So, is Social Security a Ponzi scheme, as Rick Perry said in the debate?
No, not exactly. As this article points out, a Ponzi scheme has to attract investors, whereas Social Security has a captive investor-audience: all Americans who work. And Social Security can keep asking for more from them, not just in absolute terms but as a percentage of their income as well:
Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase.
On the other hand, initial investors get rich from a Ponzi scheme, and no one gets rich off Social Security—unless you count the government itself, which uses the money for a host of things that were not originally intended when the legislation was passed. And of course, Social Security is not illegal, while Ponzi schemes are.
Nor was Social Security originally set up as a Ponzi scheme, although it does partake of some of its characteristics (mainly, that beneficiaries are paid not from profits, but from the “investments” of later payees). If the monies had been kept in a lockbox (that famous Al Gore phrase), the situation would have been somewhat better. But changing demographics are a big part of the problem; when the system was implemented, no one expected such a high percentage of people to live past the age of 65 and to be able to collect on their investments.
[NOTE: The WSJ weighs in.]
Actually, the first people to benefit from Social Security *did* get out vastly more than they put in – because they could not contribute for long, and received immediate benefits. The payments were spread out, so they did not become rich, but they did do very well indeed.
Ida Fuller contributed $24.75 and received $22,888.92. Not a bad return on investment.
In SS you are forced to be involved (if you work above the table). I think the true Ponzi scheme is the more moral system.
I disagree. It is unconstitutional.
When SS was passed, the argument was whether it would be welfare. FDR, who was a smart man, argued for the payroll tax, and I’ll paraphrase him thus: “Now no damn politician will end social security”. In short, SS is really a welfare program, but one that is dressed up to appear like a personal account holding “your” money.
My point is that is was a trick, much like a Ponzi scheme is a trick. The payoff to politicians is twofold: they get your vote for protecting “your” money, and they get to play with your money all the while.
If SS isn’t a Ponzi scheme, it’s worse.
As I understand it, Social Security was originally conceived of as a program to provide a very modest amount of money to secure minimal food, clothing, and shelter for those who no longer had access to the extended families that used to take care of older relatives.
But, as politicians have tacked on more and more subsidiary programs, and expanded benefits and eligibility–i.e. bribed the voters–it has become a monster, which, along with the other “mandatory” entitlement programs, now consumes 63% of our entire Federal budget, and they are set to automatically–unless drastically pruned and reduced in scope and benefits–increase as a percentage of our federal budget until they consume 100% in the next couple of decades.
I made my first payment into Social Security almost 46 years ago when I was working as a civilian dishwasher in a military mess hall. Today, just days away from the age of 62, I am still paying into Social Security. I would gladly refuse to accept the first penny from Social Security if the government would just keep their thieving hands from my kids and grand kids pockets. I am far from rich. I will have a very, very modest income after I finally retire. But I could survive without SS.
I can think of little more reprehensible than stealing the future from your own heirs. We have simply got to stop this inter-generational theft.
A good man leaveth an inheritance to his children’s children. Proverbs 13:22
Is there a better metaphor for it? When I was younger I’m not sure I ever heard any of my friends’ parents refer to it as anything else. And now we’re to believe there’s anyone alive who is shocked, shocked to hear the term used?
Most telling line in the article is when the author is trying to make distinctions: “though unlike a Ponzi scheme, nobody pretends otherwise”.
So if we make it functionally like a Ponzi scheme, but don’t lie about who pays and who gets the benefits, it’s not really a Ponzi scheme. Except it works like one. Not really, though — except, ok, yes, no. Maybe, if we pretend we’re not pretending.
Odd, when they explained “ponzi scheme”–used interchangeably with “pyramid scheme”– in high school, the only aspect that mattered was that you get a pay-off from the input of the newer members. It only works for as long as you can keep recruiting new members. Not seeing how that’s different that social security, even if most examples of ponzis we’d have would be voluntary. (Technically, so’s SS– you can not work, or you can move….)
SS definitely hasn’t been helped by being expanded all the time!
Ponzi, SEC.gov:
What is a Ponzi scheme?
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.
How fine of detail is needed? There is no issue, or should be no issue, here. The whole event speaks of the tea party reformation.
Rickbert concludes (4:52 pm):
“So if we make it functionally like a Ponzi scheme, but don’t lie about who pays and who gets the benefits, it’s not really a Ponzi scheme. Except it works like one. Not really, though – except, ok, yes, no. Maybe, if we pretend we’re not pretending.”
—
Living is easy with eyes closed, misunderstanding all you see.
It’s getting hard to be someone
but it all works out.
It doesn’t matter much to me.
Let me take you down, ’cause I’m going to Strawberry Fields.
Nothing is real and nothing to get hung about.
Strawberry Fields forever.
Always, no sometimes, think it’s me,
but you know I know when it’s a dream.
I think I know I mean a ‘Yes’ but it’s all wrong,
that is I think I disagree.
Let me take you down, ’cause I’m going to Strawberry Fields.
Nothing is real and nothing to get hung about. Strawberry Fields forever.
Strawberry Fields forever.
( Lennon – McCartney )
I think all this talk about the exact definition of a Ponzi scheme and does the SS fit that definition is splitting hairs in a way that most people think is unimportant.
Not to offend, but bloggers and blog readers often get caught up in nitty gritty details that are unimportant and lose the essential parameters of an issue.
The important thing is that SS is set up based on actuarial and demographic assumptions that have been proven wrong, depends on increasing numbers of participants who won’t be there to pay earlier participants, and is therefore unsound.
That’s close enough to the exact definition of “Ponzi scheme” for most people and they understand that it means that young people will get cheated with the present system.
Don: notice I used the word “illegal.” Laws can be passed that are legal but later found to be unconstitutional. If something is against the law (such as a Ponzi scheme) it is illegal, however.
However, I don’t think there’s any chance Social Security will be found to be unconstitutional—although there’s this.
By the way, for what it’s worth, the early investors in Madoff’s Ponzi scheme made great returns too, at least on paper. That’s one way he got referrals for later investors.
Foxfier,
You are correct, those who take issue with Social Security v Ponzi scheme are, as Texexec says, just nit-picking details. A Ponzi scheme pays current investors from the incoming contributions of new members. This is social security described to a “T” (sorry, couldn’t help it).
The really amazing thing is that Social Security was a program to skim middle class income from the get-go. In 1933, when SS was passed, the retirement age was set at 65, but the average life expectency of a working male (the workforce was predominently male at that time) was Age 58. So, not only were there more people paying into the system than collecting from it, but it was designed so that MOST would not collect from the system for very long; many would never collect at all.
Paul Krugman considers this FDR’s most enduring legacy!
Besides the unsustainable, automatically increasing nature of a “mandatory entitlement” such as Social Security i.e. more and more costly benefits given to more and more people who become eligible each year, there is the demographic problem i.e. fewer and fewer active workers paying into the system to support larger and larger numbers of retirees i.e. the large demographic bulge of the soon to retire Baby Boomers, now exacerbated by the reported recent decisions of hundreds of thousand of people who “unexpectedly” applied for Social Security Disability Benefits or who retired earlier than expected as a consequence of our current economic depression.
According to the Social Security Administration’s own statistics (http://www.ssa.gov/history/ratios.html), in the early years of Social Security, for instance, in 1940, there were 159 workers paying into it for every beneficiary, by 1950 that had dropped to 16.5 workers paying in for each beneficiary, by 1970 it was down to 3.2 workers paying in, a ratio that held roughly steady at a little more than 3 workers paying in for each beneficiary for the last 40 years, and was estimated to have dropped to 2.9 workers paying in for each beneficiary in 2010. Undoubtedly, that ratio has gotten even worse since 2010.
Obviously, this can’t go on.
Here’s the original Social Security Act, August 14, 1935.
http://library.clerk.house.gov/reference-files/PPL_SocialSecurity.pdf
All of 29 pages.
Not long ago, I went on a quest to see if I could find out who founded the modern libertarian movement. I thought I was going to find it to be Murray Rothbard. But it went back even further.
Somewhere on my search, I read a reference about the “founding mothers” of libertarianism. Those women were Ayn Rand, Rose Wilder Lane (daughter of author Laura Ingalls Wilder), and Isabel Paterson. It appears from her wiki entry that Rose Wilder Lane is credited with coining the term “libertarian” — I think in the early 1940s — but all three women were very involved intellectually in their writings with the fledgling libertarian movement. That’s the background for the following.
In 1943, Rose Wilder Lane appeared on a radio program and described Social Security as a Ponzi scheme that would ultimately destroy the country. Social Security was barely 10 years old and its opponents were referring to it as a Ponzi scheme. So it’s been called a Ponzi scheme going back almost 70 years ago, at least. So people who are pretending to be outraged that Perry would call it a Ponzi scheme don’t know it’s history.
When Lane called it a Ponzi scheme, Social Security was structurally sound. It was designed so that something like 15 workers supported each beneficiary. Further, the estimated expected life of the average American was less than when people became eligible for benefits. In other words, the average American was expected to die before being eligible to draw benefits.
So, Lane was opposed to Social Security on ideological grounds and she was demagoguing the program to try to get it repealed, but it WAS designed to be financially sound.
But the way the politicians have it structured today, only 3 workers pay in for each beneficiary AND now the average American is expected to draw Social Security benefits for 10 years before he dies. It is a ticking time bomb the way the politicians currently have it structured. So unlike Lane, who was demagoguing the program for ideological reasons, Perry understands it is a real problem that has to be dealt with soon. Whether it’s technically a Ponzi scheme or not, Perry is trying to get the debate started so we can get a solution to this problem.
Social Security is an addiction.
Ooops, like an addiction.
Scott Says:
September 8th, 2011 at 7:03 pm
So a simple way to keep it solvent would have been to gradually raise the retirement age in step with increasing life expectancy.
Instead, generations of Americans have been raised to believe that they had a God-given right to quit working at age 65 and spend their remaining years at leisure. I am unaware of any culture throughout history which believed that. People worked until were physically unable to, and that’s where a genuine social security program should kick in.
—-
Good comment. I’ve read almost everything by Ayn Rand and a little Rose Wilder Lane. I really need to read Isabel Paterson.
The problems of Social Security have been exacerbated by the shift to low fertility. When people have 3 or 4 kids, there are more young people to pay for retirees. When people shift to 1 or 2 kids, it doesn’t work so well. With the Baby Boomers we have a high fertility cohort about to be supported by a low fertility cohort. Already, SS is paying out more than it is taking in.
OKAY FOLKS, BRING IT ON IN. We’re going to start now.
John, put out the cigarette please and don’t eat all the cookies, all right. Some other people would like some.
Okay, okay, we’re here, as you know, for the 12 step program for all of you who want financial freedom, FF.
So, I’m going to pass the 12 steps to John who will read them. (John reads them)
The floor is open. Who would like to speak. Barry? kay-o.
Hi everybody, my name is Barry and I’m a securaholic.
Hi Barry, Hi Barry.
Well, it’s still pretty bad. Not only did I look to the government for security, my parents did too, so I’m the child of securaholics. I probably should have seen it didn’t work to well for them, but you know what happens when you let go and let government. Besides, I was always going to quit tomorrow. Tomorrow would be the day I started being responsible but that never happened since we are constitutionally incapable of being honest.
But, despite the cunning, baffling, and powerful influence of a promised government check, I kept coming to these meetings and saw those with the courage to change and also saw that half measures wouldn’t work.
Anyway, my primary purpose now is financial freedom and becoming a recovering securaholic.
Thanks for listening.
FDR admired Stalin. FDR ensured social security’s rise and ensured the Supreme Court would agree. FDR had four terms as President.
How many terms did Robert Byrd and Ted Kennedy have in the Senate? And people still wonder what went wrong…
to: kaba at 4:46 pm — God bless you for being willing to sacrifice for the next generation. I hope it doesn’t come to that.
I’m 53 and I’d be willing to forego getting any payments from Social Security if the government would just quit taking money out of my paycheck. I’d write off what I’ve already paid in as money going to support present retirees, and do the best I could for myself with the money I have left.
Social Security is not unconstitutional, the courts have already weighed in on that and it is not a crime either.
And once the baby boomers are gone, some of the problems it faces now will be gone because of the change in demographics.
Democrats love to demagogue issues like this. I am surprised that so many conservatives want to hand them this issue on a silver platter.
Americans want this program saved, not done away with..and that goes for most Republicans as well as most Americans in general.
Bush tried to reform and could not get the support he needed, largely because Democrats framed it as an attempt to kill the program..throwing around words like ponzi scheme, criminal enterprise, fraud, lie etc might make some conservatives feel better, but it will only alienate people and make reform less likely.
I work for a home health care agency. I take care of people on social security or veterans. I have never known one person, no matter how conservative, who would refuse these benefits if they felt they needed them. Talk is cheap, when you are strong and young and secure.
I have never known one person, no matter how conservative, who would refuse these benefits if they felt they needed them. Talk is cheap, when you are strong and young and secure.
Wondered when that one would show up– the usual “if you aren’t willing to subsidize the system by paying and not cashing out, and would rather FIX the system, your arguments are invalid!” (Nevermind that there’s a bit of a selection bias, seeing as a home health care agency specializing in social security and VA benefits would rather assure that you’re not going to get folks who do abstain from the benefits they paid for.)
Ditto for the usual talking point about how we can’t dare speak actual truth about this or that issue, because the Democrats will call us names.
News flash– they call us names no matter what. They’ll claim we’re trying to kill people no matter what we do, so we may as well talk truth and trust in people to not be as stupid as the Dems think they are. Face it, we’re not as good as the Dems at lying, buying votes, etc– so we should contrast ourselves, instead of being DemLite.
Retirement income is supposed to be a three legged stool – pension, savings, and Social Security. For most retirees who have had a successful working life, income from pension and savings is much greater than the SS stipend. For those people SS pays for trips, gifts to chilldren, a better car, expensive prescription medicines, etc.
There are people who, in spite of having worked 45 years, have been able to save little. These are the people for whom SS is an absolute must. Most politicians want you to believe that is a majority of oldsters. It really isn’t, though. However, since everyone who works “on the books” pays in, the program is set up to pay out to all who paid in. Because of that, it is not considered welfare but an entitlement.
However, some years back a means test was instituted. Those who have a taxable income over a certain level (About $35,000 in 2010) have to pay taxes on 85% of their SS income. The same is true of Medicare. For recipients who have their premiums deducted from their SS the monthly premium for 2011 will be $110.50. Those with joint incomes above $170,000 the premium will be $115.40.
More means testing is in the future, but it will be challenged because people believe, not without good reason, (most progressivess will tell them that) that they paid for the program during their working years. The bare facts are there isn’t enough money, so both benefit reductions and more means testing lie in the future. Later ages of eligibility as well. That is what is required to “fix” the programs. The progressives don’t want to admit it. But it has to be fixed or it will collapse and no one will get much.
If you do well and have a decent income in retirement you will continue to pay for the benefits. Is that fair? It doesn’t matter if it is fair. Fix it or it will collapse.
It would have been better if it had never been instituted, but who is ready to take care of old people who have no assets? Life’s a bitch and then you die. But most of us don’t want to see old people begging in the streets as commonly seen in the Third World.
I like Herman Cain’s idea of converting to the Chilean system where each person owns his account. The reason why the progs don’t like that is that there would be winners and losers and they would not be able to act as Golden Knights for the losers.
It’s a mess and makes my head hurt when I consider all the ramifications.
Foxfier Says:
September 8th, 2011 at 10:22 pm
That’s similar to the argument that goes: “Did you go to public school? Yes? Then you have no business criticizing public education.”
Used to be in the benefits business. Using legally acceptable calculations, and calculations the benefits companies would accept, you couldn’t match SS.
Now, the same is true of public pensions, in the sense that the required contributions aren’t in house. They’re ponzied as well, and the results can’t be achieved by legal and acceptable calculations.
Neo does not cite the conclusion of the reason.com article which roots this discussion: It is not a Ponzi scheme; “it is much worse.”
As for Terrye, the home health “caregiver”, I respond that of course the elderly who have been forced, forced to ‘contribute’ will do their level best to recover what they can. Has nothing to do with needs or wants.
I thought social security was permanently fixed during the Regan administration by the Greenspan comission. I didn’t know permanent is only 30 years.
“Greenspan Comission,” from the SSA.gov site:
The National Commission on Social Security Reform (informally known as the Greenspan Commission after its Chairman) was appointed by the Congress and the President in 1981 to study and make recommendations regarding the short-term financing crisis that Social Security faced at that time. Estimates were that the Old-Age and Survivors Insurance Trust Fund would run out of money possibly as early as August 1983. This bipartisan Commission was to make recommendations to Congress on how to solve the problems facing Social Security. Their report, issued in January 1983, became the basis for the 1983 Social Security Amendments which resolved the short-term financing problem and made many other significant changes in Social Security law.
30 years isn’t bad for a short-term financing problem’s solution, even if they did make “many other changes.”