Social Security as a Ponzi Scheme
Social Security is like a Ponzi scheme in one way but not in other, more important ones.
Jonathan Bernstein is annoyed at the “Social Security is a Ponzi scheme” meme.
After all, a Ponzi scheme is a deliberate fraud. Saying that Social Security is financed like a Ponzi scheme is factually wrong, but saying that Social Security is a Ponzi scheme or is like a Ponzi scheme is basically a false accusation of fraud against the US government and the politicians who have supported Social Security over the years.
The Ponzi scheme meme is overwrought but, as I understand it, just means that both promise big payouts on the theory that there will always be more investors to fund it and collapse if there aren’t. Social Security is a Ponzi scheme in the limited sense that, if there aren’t enough young folks to pay for the burgeoning population of retirees then the system collapses unless we continue to ratchet up taxes on the working population or pay out less to retirees than we promised.
But, no, it’s not a Ponzi scheme in the broader sense. The intent of a Ponzi scheme is to enrich the initiator and early investors by bilking later investors; they fully know the pyramid will collapse on others will be left holding the bag. The intent of Social Security is to provide a bare minimum pension for the elderly; it’s been doing that quite nicely for 75 years.
Is it in trouble? Well, the Trustees think so:
Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and will require legislative modifications if disruptive consequences for beneficiaries and taxpayers are to be avoided.
The long-run financial challenges facing Social Security and Medicare should be addressed soon. If action is taken sooner rather than later, more options and more time will be available to phase in changes so that those affected have adequate time to prepare. Earlier action will also afford elected officials with a greater opportunity to minimize adverse impacts on vulnerable populations, including lower-income workers and those who are already substantially dependent on program benefits.
Both Social Security and Medicare, the two largest federal programs, face substantial cost growth in the upcoming decades due to factors that include population aging as well as the growth in expenditures per beneficiary. Through the mid-2030s, due to the large baby-boom generation entering retirement and lower-birth-rate generations entering employment, population aging is the largest single factor contributing to cost growth in the two programs. Thereafter, the continued rapid growth in health care cost per beneficiary becomes the larger factor.
Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The $49 billion deficit last year (excluding interest income) and $46 billion projected deficit in 2011 are in large part due to the weakened economy and to downward income adjustments that correct for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink to about $20 billion for years 2012-2014 as the economy strengthens. After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Through 2022, the annual cash deficits will be made up by redeeming trust fund assets from the General Fund of the Treasury. Because these redemptions will be less than interest earnings, trust fund balances will continue to grow. After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085.
Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable wages will grow rapidly from 11-1/2 percent in 2007, the last pre-recession year, to roughly 17 percent in 2035, and will then dip slightly before commencing a slow upward march after 2050. Costs display a slightly different pattern when expressed as a share of GDP. Program costs equaled roughly 4.2 percent of GDP in 2007, and are projected to increase gradually to 6.2 percent of GDP in 2035 and then decline to about 6.0 percent of GDP by 2050 and remain at about that level.
The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 2.22 percent of taxable payroll, up from 1.92 percent projected in last year’s report. This deficit amounts to 17 percent of tax receipts, and 14 percent of program outlays.
The 0.30 percentage point increase in the OASDI actuarial deficit and the one-year advance in the exhaustion date for the combined trust funds primarily reflects lower estimates for death rates at advanced ages, a slower economic recovery than was assumed last year, and the one-year advance of the valuation period from 2010-2084 to 2011-2085.
While the combined OASDI program continues to fail the long-range test of close actuarial balance, it does satisfy the conditions for short-range financial adequacy. Combined trust fund assets are projected to exceed one year’s projected benefit payments for more than ten years, through to 2035. However, the Disability Insurance (DI) program satisfies neither the long-range nor short-range tests for financial adequacy. DI costs have exceeded non-interest income since 2005 and trust fund exhaustion is projected for 2018; thus changes to improve the financial status of the DI program are needed soon.
Does that mean we’ll simply stop paying out on old folks, making it a Ponzi scheme in effect if not by design? It’s simply inconceivable. Most likely, we’ll instead address the issue by some combination of modest increases in taxes, modest increases in the retirement age, and modest means testing.