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Is Social Security A Ponzi Scheme?

Rick Perry’s comments about Social Security, in addition to redefining the Republican Presidential race, have set off something over a debate over whether it’s appropriate to refer to a program that’s been part of American government for some 75 years as a “Ponzi scheme.” It’s even set off a debate about that particular point within the GOP itself. It’s obvious that Perry chose his words carefully. “Ponzi Scheme” is a phrase that stretches back to the 1920’s, but it’s remained part of American cultural memory throughout the time, partly because people keep trying to pull it off every couple of years. It’s synonymous with fraud and deception and theft. The question, though, is whether it’s an accurate way to describe Social Security.

Not surprisingly, opinion about this among pundits tends to depend on which side of the political aisle you happen to be sitting on. Erick Erickson says it’s definitely a Ponzi Scheme, as does Rush Limbaugh. Ezra Klein, Matthew Yglesias and Kevin Drum all say that it clearly isn’t. As Andrew Sullivan helpfully reminds us, though, it’s probably best to start with a definition before actually discussing this question:

A Ponzi Scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.

The system is destined to collapse because the earnings, if any, are less than the payments to investors. Usually, the scheme is interrupted by legal authorities before it collapses because a Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.

The scheme is named after Charles Ponzi[1] who became notorious for using the technique in early 1920.[2] Ponzi did not invent the scheme (for example Charles Dickens’s 1844 novel The Life and Adventures of Martin Chuzzlewit described such a scheme decades before Ponzi was born),[3] but his operation took in so much money that it was the first to become known throughout the United States. Ponzi’s original scheme was based on the arbitrage of international reply coupons for postage stamps; however, he soon diverted investors’ money to support payments to earlier investors and himself.

So, where does Social Security fall within this definition? It’s easy to see where the Social Security as Ponzi scheme idea from. Social Security works by financing current benefits from the taxes received from current workers, then investing whatever surplus is left over (if any) in Federal Government bonds. If you’re expecting to think of Social Security as an “account” where you’re money is saved, then you’d quickly find that the system was never intended to function that way. Of course, the system has never really been sold as a government bank holding your retirement account. Nonetheless, the idea has persisted for decades among some Americans that they had a Social Security “account” from which their future benefits were paid, perhaps leading some to mistakenly believe that there was money sitting in a bank somewhere with their name on it. Politicians have often exploited this misconception by referring to Social Security “Trust Funds” and “lock boxes” to give the impression that funds received via Social Security were separate and apart from general revenues when, in reality they weren’t. As John Steele Gordon notes, this is perhaps the real fraud about Social Security, the fact that politicians have hidden from the public the role the Social Security system has played in enhancing general government revenues:

If you want fraud in the current Social Security system, however, it is in what happened to the surpluses that were run up by Social Security to help fund the retirement of the baby boomers. The money was transferred to the Treasury, which called it income, in exchange for non-marketable federal bonds, and Congress promptly spent it. If someone in the private sector tried a scheme like that it would be accounting fraud and earn him a stretch in Club Fed. One reform Congress should enact tomorrow-but won’t-is to require that Social Security surpluses be invested in federal bonds bought in the bond market. This would keep the surpluses out of the hands of politicians (and, by the way, lower the interest costs on other federal borrowing).

The common response to an argument like Gordon’s is that there’s a Social Security Trust Fund but, as The New York Times conceded more than a year ago, that Trust Fund is, in reality, a fiction:

Although Social Security is often said to have a “trust fund,” the term really serves as an accounting device, to track the pay-as-you-go program’s revenue and outlays over time. Its so-called balance is, in fact, a history of its vast cash flows: the sum of all of its revenue in the past, minus all of its outlays. The balance is currently about $2.5 trillion because after the early 1980s the program had surplus revenue, year after yeNow that accumulated revenue will slowly start to shrink, as outlays start to exceed revenue. By law, Social Security cannot pay out more than its balance in any given year.

For accounting purposes, the system’s accumulated revenue is placed in Treasury securities.

In other words, the government has already spent all of the money supposedly contained in the Social Security Trust Fund. The only thing left is an “IOU” from the Treasury Department to the Social Security Administration in the form of a a special inter-governmental Treasury Bond that cannot be bought and sold on the open market. Guess who has to make good on those IOUs? Well, you can find them in the mirror, and making good could mean raising taxes, cutting benefits, or funding benefits from the general revenues. Of course, the first and third choices are the same thing. This is why there was a danger in August that the government might not be able to pay Social Security benefits if the debt ceiling weren’t raised. Those benefits are paid from the same general revenues that are used to pay defense contractors, federal employee wages, and every other item in the Federal Budget. If there was an actual Trust Fund, then there never would have been a concern that Social Security payments might have been in danger.

All of this leads Shikha Dalmia to argue that Social Security isn’t a Ponzi Scheme, it’s worse. This is a great rhetorical argument, but I’m not sure that it really does much to address the real problems that the Social Security System faces. In the end, what we’re going to have to deal with in the coming decades is a problem created by two factors. First, there’s the accounting slight of hand noted above by which the Federal Government has used SSI contributions to fund general revenue spending while creating a phony “Trust Fund” that is in turn funded by general revenues. On top of that, and totally unavoidable, is the demographic problem:

Social Security is a Ponzi scheme in the sense that the sums invested in it by today’s workers are paid out to today’s retirees. It is most certainly not a Ponzi scheme in the fraudulent sense, as the mechanism is above board and visible to all. The problem is a profound demographic shift since Social Security began in 1935. Then, there were some 20 workers for every recipient, and life expectancy was about 65, the age when retirees became eligible to receive benefits. Today, there are only three workers for every retiree, and life expectancy is fast approaching 80. By 2030, there will be only two workers for every recipient and life expectancy is likely to be well over 80.

Obviously, the current system cannot be sustained without ruinous FICA tax increases, drastic cuts in benefits for future retirees, or a vast and lethal plague that affects only the elderly. Liberals can vow to protect Social Security all they want, but that is “Canutinomics”: the mathematics are inexorable. As the late economist Herbert Stein famously explained, “If something cannot go on forever, it will stop.”

We face a future where the fiscal health of the Social Security system will be in trouble if nothing is done, then, because of the combined effect of greedy politicians and the demographic anomalies created by the Baby Boom that followed World War II and the Great Depression, and the subsequent drop in the birth rate that occurred after it ended. That drop occurred both because of the natural and expected result of a temporary increase in the birth rate, and because of the societal changes that took place as the Baby Boom generation came of age. Birth control, men and women both delaying marriage until later in their 20s, women pursuing professional careers resulting in pregnancy later in life, and smaller families. All of these are the result of increased prosperity and education, and the decline in birth rates is something that’s been experienced by every First World nation, each of which have suffered their own fiscal impacts as a result.

The one thing that cannot be denied is that the current Social Security system is unsustainable. At some point in the future, we’re going to reach a point where it will simply be impossible to finance benefits with the FICA tax receipts being paid. At that point, either the system is going to collapse as younger generations rebel against the idea of financing the retirement of the elderly, or it’s going to have to change in a manner that is going to hurt the people receiving benefits at the time. Or, we could try to solve the problem now.

We could gradually raise the retirement age, something that may not be popular but which is going to be necessary. We’re already at the point where everybody knows that Social Security by itself will not be sufficient to live on in retirement, that’s why there are so many opportunities provided to establish private retirement accounts either individually or through one’s employer. Expecting to get Social Security from the day you retire at 65 until the day you die while failing to prepare for the future yourself simply isn’t an option, and most rational people know that at this point. Gradually raise the retirement age over a period of years, and people will be able to adjust their retirement plans accordingly.

We could adjust the way the cost-of living increases are calculated. Outside of Social Security and the defined benefit plans paid out by governments, no other retirement plan includes an automatic adjustment for inflation. Why should Social Security be any different?

We could look south of the border at what Chile did with it’s form of Social Security:

In 1980, the government of Chile decided to take the bull by the horns. A government-run pension system was replaced with a revolutionary innovation: a privately administered, national system of Pension Savings Accounts.

After 15 years of operation, the results speak for themselves. Pensions in the new private system already are 50 to 100 percent higher–depending on whether they are old-age, disability, or survivor pensions–than they were in the pay-as-you-go system. The resources administered by the private pension funds amount to $25 billion, or around 40 percent of GNP as of 1995. By improving the functioning of both the capital and the labor markets, pension privatization has been one of the key reforms that has pushed the growth rate of the economy upwards from the historical 3 percent a year to 6.5 percent on average during the last 12 years. It is also a fact that the Chilean savings rate has increased to 27 percent of GNP and the unemployment rate has decreased to 5.0 percent since the reform was undertaken.

More important, still, pensions have ceased to be a government issue, thus depoliticizing a huge sector of the economy and giving individuals more control over their own lives. The structural flaw has been eliminated and the future of pensions depends on individual behavior and market developments.

(…)

Under Chile’s Pension Savings Account (PSA) system, what determines a worker’s pension level is the amount of money he accumulates during his working years. Neither the worker nor the employer pays a social security tax to the state. Nor does the worker collect a government-funded pension. Instead, during his working life, he automatically has 10 percent of his wages deposited by his employer each month in his own, individual PSA. This percentage applies only to the first $22,000 of annual income. Therefore, as wages go up with economic growth, the “mandatory savings” content of the pension system goes down.

A worker may contribute an additional 10 percent of his wages each month, which is also deductible from taxable income, as a form of voluntary savings. Generally a worker will contribute more than 10 percent of his salary if he wants to retire early or obtain a higher pension.

A worker chooses one of the private Pension Fund Administration companies (“Administradoras de Fondos de Pensiones,” AFPs) to manage his PSA. These companies can engage in no other activities and are subject to government regulation intended to guarantee a diversified and low-risk portfolio and to prevent theft or fraud. A separate government entity, a highly technical “AFP Superintendency,” provides oversight. Of course, there is free entry to the AFP industry.

Each AFP operates the equivalent of a mutual fund that invests in stocks and bonds. Investment decisions are made by the AFP. Government regulation sets only maximum percentage limits both for specific types of instruments and for the overall mix of the portfolio; and the spirit of the reform is that those regulations should be reduced constantly with the passage of time and as the AFP companies gain experience. There is no obligation whatsoever to invest in government or any other type of bonds. Legally, the AFP company and the mutual fund that it administers are two separate entities. Thus, should an AFP go under, the assets of the mutual fund–that is, the workers’ investments–are not affected.

Workers are free to change from one AFP company to another. For this reason there is competition among the companies to provide a higher return on investment, better customer service, or a lower commission. Each worker is given a PSA passbook and every three months receives a regular statement informing him how much money has been accumulated in his retirement account and how well his investment fund has performed. The account bears the worker’s name, is his property, and will be used to pay his old age pension (with a provision for survivors’ benefits).

As should be expected, individual preferences about old age differ as much as any other preferences. Some people want to work forever; others cannot wait to cease working and to indulge in their true vocations or hobbies, like writing or fishing. The old, pay-as-you-go system did not permit the satisfaction of such preferences, except through collective pressure to have, for example, an early retirement age for powerful political constituencies. It was a one-size-fits-all scheme that exacted a price in human happiness.

The PSA system, on the other hand, allows for individual preferences to be translated into individual decisions that will produce the desired outcome. In the branch offices of many AFPs, there are user-friendly computer terminals that permit the worker to calculate the expected value of his future pension, based on the money in his account, and the year in which he wishes to retire. Alternatively, the worker can specify the pension amount he hopes to receive and ask the computer how much he must deposit each month if he wants to retire at a given age. Once he gets the answer, he simply asks his employer to withdraw that new percentage from his salary. Of course, he can adjust that figure as time goes on, depending on the actual yield of his pension fund. The bottom line is that a worker can determine his desired pension and retirement age in the same way one can order a tailor-made suit.

Gradually raising the retirement age, adjusting the way cost-of-living increases are calculated to bring them more in line with economic reality, and ceasing to raise Social Security benefits to keep them in line with increasing wage rates would go a long way to making Social Security financially stable. A gradual transition to the Chilean retirement scheme touted (quite correctly) by Herman Cain last night, in which people make mandatory payments into an account they actually own and which is managed, very conservatively, by independent financial institutions, is the long-term solution.

The Chilean system has been in operation for 30 years now and remains completely financially stable, even after weathering the ups and downs of the world stock markets over the past three decades. There’s no reason that something like this couldn’t be implemented in the United States. We wouldn’t need to change it all at once, and we wouldn’t need to require that current beneficiaries or those close to the retirement age be left twisting in the wind. Those people have planned their lives in reliance on their Social Security payments, and it’s only equitable that they receive them, even if they need to be funded out of general revenues. For younger workers, though, we could give them a choice to have an independent retirement system where they make the decision about how their money is invested, and the government would be relieved of the burden of ensuring the stability of the system.

That’s the kind of thing we should be talking about, not debating about whether or not Social Security is a “Ponzi Scheme.”

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. john personna says:

    The whole “there is no trust fund” thing relies on breaking the accounting view. If SS payments went to Prudential, and then from Prudential to US Treasury investments, no one would say that those investments did not exist.

    The argument is that since Prudential is not in the loop, there is no savings. It is an argument not based on contributions, or accounting, or math … only on naming. Since it is the government they’d have us believe that savings don’t count.

    Like or Dislike: Thumb up 2 Thumb down 0

  2. legion says:

    Well, I’m not good enough on financials to really argue this one, but I would like to point something out… if SS is a Ponzi scheme, isn’t it Perry’s generation of yahoos that created specifically so they wouldn’t have to work until they died, at the expense of other generations?

    Like or Dislike: Thumb up 2 Thumb down 0

  3. Polaris says:

    John,

    No, it’s a matter of basic honesty. For decades the govt (or at least many within govt) has willfully and cheerfully passed on and supported the notion that somehow each dollar you send in SS taxes is in your own little protfolio that the government protects, i.e. what Gore called his infamous “lockbox”.

    THIS IS A LIE

    The fact is our SS taxes go into the general fund which means there is no SS “Lockbox” or “protected accounts” and never has been. This is where the fraud part of the Ponzi scheme comes in.

    However, this is a lie that’s done an enormous amount of political damage because for decades many people believed it and didn’t want people messing with “their” money, not realizing it had been pilfered almost as soon at it was sent.

    -Polaris

    Like or Dislike: Thumb up 2 Thumb down 4

  4. Barry says:

    You’re quoting CATO on Social Security? And Chile?

    Like or Dislike: Thumb up 0 Thumb down 0

  5. Barry says:

    Sorry, I hit ‘post’ too soon:

    google ‘cato leninist plan’.

    The organization was founded to destroy Social Security.

    Second, please read Krugman on Social Security, to get some truth.

    Like or Dislike: Thumb up 7 Thumb down 0

  6. john personna says:

    @Polaris:

    You just made up a claim, to make a lie. That is very dishonest.

    What are the Social Security Trust Funds?

    The Social Security Trust Funds are the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) Trust Funds. These funds are accounts managed by the Department of the Treasury. They serve two purposes: (1) they provide an accounting mechanism for tracking all income to and disbursements from the trust funds, and (2) they hold the accumulated assets. These accumulated assets provide automatic spending authority to pay benefits. The Social Security Act limits trust fund expenditures to benefits and administrative costs.

    Benefits to retired workers and their families, and to families of deceased workers, are paid from the OASI Trust Fund. Benefits to disabled workers and their families are paid from the DI Trust Fund. More than 98 percent of total disbursements in 2010 were for benefit payments.

    A Board of Trustees oversees the financial operations of the trust funds. The Board reports annually to the Congress on the financial status of the trust funds.

    The government has never claimed that all our payments go into the fund, only (obviously) excess cash flow.

    Like or Dislike: Thumb up 5 Thumb down 0

  7. Tsar Nicholas II says:

    At the risk of beating a dead horse calling it a Ponzi scheme actually is an insult to Ponzi schemes. When someone is grifted by a Ponzi scheme they’re not taxed upon entry and then taxed again upon distribution of their partial return.

    As for the systemic failures of the system they’re as simple as math. A massive generation of recipients (the Boomers) will need to be supported by a tiny generation (the Baby Bust). When you factor in the unemployment problem for the younger generation the collapse of the system and by extension the economy at large becomes inevitable.

    Like or Dislike: Thumb up 1 Thumb down 3

  8. Polaris says:

    John,

    I’d accept that criticism if you just stuck to the official govt documents, but public officials (esp in congress) have for years insisted that our social security funds have been locked away and were safe. That’s never been true.

    There is a reason why most people until recently believe it, however. Whether you want to admit it or not, what I said is NOT a lie…just because the ‘truth’ (hard to find and written in a confusing way) can be found in the official govt fine print. That’s not what people hear or read and we both know it.

    -Polaris

    Like or Dislike: Thumb up 0 Thumb down 6

  9. Vast Variety says:

    So in other words you would give younger workers the option to Opt out of Social Security and instead put their money into Private Retirement Accounts that are heavily regulated (at least initially) and work basically like mutual funds.

    Something to think about..

    Like or Dislike: Thumb up 0 Thumb down 0

  10. VV,

    I don’t think they’d need to be much more “heavily regulated” than the existing IRA/SEP/SIMPLE/401k/403b system

    Like or Dislike: Thumb up 0 Thumb down 0

  11. john personna says:

    @Polaris:

    I’d accept that criticism if you just stuck to the official govt documents, but public officials (esp in congress) have for years insisted that our social security funds have been locked away and were safe. That’s never been true.

    What is that claim? I don’t even get it.

    If Prudential, or another insurance company, bought Treasuries for their retirement products, would they be “locked away and safe?”

    Like or Dislike: Thumb up 0 Thumb down 0

  12. john personna says:

    @Vast Variety: @Doug Mataconis:

    The problem is that private investors, on average, fail. We know that. It is the record gleaned from brokerage houses and mutual funds. [example]

    So, after people with private accounts fail, do they go on welfare?

    Is that really a net win for me, the taxpayer?

    Like or Dislike: Thumb up 7 Thumb down 0

  13. Polaris says:

    @john personna:
    When you say “Trust Fund” to your typical Joe in Peoria, he thinks of a bank vault where his money is kept.

    I know that; I believe you know that too; and the government definately knows that. That’s especially true since Joe in Peoria knows that if his money were in a private account, that account would be subject to risk. All honest brokers and brokerage houses won’t take a dime from you until they hammer the point home that investing any money has a non-zero chance of losing it all.

    My point is that the government and those in it have used and abused this (mis)conception to raid social security when it was pulling in massive surplusses in order to make the general budget look better. In fact Clinton’s vaunted budget surpluses would not have existed without this accounting gimmick.

    However, it’s a LIE, and now the proverbial chickens are coming home to roost now that SS has to pay more out than it takes in making it for the first time ever (since the 1980s iirc when it had to be readjusted) that SS is a net minus on the federal books.

    -Polaris

    Like or Dislike: Thumb up 0 Thumb down 2

  14. john personna says:

    Related: Risk and Returns of Stock Market Investments Held in Individual Retirement Accounts

    The thing to note in those graphs is that there are decades where it’s good to be born, and decades where it’s bad to retire.

    When you have a stock-market based private retirement plan, and you retire at the start of a long-cycle secular bear market, you are screwed.

    Like or Dislike: Thumb up 1 Thumb down 0

  15. john personna says:

    @Polaris:

    I think you’ve retreated off to “some people having a wrong idea” and “that is a lie.”

    Boring.

    Like or Dislike: Thumb up 2 Thumb down 0

  16. Polaris says:

    John,

    No I haven’t. People have been sold for decades that their social security money was theirs and was absolutely safe. It’s only relatively recently that the fact of the matter has percolated down to the consciousness of the electorate, and many are (unsuprisingly) ticked off.

    Go back to the 1992 campaign of Ross Perot. Ross Perot’s main issue (as we all know) was deficit spending. Whenever he mentioned SS accounts, the response (from both parties as I remember) was no, Crazy Ross, you are wrong. Your SS money is locked away and guaranteed so it won’t go belly up as you claim.

    Crazy Ross turned out to be not so crazy after all it turns out.
    -Polaris

    Like or Dislike: Thumb up 0 Thumb down 0

  17. Rick Almeida says:

    @Polaris:

    When you say “Trust Fund” to your typical Joe in Peoria, he thinks of a bank vault where his money is kept.

    In other words, you’re making things up as you go. Evidence or GTFO.

    Like or Dislike: Thumb up 3 Thumb down 0

  18. john personna says:

    @Polaris:

    No I haven’t. People have been sold for decades that their social security money was theirs and was absolutely safe. It’s only relatively recently that the fact of the matter has percolated down to the consciousness of the electorate, and many are (unsuprisingly) ticked off.

    Use some common sense. Social Security is supported by 4 things:

    – current contributions
    – accumulated assets
    – the treasury’s ability to print money
    – congressional commitment

    Eyeballing it, you only need any 2 of those 4 to keep making payments. But certainly, with the last, congressional commitment, the rest can be made to match.

    When you make this claim that there is no safety, you are making a political argument that congress feels no commitment, right? And that dovetails with your political goal of removing congressional commitment.

    Like or Dislike: Thumb up 2 Thumb down 1

  19. john personna says:

    Basically, Polaris is telling us that what happened in 1982 is impossible:

    Were the assets of the Social Security Trust Funds depleted in the past?

    The assets of the larger trust fund (OASI), from which retirement benefits are paid, were nearly depleted in 1982. No beneficiary was shortchanged because the Congress enacted temporary emergency legislation that permitted borrowing from other Federal trust funds and then later enacted legislation to strengthen OASI Trust Fund financing. The borrowed amounts were repaid with interest within 4 years.

    Like or Dislike: Thumb up 2 Thumb down 0

  20. Polaris says:

    John,

    I am saying no such thing and indeed I even allude to 1982. However, I remember 1982 very well, and that social security adjustment was one of the quietest changes ever made because both President Reagan and Congress knew they had to act, but knew that if that near miss ever became public knowledge, then the fecal matter would hit the fan. Even in 1982, publically all parties were saying, “Not to worry. We are making a few minor tweaks, but social security is fine. YOUR money is safe.”

    That of course was a lie. Once you wrote that check to the govt for SS tax, that money was no longer yours, but it’s been a convenient lie for decades.

    -Polaris

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  21. john personna says:

    @Polaris:

    “Not to worry. We are making a few minor tweaks, but social security is fine. YOUR money is safe.”

    If they said that, I’d think “YOUR” referred to future payments, and the government’s commitment to make them.

    I can see why you’d want to undermine the commitment. If you want to eliminate Social Security, you must first undermine confidence in it.

    Though surely you can see how chicken and egg that is. You need to destroy a working institution, in order to demonstrate its failure.

    Like or Dislike: Thumb up 4 Thumb down 0

  22. Vast Variety says:

    @john personna: The link you pointed to is discussing general investing and has nothing to do with IRA/SEP/SIMPLE/401k/403b accounts or mutual funds. Low risk accounts while having a low rate of return will almost always over time earn money as they have a natural tendency to rise along the same curve as the average of the market. They ride out the highs and the lows. Your never going to eliminate all risk. Even under the current Social Security system there is risk, and as we go along that risk is increasing due to the fact that Social Security benefits alone leave most elderly sitting near or just above the poverty line.

    Like or Dislike: Thumb up 0 Thumb down 0

  23. Polaris says:

    http://moneywatch.bnet.com/retirement-planning/blog/money-life/the-social-security-trust-fund-myth/2944/

    This is from CBS and it basically admits that by using such terms as “Trust Fund” the govt has misled the public for years. There are many other links.

    -Polaris

    Like or Dislike: Thumb up 0 Thumb down 0

  24. Polaris says:

    For the record I have no desire to get rid of social security. Many people (including my own grandmother before she passed as a widowed retired farmer) needed it and still need it.

    However:

    1. The retiirement age needs to be raised to at least 70 to make it dovetail with modern longevity demographics.

    2. It needs to be means tested.

    So far, nobody is willing to take the political heat for doing these things.

    -Polaris

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  25. john personna says:

    @Vast Variety:

    IRA/SEP/SIMPLE/401k/403b all offer a variety of mutual funds for allocation, and all of those rely on equity components for long term growth.

    What else do you think is in them?

    Like or Dislike: Thumb up 0 Thumb down 0

  26. Drew says:

    “If SS payments went to Prudential, and then from Prudential to US Treasury investments, no one would say that those investments did not exist.
    The argument is that since Prudential is not in the loop, there is no savings. It is an argument not based on contributions, or accounting, or math … only on naming. Since it is the government they’d have us believe that savings don’t count.”

    This is so ignorant. In this example, Prudential is just a broker or custodian. You actually own real live securities in return for your contribution, held by Pru. Further, Prudential does not spend your contributions on the horses, vacations, transfer payments to people, bridges to nowhere etc thereby depleting your account under the notion that it can borrow and pay you down the road if you decide to redeem your position. But the SS system does just this – it depletes your contributions. And what if the taxing or borrowing requirement to fund the non-asset backed SS system are simply untenable? Uh-oh. That’s why you are hearing talk about means testing to avoid honoring the obligation – code for bait and switch that makes Enron look like choir boys.

    The example cited applies only to leveraged entities. So, the money you deposit in a bank is not in a vault either. It gets invested. So you are reliant on the solvency of the bank should you decide to redeem. That’s why there is deposit insurance…..it transfers credit risk up to the FDIC limit from the bank to the government.

    Endeth the Finance 101 lesson that most people who decide to comment on this issue take the time to understand.

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  27. ratufa says:

    You’ve managed to touch on pretty much every silly anti-Social Security argument out there.

    For example, let’s look at the “the money has already been spent” argument:

    Of course the money has already been spent! Every time some entity gives the government money in exchange for an “IOU”, whether it’s some Wall Street firm buying treasury bills or the Social Security Administration getting a internal government security in exchange, the government then spends the money. It’s never been the case that the Social Security trust fund has consisted of gold doubloons. That these internal securities can’t be sold on the open market makes much less difference than you think it does — what matters is whether the government is willing/able to pay them off.

    It’s never been a secret as to how Social Security works, even if some politicians have made misleading statements. The bonds (or “IOUs”, if that makes you feel better) in the Social Security trust fund are US Treasury debt — that $14+ trillion number you see mentioned when talking about Federal debt includes the trust fund. Redemptions will be made from the Treasure general fund — meaning the money from income taxes and other general fund revenue. This is how the system is supposed to work. Why do you think payroll taxes were increased during the Reagan administration (ok, that might have been a loaded question)?

    The big difference between bonds in the trust fund and government debt held by the public is that the government can choose to renege on paying the bonds in the trust fund without the consequences that would arise from defaulting on public debt. Whether or not it chooses to do so, as opposed to cutting spending in other areas, raising taxes, etc, is a matter of politics. The “Ponzi scheme” claims are basically political arguments, meant to influence political opinion.

    None of this is to say that Social Security isn’t going to cause fiscal strains on government finances as our population gets older. Everyone paying attention has known about this for ages.

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  28. john personna says:

    @Drew:

    I think you’ve focused on parts of that thought experiment that don’t even matter. I used “Prudential” to signify any private company, to illustrate that if they did buy treasuries, we’d count them.

    Somehow you think the story was about the placeholder? lol.

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  29. Tano says:

    Doug,

    There are some point in your post that are just outrageously wrong.

    Social Security works by financing current benefits from the taxes received from current workers, then investing whatever surplus is left over (if any) in Federal Government bonds.

    This is not how the System is set up to work. The “surplus” is not an inherent feature of the system. It was a temporary fix, put in under Reagan, to address the existence of a demographic bubble – the baby boomers. While this bolus of people is in the workforce, there is “extra” revenue coming into SS. When they retire, there is excess outflow. So instead of simply lowering tax rates to avoid excess revenues (as would be the case in “normal” times), the deal was to collect the surplus, use it to pay down the national debt (by buying T bonds and having the Treasury use the money to pay off other obligations), thus opening up future borrowing capacity for when the boomers retire.

    Politicians have often exploited this misconception by referring to Social Security “Trust Funds” and “lock boxes” to give the impression that funds received via Social Security were separate and apart from general revenues when, in reality they weren’t.

    This is just ridiculous. The “trust fund” is a portfolio of Treasury bonds that the SS system holds. The SS system is a separate legal entity from the Treasury. The bonds it holds are legal obligations, backed by the full faith and credit of the US government, to the same extent that the T-bonds you may hold in your private financial accounts are. Is your private money in your bank account separate and apart from the general revenues of the US government? Same for SS’s money.

    The “lockbox” was, of course, the much-ridiculed proposal by Al Gore to insist that the money lent to the Treasury by SS be used to pay down other debt, and not used for spending. I would think that such a proposal would have been very popular with people like you.

    In other words, the government has already spent all of the money supposedly contained in the Social Security Trust Fund.

    Because, in part, the Republican and libertarian morons were too busy mocking the concept of the “lockbox”, which was simply a proposal to NOT spend the money, but rather to use it to pay off other debt., which would, in turn, open up borrowing capacity in the future when it came time to pay off the bonds.

    If there was an actual Trust Fund, then there never would have been a concern that Social Security payments might have been in danger.

    That is ridiculous. The danger was that the Fed Govt. was going to default on its obligations. Yes, the SS system holds bonds backed by the full faith and credit of the US. As do millions of investors world wide. If the Federal government defaults, then everyone is screwed, including SS. The entire financial system would collapse It is only under those conditions that there is any danger to the bonds held by SS.

    For younger workers, though, we could give them a choice to have an independent retirement system where they make the decision about how their money is invested,

    We have that already. There are all manner of financial instruments for private retirement planning – 401ks, IRAs. Roth IRAs. etc etc. You want to add to that, or create some umbrella account to rationalize the process? Fine – who would oppose that?
    But it should be, as it is now, in ADDITION to SS, which has always been designed not to be the primary retirement fund, but the safety net which could provide a minimum benefit that most people would build upon in their private accounts.

    Like or Dislike: Thumb up 6 Thumb down 1

  30. Rob in CT says:

    The “lockbox” was, of course, the much-ridiculed proposal by Al Gore to insist that the money lent to the Treasury by SS be used to pay down other debt, and not used for spending.

    Just think how much worse off we’d be if we’d followed that buffoon’s advice! Oh, wait…

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  31. Hey Norm says:

    “…The only thing left is an “IOU” from the Treasury Department…”

    I have a couple IOU’s in my pocket. They are signed by the Treasurer of the US and the Secretary of the Treasury. They have pictures of Andrew Jackson on them. What’s your point?

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  32. Dave Schuler says:

    I think the fuss over Social Security is much ado about not very much. We have a demographic hump which we have known about for sixty years. It can be coped with.

    The real problem is Medicare which is already in the red and, according to the Trustees, is unlikely to go into the black again.

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  33. Drew says:

    ratufa –

    You completely miss the point. Without asset backing of the fund you create a credit issue. That credit issue can only be resolved in three ways: taxing, borrowing or printing by the US Govt. On the first two, we are finding that its not so easy to fullfil the obligation as generally perceived. As I pointed out, that’s why means testing, new SS tax or eligibility provisions and on are being debated. Not so simple, and I’ll make a gentlemen’s bet that renigging on the obligation to some will be a part of the “solution.” That’s a polite way to say fraud.

    As for printing, that’s always an option. But someone who contributes a dollar but gets paid back in a dollar with the spending power of a nickel has been similarly effectively frauded.

    jp – Just words on a page. Nonsense.

    Like or Dislike: Thumb up 0 Thumb down 1

  34. Drew says:

    “It can be coped with.”

    Any funding problem can be “coped with” if you simply adopt an attitude that cash inflows and outflows can be dictated. The question become the fairness and equity of those dictated policies. “Coped with” doesn’t seem so benign a phrase then.

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  35. john personna says:

    @Drew:

    jp – Just words on a page. Nonsense.

    When you can’t say something smart, say something empty.

    Like or Dislike: Thumb up 3 Thumb down 1

  36. john personna says:

    @Drew:

    Any funding problem can be “coped with” if you simply adopt an attitude that cash inflows and outflows can be dictated. The question become the fairness and equity of those dictated policies. “Coped with” doesn’t seem so benign a phrase then.

    Actually, at it’s heart, this quote negates the “ponzi” claim, and makes it (correctly) a pragmatic balance of inflows out outflows. And sure, fairness matters.

    And certainly, any accrued balance, inflows-outflows, represents a real reserve, and not a “lie.”

    Like or Dislike: Thumb up 2 Thumb down 0

  37. michael reynolds says:

    People, people, you’re all missing the point.

    Obviously we need people to die a bit younger and this whole thing is solved.

    This is the inevitable result of our reckless effort to curb smoking. We can save future generations by subsidizing cigarettes and running a series of ads to promote a return to tobacco. (And think of the job creation in North Carolina!)

    But this won’t help us in the short run — cancer takes too long to develop. If we encourage teens to start smoking today they won’t start dying off for another 40 years. We can’t wait that long.

    Fortunately I have a series of seven practical steps we can implement today. I call it the Timely Death Act.

    1) No airbags or seatbelts in Lexuses or Buicks.
    2) Extra airbags in Scions and Neons.
    3) Trifocals hell, single vision lenses only.
    4) New version of the “I’ve fallen and can’t get up” system summons street gangs not paramedics.
    5) Motorcycle licenses only for those 50 or over.
    6) Outlaw bathtub safety strips.
    7) New tradition: The Running of the Seniors.

    Pass this bill now.

    Like or Dislike: Thumb up 4 Thumb down 0

  38. Moosebreath says:

    Doug,

    “Obviously, the current system cannot be sustained without ruinous FICA tax increases, drastic cuts in benefits for future retirees, or a vast and lethal plague that affects only the elderly”

    Since the amount at issue is about .7% (that’s seven tenths of one percent) of annual GDP, somehow the words “ruinous” and “drastic” are more than a bit overblown and misleading. Dave Schuler has it exactly right. Social Security is a known quantity and can be coped with. Medicare is the big issue.

    Like or Dislike: Thumb up 5 Thumb down 0

  39. WR says:

    Of course there’s an insanely simple fix for SS — just raise the ceiling on taxable income. Poof, shortfall disappears.

    But of course, In Tealand (and Randland), it’s much better thant seniors starve on the street than that billionaires pay a nickel in taxes.

    Like or Dislike: Thumb up 2 Thumb down 0

  40. john personna says:

    4) New version of the “I’ve fallen and can’t get up” system summons street gangs not paramedics.

    That one’s best.

    Like or Dislike: Thumb up 1 Thumb down 0

  41. Dave Schuler says:

    Okay, let’s flesh out “coped with ” a bit more. Raise FICA max a bit, raise SSRA a bit. Those two alone could fix it. We could also adjust the formula for COLAs. More extreme: means-testing.

    Fixing Social Security doesn’t require uprooting the system root and branch and it doesn’t warrant all of the chest-pounding that’s going on.

    Like or Dislike: Thumb up 4 Thumb down 0

  42. Andre Kenji says:

    The Chilean model requires the companies that administer the pensions to be bailouted from time to time. Besides that, there is the problem of these companies exerting too much control over the economy.

    Like or Dislike: Thumb up 0 Thumb down 0

  43. Hey Norm says:

    @ Dave Schuler…
    Medicare is only a symptom of Health Care costs in general. You can fiddle around the edges of Medicare – and I don’t have a problem with that. But Health care inflation is unsustainable for business and individuals as well. It’s a tragedy that Republicans could not act like adults during the year we worked on the ACA. What we ended up with is a start…but with bi-partisan cooperation it could have been more. Alas…that’s the current state of the GOP.

    Like or Dislike: Thumb up 2 Thumb down 0

  44. gVOR08 says:

    This whole discussion of whether SS is a Ponzi scheme is ridiculous. Perry’s use of the term, and this post, are smoke screens to hide the real issue. Promises were made, bonds were bought and paid for, SS can present those bonds and Treasury is obligated to redeem them. Unless some future congress decides otherwise. This is all about providing political cover to that congress by pretending the decision is already made or inevitable.

    Republicans borrowed your SS money to pay for their wars and tax cuts. Now they don’t want to pay it back. It is that simple.

    Like or Dislike: Thumb up 7 Thumb down 0

  45. Vast Variety says:

    @john personna: They don’t operate in the same way which is the point. But you feel free to continue your distortion.

    Like or Dislike: Thumb up 0 Thumb down 2

  46. ponce says:

    For younger workers, though, we could give them a choice to have an independent retirement system where they make the decision about how their money is invested, and the government would be relieved of the burden of ensuring the stability of the system.

    Um, the whole point of Social Security is its guaranteed income in retirement.

    Once the crooks on Wall Street have drained the retirement accounts of an entire generation of Americans, we’ll be back to we were in the 1920s trying to figure out what to do with millions of sick and starving senior citizens.

    Like or Dislike: Thumb up 1 Thumb down 0

  47. Drew says:

    Dave –

    I think we’ve got to do better on what “a bit” on FICA max and SSRA really means. It needs to be quantified. Non-quantified ideas don’t work in the real world, and can’t be tested in the political environment in which they must be passed. Similarly, means testing needs to be quantified. Any means testing equals violating the implicit contract of SS. Lord knows what would actually be needed to reach solvency.

    I think you and I are on the same page that it is resolvable. I’m pointing out that we shouldn’t sugar coat it with “coping” or “a bit.” Those are subjective descriptions, and I don’t think what people who entered the system years ago thought they had bargained for. They will be mad as hornets. Serious issues shouldn’t be sugar coated just because they aren’t the most acute.

    This is like a patient who presents in the ER in full cardiac arrest (Medicare) but also has a gun shot hole in their liver (SS) and describing the relative problems as “a bit” and “we can cope” for the gunshot wound. I don’t think our doctor friends would be as sanguine.

    Like or Dislike: Thumb up 0 Thumb down 0

  48. SKI says:

    Shorter Doug: “Because of the rising cost of health care and the projected massive deficits that will cause if we don’t raise taxes, let’s destroy the defined benefit attribute of Social Security and make our future seniors play roulette for their future security.”

    Like or Dislike: Thumb up 1 Thumb down 0

  49. SKI says:

    @Hey Norm:
    As someone who works in Health care, this is dead on. The issue isn’t Medicare but how our entire health care system is structured.

    Like or Dislike: Thumb up 0 Thumb down 0

  50. SKI says:

    @michael reynolds:

    But this won’t help us in the short run — cancer takes too long to develop. If we encourage teens to start smoking today they won’t start dying off for another 40 years. We can’t wait that long.

    Actually, that is pretty much perfect. They can pay in for their entire working lives then die right before they (a) qualify for Medicare to bear the costs of their cancer and (b) draw on Social Security. We may need to deficit spend (i.e., borrow) for a few years to cover the years before this cohort starts to die but we will easily be able to pay it off after they start dropping.

    Like or Dislike: Thumb up 0 Thumb down 0

  51. john personna says:

    @Vast Variety:

    IRAs and the rest buy equity mutual funds and bond funds. How can they not be “like” what they are?

    Like or Dislike: Thumb up 0 Thumb down 0

  52. john personna says:

    Do you have a retirement account? Do you own mutual funds in it?

    Like or Dislike: Thumb up 0 Thumb down 0

  53. jan says:

    Here is an interesting article comparing the immediacy of medicare over SS.

    Like or Dislike: Thumb up 0 Thumb down 0

  54. David M says:

    @jan: That is exactly why many people keep saying health care reform is much more important than social security reform.

    Like or Dislike: Thumb up 0 Thumb down 0

  55. anjin-san says:

    The “lockbox” was, of course, the much-ridiculed proposal by Al Gore to insist that the money lent to the Treasury by SS be used to pay down other debt, and not used for spending. I would think that such a proposal would have been very popular with people like you.

    Thats the way I remember it, and I remember he was shredded by the right for making what seems like a reasonable and prudent proposal. Now out in tea party land it has morphed into “AlGore claimed Social Security was in a lock box.” Which is right up there with the stupidity of “AlGore says he invented the internet.”

    Like or Dislike: Thumb up 2 Thumb down 0

  56. Terrye says:

    I guess my problem is that I feel as if people like Perry actually believe this is a ponzi scheme…then why rush to assure us all that it should be saved..why save ponzi scheme? It is as if they want it both ways. They want to trash the system, but assure its survival. I think I would have more respect for Perry if he said we should just let it go away. At least that would be consistent.

    Personally, I don’t think the system is illegal or unethical or a failure. I do think that entitlement reform is necessary however to maintain any sort of safety net. Democrats need to come to terms with that.

    Like or Dislike: Thumb up 0 Thumb down 0

  57. Terrye says:

    @Polaris: I can honestly say that I never thought they put my payroll tax in an account just for me. I think you are underestimating the average person…most people know that the taxes we pay go to pay benefits for people in the system.

    Like or Dislike: Thumb up 0 Thumb down 0

  58. Polaris says:

    @Terrye:

    I can honestly say that I never thought they put my payroll tax in an account just for me. I think you are underestimating the average person…most people know that the taxes we pay go to pay benefits for people in the system.

    Terryre, I’ll take your word on it, but it’s a illusion (heck I call it a lie) that the SS Adminstration itself promotes in it’s regular mailings. I’m sure you (and everyone else) has seen then. They are a little brochure that supposedly details how much money you’ve contributed to your account, and then they do a little hocus pocus and tell you what you should be getting as a payment. Unless you know better, you’d swear they are acting as your own little brokerage.

    That IMHO elevates SS to fraud.

    -Polaris

    Like or Dislike: Thumb up 0 Thumb down 1

  59. Racehorse says:

    One solution has been proposed in the past: give people some options with the SS money such as being given the choice of investing some of it. Any money made would be tax free, exempt from capital gains. Think of where many people would be now if this had been implemented years ago – millionaires with no more need for SS support when they retired! This would just be an option. Think of how it would help businesses with this influx of investing.
    This was proposed years ago by Senator Daniel Moynihan and then in 2000 by President Bush.
    It got nowhere because of the SS “scare” that is put out every time any change is proposed.

    Like or Dislike: Thumb up 0 Thumb down 0

  60. john personna says:

    @Racehorse:

    Another thought … what is the SS withholding rate? Something like 6%?

    I hate to break it to you, but in an uncertain world, we should be shooting for something like the Chinese savings rate … 30%

    It is all about savings rate.

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  61. ratufa says:

    @Drew:

    I was responding to Doug’s original post, not anything you said.

    Like or Dislike: Thumb up 0 Thumb down 0

  62. Bill says:

    There are laws that prohibit the use of social security revenues (funds) from being used to fund other non-related federal debts.

    One is the the Budget Enforcement Act of 1990. Section 13301 of this act made it a violation of federal law to use social security revenue for non-social security purposes.

    It should be noted that some sections of the aforementioned act has been amended several times, however Section 133301 has never been repealed.

    The other is the statutory Pay-As-You-Go Act of 2010 (PAYGO)

    Listed below is some specific exemptions to PAYGO.

    PAYGO subjects mandatory spending to sequestration, with specified exemptions. Exemptions from sequestration include Social Security; most unemployment benefits; veterans’ benefits; interest on the debt; federal retirement; and the low-income entitlements such as Medicaid, SNAP (food stamps), and Supplemental Security Income. The major remaining mandatory programs, which are subject to sequestration, include most Medicare payments, farm price supports, vocational rehabilitation basic state grants, mineral leasing payments to states, the Social Services block grant, and many smaller programs. (sequestration also means confiscation.)

    Given the fact that Section 13301of the Budget Enforcement Act of 1990 made it a violation of federal law to use social security revenue for non-social security purposes, it is hard to justify how our elected officials can use the word “borrowed” to refer to any of the revenue (monies) they confiscate from the social security fund, even if it is eventually paid back.

    The reason our elected officials cannot justify the taking of social security funds as long as they are eventually paid back is due to the fact that the revenues they receive to pay back the funds they (borrow) confiscate from the social security fund comes from the same source, “the taxpayers.” In other words they are creating an additional special hidden tax on the taxpayers which they, the taxpayers, have a mandatory duty to pay or face charges of tax evasion.

    I cannot speak for others, however, I can speak for myself.

    I do not object to paying my fair share of taxes. However, I do object when our elected officials use the original tax monies I have paid for other purposes than that which they were originally intended and then expect me to come up with addition revenue (taxes) to replace the monies they have collected from me in the form of taxation.

    In other words I consider this form of double taxation which our elected officials have approved to be nothing less than fraud on their part. More importantly, I feel they should be held accountable for their actions whenever they misuse the tax monies they have collected from the taxpayers.

    The following is something that our elected officials need to understand.

    The social security program was not created as a private banking account for the government to pay off other non-related debts of the federal government at their leisure. The social security program was created as a safety net for the people in order to assure they would have some form of income later on in life when they need it.

    They also need to understand that social security is not a “Pay-As-You-Go.” program

    The Pay-As-You-Go Act of 2010 (PAYGO) has made it very clear that social security, and the low-income entitlements such as Medicaid, SNAP (food stamps), and Supplemental Security Income is exempt from the mandatory cuts which most of the legislative body of congress want to pass, in order to allow them to reduce the federal debt.

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  63. Eric Florack says:

    Is Social Security A Ponzi Scheme?

    Yes.
    Next question.

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  64. Carly EngageAmerica says:

    Social Security may not be a “Ponzi scheme,” but the way in which the program functions now is unsustainable. Social Security is projected to go bankrupt in 2037. Currently Social Security and Medicare use 8.5% of nonentitlement revenuees (federal revenues dedicated to all other programs besides the two). By 2020, the deficits will grow to almost 25%. This means that within 9 years, in order to pay projected benefits to retirees and the disabled, the federal government will have to stop doing about one out of every five things it does today (http://eng.am/poetWU).

    All of the following solutions will substantially eliminate these problems. Choose one and let Washington know what you think:
    a. Reduce benefit payments by 5% AND increase the retirement age to 70 over time
    b. Increase both the employee and employer contribution immediately by 1.1% for income up to $106,800 (its current limit)
    c.Reduce benefit payments by 5% AND increase both the employee and employer contribution immediately by 0.05% each year for the next 20 years for income up to $106,800 (its current limit)
    d. Remove the $106,800 limit and count all income towards the SS tax
    e. Decrease the cost of living adjustment by 1% per year AND raise the retirement age to 67.
    f. Tax income over $106,800 at 3%, index the retirement age to longevity AND decrease cost of living adjustment by 0.5%
    Source: http://eng.am/oTlck2

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