The Second Rule of Economics: TANSTAAFL

The second rule of economics is TANSTAAFL: There Ain’t No Such Thing as a Free Lunch.1 The first law is, you shall not steal, even by majority vote. While something might appear to be free (e.g., education, healthcare, housing, etc.), there is always a cost to someone. Ignore this law, and all economic hell breaks loose. Of course, politicians believe they can ignore and break any law. They believe they can create economic prosperity ex nihilo, “out of nothing,” simply by legislating it. Most Americans don’t care about these economic realities any more than the politicians who propose them because they are the first-in beneficiaries.

When Social Security was implemented, the maximum amount any one person paid into the system was $60 per year — a total of two percent from employee and employer of a maximum $3000 per year. Today, the percentage is 12.4% on $97,500 per year.

The Social Security Administration estimated that those born in 1877 (and retired in 1942) got an average of 36.5 percent real rate of return on their Social Security contributions, while those born in 1950 (me) will receive on average a 2.2 percent return. Those born in 1975 will get a return of 1.8 percent. It’s even worse for future workers. The government should have seen this coming when Ida Fuller received her first Social Security check. She paid $22 into the program and received more than $20,000 in retirement benefits.2

In 1935, there were 45 people paying into SS for every one person receiving benefits. Today, that ratio is about three to one.3 Is it any wonder the SS has been described as the “world biggest chain letter”?

“The World’s Biggest Chain Letter — Unless You’re the Government”: Social Security is a pay-as-you-go retirement program. Those paying in now are paying those receiving benefits now. Social Security works like a chain letter. Some people have described SS as a “Ponzi scheme,” named after Charles Ponzi, a con artist who bilked people of a lot of money. How did he do it? He would tell people that he would pay them a huge return on their investment within a few months. Then he would take their money and pay off the previous investors. It worked great for the first ones to (unknowingly) get in on the scheme. Ponzi then used his early “investors” as testimonials to attract new “investors.” After a time, the number of investors ran out, and so did Ponzi with their money. Ponzi had worked the “pyramid scheme”: the people at the top (those who get in early) receive the benefits that are being paid in from those at the bottom (those getting in late). The following appeared in Parade Magazine (March 28, 1976): “Social Security is a wonderful plan. People say it’s going bankrupt. Don’t believe them. It works. I know. My uncle reached 65 and he sent in the appropriate forms. In a week he received a wonderful letter: “Dear Mr. Gold. Welcome to the Social Security System. Attached is a list of ten names. Just send $100 to each name on the list and retype up a new list with your name at the bottom. But remember, don’t break the chain!’”4

If a private insurance company operated this way, the directors would be arrested, tried, and sent to prison for a long time. Democrat fundraiser Norman Hsu was charged with a “massive Ponzi scheme.”5 The Ponzi scheme is named after Charles Ponzi (1882–1949) who was involved in a multi-million dollar fraud scheme where nearly 40,000 people invested about $15 million. And this was in 1921!

ObamaCare, like Social Security and the worse off Medicare system, will generate buckets of red ink for future generations. Who will pay for this? The same people who are paying into Social Security to keep the program alive. You and I know them as “the rich” who are already paying the majority of taxes. Hsu couldn’t keep the scam going because he couldn’t force people to keep contributing. Politicians can by the force of law. Just try to drop out of the system. Bernard Madoff, former Nasdaq Stock Market chairman and founder of Bernard L. Madoff Investment Securities LLC, was arrested, charged with securities fraud, and sentenced to 150 years in prison in what federal prosecutors called a “Ponzi scheme” that involved fabricated gains of $65 billion.

Ponzi, Hsu, and Madoff created investment programs that were little different from government programs. They went to jail because they weren’t the government. Why are we surprised since the “stimulus” was a huge government counterfeit project.

In 1981, employees of Galveston County, Texas, chose to leave SS for a private alternative. At first, not everyone was in favor of the innovative idea. The unions (naturally) opposed it. Employees deposited approximately the same amount of money in private accounts. To date, the funds have achieved an average 8.64 percent annual rate of return since inception. Many of these retirees are millionaires today, living off the interest and free to pass on their estate to their children. This can never happen under Social Security.

Consider this scenario: A man and his wife have paid into SS since the first day they went to work — forty-five years of SS payments. They both reach retirement age on the same day. On the way to the mail box to pick up their first checks, they are killed by a drunk driver. Their estate gets nothing. The money is lost.

Just because politicians can create economic programs does not mean they are ethical or that they will work. Putting people in power so they can take money from your neighbors and give it to someone else does not make it right, whether they are Republicans or Democrats.

  1. The phrase has been attributed to science fiction writer Robert A. Heinlein in his 1966 novel The Moon Is a Harsh Mistress. Two of Heinlein’s best known science fiction works are A Stranger in a Strange Land (1961) and Starship Troopers (1959). Heinlein’s political philosophy was anti-socialist (“correct morals arise from knowing what man is—not what do-gooders and well-meaning old Aunt Nellies would like him to be.”) and anti-communist (“All the work one cares to add will not turn a mud pie into an apple tart.”). []
  2. Gary North, Government By Emergency (Ft. Worth, TX: American Bureau of Economic Research, 1983), 8. []
  3. James M. Pethokoukis, “Boomer Burden,” U.S. News & World Report (January 17, 2005), 46. []
  4. Quoted in North, Government by Emergency, 4–5. []
  5. Fundraiser Hsu charged with pyramid scheme” (September 20, 2007). []