/02 Business Week was aptly titled The Betrayed Investor. They note that the new "investor class" lost $5 trillion in the stock market from 2000 to 2002. And what did businesses do with the money pumped in by the "worker capitalist?" " The market's steep rise in the late '90s had a dramatic effect on business, too. Companies merged and acquired furiously." And we know how much we all benefited from that process. [Note: This article does a nice job of talking about the inner circle incentives for fraud in the investment-banking arena.]

The effect of this move to invest has further increased wealth transference. As noted in the WSWS article, household debt increased by 25% over the 1990s with 70% of the debt owed by the bottom 90%of households. Meanwhile, the top 10 percent of households controlled over 70% of the wealth. Why? because both the interest from debt and the gains from cash influx from "small" investors went into largely the same pockets - the top ten percent. More specifically, it went into the pockets of the top one percent.

According to David Cay Johnson in Perfectly Legal, the top .5 percent saw their incomes increase from $317,582 in 1970 to $777,450 in 2000 (p34). The 99.0 - 99.5 percentile saw their incomes increase from $202,792 to $$384,192. Over the same period, the bottom 90% saw their incomes fall from 2/3 of the whole to slightly more than 50%. He notes that for the top .01 percent (13,400 taxpayers) their average income of $3, 641,285 in 1970 increased to an average of $23, 969,767 in 2000 (p36). "For every $1 that each taxpayer in the bottom 90 percent of Americans saw in income growth between 1970 and 2000, each of those in the top one-hundredth of 1 percent ... earned $7,500. (p37)" It is important to note that income is only a fraction of wealth at the very top.

So now Bush wants to privatize Social Security. This would force even more worker's money into the pockets of large investors, the investment-banking crime ring, and corporate coffers. At the same time, the transfer would be funded by those same worker's tax dollars, and result in a long range elimination of Social Security. The loss of the Social Security fund would hurt more than those desiring to retire. I believe it would also have a dramatic negative effect on all those trillions of outstanding debt. While the fund exists, it is a largely untouchable asset. It is a solid pool of reserve - not to be spent per se, but as an asset to borrow against. With the national debt now standing at roughly $7 trillion (and climbing) that asset takes on critical significance.

With the privatization of Social Security, a major extraction of both personal and public wealth could be accomplished. As one employer held retirement fund after another is decimated, and people try to save for retirement through IRAs and 401k plans, the movement of money into the stock market increases. As we teeter on the edge of a global economic collapse, there are perhaps hopes that one more last draining of the economic pool is possible - force all retirement money into the stock market through the privatization of Social Security.

Do I think that the push to privatize Social Security is a Ponzi scheme? You bet I do, but then I also believe that monopolistic capitalism is a Ponzi scheme. The current plan is yet another in the long scheme to transfer what little wealth remains in the hands of the many to the hands of the few. Think about the history up to this point as the ads bombard us with what a "good idea" and "necessity" it is to give workers a "choice" about their retirement.

Sources
Recent Changes in U.S. Family Finances: Evidence from the 1998 and 2001 Survey of Consumer Finances, Federal Reserve.

Business Week, 2/25/02 The Betrayed Investor

WSWS 3/20/01 US stock market slide: a turning point in American and world politics

Joint Economic Committee Study - April 2000 The Roots of Broadened Stock Ownership

David Cay Johnston, 2003. Perfectly Legal.