It's an astonishing story. This seemingly trustworthy guy named Bernard Madoff was supposedly investing something on the order of $50 billion for some of America's richest people, pretended it was earning gobs of interest, actually used the principal of some to pay others wanting redemptions -- and lost practically everything.Here's a more astonishing story. Our seemingly benevolent federal government has taken from the public enormous sums of money for Social Security and Medicare, made it seem it was putting much of it in a trust fund, actually ran up stratospheric sums in unfunded liabilities and is now faced with major perplexities.
There's a close but imperfect analogy here, because both Madoff and the government have engaged in something approximating a Ponzi or pyramid scheme in which the money of new investors pays off old investors until finally there's nothing left, and everyone goes home broke.
The pretense used to be that when you coughed up your payroll tax, you were actually putting money into a personal Social Security account for your own future benefit. What's actually happened, of course, is that the taxpayer dollars go to pay the immediate benefits of today's recipients, whose numbers are about to vastly increase, while the surplus magically disappears into the supposed trust fund.
If you conceive of a trust fund as actual assets held someplace, there is no such thing, just a government obligation to repay the money someday. The surplus theoretically holds down deficits and debts so that its retrieval through borrowing won't be devastating, but, in fact, our spendthrift government has been racking up record deficits even after using up the surplus dollars, and what's facing us is a fiscal doomsday.
According to Heritage Foundation analysts, the unfunded liabilities for both Social Security and Medicare add up to more than $46 trillion, some 50 times this year's approved bailout funds, and the equivalent of having to come up with money comparable to the bailout billions "every single year in perpetuity." That figure of $46 trillion, Heritage calculates, is more than all the taxes collected since the nation's founding. The prospect is devastating tax increases or scrapping everything else the government does or facing economy-wrecking deficits or some combination of the three.
The Madoff-and-entitlements analogy does break down on several points. For one, it's not the intended entitlement recipients who may suffer so much as the taxpayers both rich and not-so-rich having to make up for the lost money. For another, it was possible to ferret out what was happening as our entitlements programs got us into a jam. While Heritage and other think tanks would like the government to be more "transparent" about the entitlements issue, the facts exist for those willing to dig. Madoff's clients apparently had no way to get at the truth.
And while there may be no way for those who invested with Madoff to get more than a smidgen of their money back if any at all, there are solutions to the Social Security and Medicare shortfalls. For instance, you can change the index establishing future Social Security payments so that they do not increase beyond the cost of living, helping to make a major difference in payouts. Fixing Medicare is more complicated, but doable if the government acts soon. Right now, most baby boomers are contributors to the systems, but will soon start becoming recipients in huge numbers, a change that will make repairs exceedingly tough.
Two things you don't want to do -- start new entitlements until we've fixed the old ones, or try to solve the entitlement problems just with more tax money. That would be about the same as Madoff trying to get out of his hole by seeking more investors.