IS SOCIAL SECURITY A PONZI SCHEME?
This evening’s Tea Party Debate in Tampa Bay is once again running into the whole “social security is a ponzi scheme” argument as Rick Perry and Mitt Romney go after one another on this hotly contested subject. Perry has consistently referred to the program as a “ponzi scheme” – a term which has come under harsh criticism from many on the left and right who claim that the term is misleading and hyperbolic. And they’re exactly right.
First of all, let’s get the definition of a ponzi scheme right. According to the SEC, a ponzi scheme is “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” Quite simply, a ponzi scheme involves the promise of future payments that current returns do not justify.
The confusion in the Social Security debate revolves around this idea that there is a “trust fund” that current workers pay into to fund those who are currently receiving the benefits. Due to a multitude of factors, the current beneficiaries are essentially receiving more than they themselves paid into the system. So, this “trust fund” appears deficient. It has the appearance of paying more out than it brings in. But this is a misconception of the way government spending works.
This sort of debate gets right at the heart of the misconceptions regarding the U.S. monetary system and the many myths that persist. This myth that the Social Security Trust Fund might “run out of money” is as silly as the whole debt ceiling debate and this idea that we can “run out of money” that we can literally create out of thin air. Of course, there’s simply no such thing and the confusion stems from the public’s constant desire to compare a currency issuer to a currency user. But this comparison is completely illogical. A currency user is always constrained in his/her ability to spend. The same cannot be said of a currency issuer, who has no traditional solvency constraint – as in, not being able to meet one’s obligations. The USA can always create dollars to meet its obligations. What the steward of these dollars needs to consider is their potential inflationary impact.
The USA always has the money to make its social security payments. More importantly, what there is here, is a group of citizens who need to decide whether or not we, as a nation, want to provide these benefits for our elderly. In doing so, we don’t need to measure whether or not we have the money to pay future beneficiaries. What we need to decide is whether these benefits are consistent with the size of government and prosperity that we as a nation desire for ourselves. This might sound like tautology to some, but it is most certainly not. Our approach to government spending requires a dramatic overhaul in this nation. One which tries to align the needs and desires of its citizens with the size of government we desire. Hyperbolic terminology which implies that we “can’t pay” only misleads the voting public, generates unnecessary fear and misconstrues what the real debate should focus on.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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244 Comments
A lot of very good posts here. But none seem to address the real problems of Social Security.
When SS was created, in 1937, it overwhelmingly applied to men, since women did not participate in the workforce as much as they have since the 1970s. The life expectancy of a man in 1937 was 67. SS, therefore, was designed to take a lifetime of taxes and insure 2 years of retirement. Pretty easy to do.
SS is a Defined Benefits program. These are used by major corporations and other government entities worldwide and the problems they face are identical to SS. In a Defined Benefits program, a participant is usually promised income for life. The level of income is determined by the wages paid to the worker during their career, and, in most cases, with heavy emphasis on their last 3 years. This is also how SS is structured.
Not surprisingly, corporations are moving away from these types of programs toward the increasingly popular 401K programs, which are Defined Contribution programs. The big difference, and I mean Big, is that in a Defined Contribution program, the risk of having enough for retirement is the participant’s, not the plan sponsor’s.
Also not surprisingly, participants prefer the Defined Benefit program, while companies and government entities prefer the Defined Contribution program.
But Defined Benefit programs have bankrupted major corporations. Today they are disappearing from the private sector, while they remain ever present in the public sector. You can still get a job as a school teacher, work for 25 years and retire with a pension. I don’t know for sure, but I’m pretty confident that Google and Apple do not offer such deals to workers.
At the heart of the difficulty that Defined Benefits programs face is the success of our way of life. Retirees are now living quite a bit longer than when these plans originated. Today the work force is roughly half women, who live longer than men.
It is not uncommon for a female school teacher to work 25 years, retire, and collect a pension for 30 or more years. The numbers don’t work. They don’t work almost no matter what you do.
The few ways in which it can work is if you have an ever growing number of workers, or, if you do not have cost of living increases (COLAs). Neither of these are true of SS and most pension funds.
The public sector, the last great bastion of the Defined Benefit program, has great difficulty modifying its programs. That’s because any major changes, such as eliminating COLAs, requires legislative approval. In short, politics give the power to the worker, making change very difficult. Unlike in the private sector, where a plan either is modified or bankrupts a company, in the public sector they can keep these things going by raising taxes. Or, as Cullen has pointed out, printing more money.
If a Defined Benefit program can be modified to respond to changes, such as people living longer, it may be able to survive.
In short, SS needs to change, or all of us face higher taxes or inflation or both. SS needs to increase the retirement age now for those not yet in the workforce. It may need to include means tests for whether someone gets SS.
IRA accounts are an attempt to move the workforce toward a Defined Contribution plan. The difficulty is that, we the people, are ultimately going to pay the price for those who do not save, no matter what we do. If we move the country off of SS to more Defined Contribution, then those who fail to save and invest wisely become wards of the state. We don’t escape caring for them, and paying for them.
Your summary makes sense. We can, and will adjust SS parameters as needed. Fundamentally, we need to have productive people stay productive longer. It is already happening. It is in my long term plan.
AND we need to provide basic care for non productive memebers of our society, even those who will not become productive, due to age, or disability.
It is reasonable to discuss the limits of basic care funded by government. Just keep the discussion honest, that’s all we can hope for.
Roger, the added benefit to all this is that there seem to be many health benefits to working longer, especially for men.
That said, there is no free lunch. Older workers staying in their jobs make is harder for younger workers to advance. One of the main reasons SS was created was to move older workers out of the work force to make it easier for unemployed younger workers to find jobs. If we now push retirement age up, we run the risk of making life more difficult for younger workers.
Of course, if we retire earlier, we make life more expensive for younger workers.
A client recently asked me when I thought all these problems would be worked out and my answer was, “When we’re all dead.” That’s probably correct. Too many of us Boomers are in the way, no matter how you slice it.
But, we’re here now. 84 million of us. Some of us will keep working and others have already retired. What has to be figured out now, for our children and grandchildren, is how do we get through this period, and turn the world over to them, without destroying everything the last several generations have built up, just because we are a large and healthy group of elders.
Calling it a Ponzi scheme will move the needle over toward destruction. I think we can do better than that. Too bad that kind of demagoguery gets so much attention and credibility. We need real solutions, not slogans and sound bites.
Just the debate we are having in the UK. Raising the retirement age is possibly healthy, and we are doing it (but it has issues for those whose labour is manual and less valuable or impossible in old age), the gender gap in longevity, the gap between private and public sector pension provisions, the high unemployment among youth, and most controversially of all, means testing for health and other aid in old age (which encourages “double dipping” – you have to spend it first to claim it).
The private sector has led the way (not entirely altruistically, of course) with defined benefit schemes. And while private sector schemes do have to be funded, it’s perhaps easier (if not correct) to draw an analogy between them and public sector obligations when framing the political debate about the latter (which is where we are today). Okay, a “ponzi scheme” may not be a technically correct description. But they are cons. That these schemes are sadly unaffordable (yes we have the GBP, but it would be irrational to allocate them thus) is a point that could be made. But those arguing against cuts will just assume that they can bring down a government, and kick the can down the road. There’s little intergenerational comradeship, it seems.
Somehow, we have to make, with complete credibility, the point that these benefits are going to be reduced or capped, without later capitulation. Not an easy thing to suggest, if you are a politician, when many in your electorate are either state employees or lower paid private sector ones relying on the universal state pension.
In the UK, the political approach so far has not (mainly) been to suggest bankruptcy of the system per se, but to capture the support of those in the private sector envious of the terms of those in the state sector. Envy is a powerful tool.
Cullen,
I think Social Security is a Ponzi Scheme. The problem with Ponzi schemes is that they go dry when times get tough and nobody will cough up new money. Fortunately, our social security ponzi scheme never runs out of money due to our currency issuer privilege. I just think the ponzi has gotten a little out of whack as older investors are getting more money than they should.
Perhaps it’s time for Cullen to require that visitors register before they can comment. That way it should be easier to banish those who come here to disrupt instead of to debate and to learn.
Another lost investment opportunity.
I would have never thought to buy the SS Ponzi scheme calls. I just never saw a 240 thread post coming. I was short and lost this one.
I’ve got as much success predicting high thread posts here as I did with getting Mormon Lisa XXXX in 9th grade to believe I would Marry her if she…….
I still think about the one that got away.
In the spirit of the TPC and to stay on topic…I agree with what ever beowulf said. I was going to say the same thing he beat me to it.
Aspen 1880:
For the third time, do you consider Medicare Part D fully funded?
Don Levit
Until recently, SS was a perfectly self-sufficient insurance program. The “trust fund” was created ostensibly to “save up” money for the retirement of a population boom that threatening to be entitled to more than the future workers could pay. Instead, they raised the FICA taxes during the time the boomers were working to save up with the intent of then drawing on the fund when those boomers retire.
If we take Cullen seriously (that there is no “money” there, but rather the government creates money as it’s needed) then what were the surplus FICA taxes for? Would the Bush tax cuts for the wealthiest Americans have been passed if we hadn’t had a “budget surplus” at the time? I doubt it. This makes it sound like the surplus FICA taxes they’ve been collecting over the last three decades were a back-door transfer of wealth from workers to the wealthy, no? Maybe that’s a good thing. Maybe democracy doesn’t work and the only way to get the middle class to back off in their demands is to trick them?
Cullen
How is censoring and timeouts much different censoring some MMTers accuse Thoma of?
MMT wants mainstream economist to engage the MMT dialogue rather than ignore it. But at times when things get difficult you don’t extend the same generosity that you expect from mainstreamers.
Be the change you want to see.
If MMT cannot be openminded in a dialog why do you expect mainstreamers must be?
Baychev, it’s your destiny to join the dark side….
Cullen:
Does your website have a function that would allow commentators to vote others off the island?
It’s not that I would vote Baychev off: it is that clearly you spend a great deal of time managing comments, and responding to them (which is actually one of the better features), YET, it seems to get on your nerves.
To steal an analogy from hangemhi, can you enlist the aid of responsible uncles at the wedding to usher the offending drunk out the door? I see the attempts, but not the machinery.
Of course, we need to hear dissent, or become victim to groupthink, but I think there is plenty of reasonable dissent. A little bit of group policing won’t stop that.
This is a wonderful free (ad supported) resource, that I would not like to see degraded. Happy to clean up after the party from time to time.
There’s only one consistent commentor I would vote off- Jo.
Roger and others,
I really prefer not to ban people or be forced to censor. Rather, I would prefer to just see other users try to promote and uphold the environment we’ve created by telling these bad apples why they need to shape up or ship out.
I always appreciate any aid. So thanks.
“I really prefer not to ban people or be forced to censor.”
Of course. However sometimes necessary.
“Rather, I would prefer to just see other users try to promote and uphold the environment we’ve created by telling these bad apples why they need to shape up or ship out.”
Also known as “feeding the trolls”. It just depends on your view of the sincerity of the commenter and their attempts to understand other points of view vs. just wrangling.
Your site. Thanks for the generosity of your time in creating/maintaining it. Your choice on spending those resources on creating new content or policing the comments.
If Roger is suggesting that no one would question your commitment to all points of view if you chose to limit some commenter’s rights here, I would second the motion.