It's not really a Ponzi scheme. A Ponzi scheme pays interest to attract investors so it needs significantly more customers with each iteration. Madoff's infamous one paid out 12% annually, so it needed to grow by 12% each year just to achieve stasis (or it would have if cash outs equaled profits anyway, some years it was probably more or less).
Social Security isn't a Ponzi scheme because it would work perfectly well if the population remained stable over time, or shrank. And it would even be alright if it grew slowly and linearly.
What really throws a wrench in the cogs is when the generation retiring is much larger than the ones still working, especially the one or two before it. This is why the Baby Boomers leaving the work force is so problematic.
The good news (in a sick sort of way) is that our diet and health care are so bad that we save a little due to lifespans actually shrinking. People mistakenly attribute the problem to longer lifespans, but the expectancy of a working-age adult (the only group that matters for the purposes of entitlements) has barely budged since before Social Security was invented, and is now quite possibly shrinking. Lifespan from birth (as it is typically expressed) has risen almost entirely due to lower infant mortality.
the main problem with Social Security isn't really changes in population size (though it still is a problem). The core problem of Social Security is this:
"Taxes paid by today’s workers are used to pay today’s retirees. If money is left over, it finances other government spending—though, to maintain the insurance fiction, paper entries are created in a “trust fund” that is simultaneously an asset and a liability of the government. When the benefits that are due exceed the proceeds from payroll taxes, as they will in the not very distant future, the difference will have to be financed by raising taxes, borrowing, creating money, or reducing other government spending."
Basically politicians (of both parties) raid the Social Security fund and just leave IOU notes behind to fund their pork projects. If the money was untouchable and only used for Social Security, the problems we'd see with just population changes wouldn't be nearly as bad... hence (I could be wrong but I feel) this is one of the core arguments that Social Security is a Ponzi scheme.
No, that is entirely incorrect. The government borrowing from SS is no different than them borrowing from the Chinese, either way it has to be repaid. At least this way the interest is going to Americans. Government borrowing itself may be a problem, but it's an entirely separate one.
The kicker is the first sentence. Today's workers pay today's retirees. The payments are designed to ensure a consistent, inflation adjusted standard of living for retirees. If the ratio of retirees to workers stayed the same, the payments would. But when there fewer retirees per worker, workers pay less, and when there are more, they pay more. It's the system's fatal flaw.
The problem now is that baby boomers paid much lower Social Security taxes than us, but they still need to receive the same standard of living that we will. You can see the historical rates here:
They paid a lower % with a much lower cap, even adjusted for inflation. They did so because the retiree to worker ratio was lower. If they paid the same percentage and cap that we do now, Social Security would be sitting on enough money to cover the shortfall in the future.
In 20 years, that ratio will be much higher than today, meaning the workers of 2018 would have to pay far higher taxes still for the system to fund itself. This would, of course, be unbearable (it's already close) so the government will have to seek other solutions, such as borrowing money or printing.
The government borrowing from SS is no different than them borrowing from the Chinese, either way it has to be repaid.
I'd like to offer you an annuity. Here's how it works: you give me about 15% of your paycheck every year, and I spend the money on whatever I feel like. I replace it with a piece of paper that says "Dear Byrneseyeview: Please tender to the bearer -- Byrneseyeview -- an amount equal to the sum borrowed)." See how this 100% foolproof scheme might break down?
a) Government borrows $4 trillion from the Chinese at 2% annually.
b) Government borrows $4 trillion from Americans, by way of Social Security, at 2% annually.
What's the difference in what the government owes after 10 years? Either way the government has to raise $4 trillion (plus interest) in taxes, borrow it, or print it to pay it off. Either way everyone is in the exact same boat, except in boat b, Americans get the interest. In boat a the Chinese do. (Unless you count borrowing from the Chinese, leaving the Social Security money in a CD, and defaulting to on the borrowed money while paying out SS an option, which it isn't.)
I wasn't suggesting that government borrowing is not a problem. It is. They probably should just not borrow the $4 trillion from anywhere. But that's just a different issue that has nothing to do with Social Security, as many economists have pointed out.
You're right it doesn't make any difference, but your point is irrelevant.
Social security is only as "sound" as the will of future taxpayers to pay the inevitably increased taxes required to keep it going, regardless of whether the money is borrowed, promised, set-aside, appropriated, recommended, etc.
Since its inception, social security benefits have been cut little by little to the point where middle class people must significantly supplement it with their own private investments to avoid poverty in retirement.
So there still may be something called "social security" in 20 or 30 or 50 years, but chances are it will bear little similarity to the program's initial inception or even to the program people think of it as today.
You also argue that the government should borrow money. Why not just tax today for what we spend today? Had we done that, Bush would never have been able to go to war in Iraq, the "trust fund" would not be in danger, etc.
Not to digress, however. The biggest threat to social security is that congress won't have the will to use the limited available tax revenue for the program, and the public won't want the drastically increased taxes.
Obama wisely suggested switching SS over to be a welfare program and funding it from general revenue, but the initial concept was that it's not welfare and so nobody should feel like they are on welfare when they receive their social security check. This is a fairly significant matter.
The problem is not with the borrowing; the problem is that Social Security's asset base consists of the government's ability to borrow money. It is usually a really bad sign when someone says "I totally can't pay off this loan, but I know this guy who is willing to lend me more money because he has no idea how financially irresponsible I am."
No, the problem is with the borrowing. When our nation borrows that much, everyone's asset base consists of the government's further ability to get money (by borrowing, printing, etc.). That's the way free floating currency works. Having to print $4 trillion to put the money back in Social Security is the same to every American as having to print $4 trillion to give to China.
Well, I certainly wasn't claiming it was a top-notch investment strategy. But for Social Security to work, it has to have periods where it's overfunded, so it can pay out when it's underfunded (and the problem is that it didn't) and that surplus has to go somewhere. I can't think of anything better for it than what they do, which is essentially buy government bonds. It's the only 100% guaranteed investment, since the government can print money to replace it. Just be glad they didn't buy CDOs with it.
Unless the US economy really goes in the toilet[], Congress is not going to substantially cut Social Security benefits for retirees. (The Republicans couldn't get partial SS privatization to pass Congress even when Bush was at the height of his popularity.)
[]and if the economy gets that bad, then anyone who relied on private savings or investment for their retirement is probably also screwed.
Yes, but an HSA is explicitly not an insurance account; it's a tax-advantaged savings account you use to cover routine, predictable medical expenses while a high-deductable insurance plan covers broken bones and gigantism.
[Social Security] would work perfectly well if the population remained stable over time, or shrank. And it would even be alright if it grew slowly and linearly.
You got it right but say it backwards. The problem is population shrinking.
The generation retiring is much larger than the ones still working when population has shrunk at some point. Baby Boom wouldn't be a problem in this respect, had it been followed by Baby Big Bang.
But long-term population shrinkage can be accommodated by raising the Social Security tax (an fund-raising option that was not available to Ponzi or Madoff). As long as the generation-to-generation increase in worker productivity is greater than the generation-to-generation increase in the tax, it won't harm the general welfare.
And if that doesn't do the trick then the US can always let in more working-age immigrants.
but the expectancy of a working-age adult ... has barely budged since before Social Security was invented. Lifespan from birth ... has risen almost entirely due to lower infant mortality.
This is not true. While it's true that infant mortality rates in industrialized countries have decreased a lot since the 1930s, so have mortality rates at every age.
Social Security isn't a Ponzi scheme because it would work perfectly well if the population remained stable over time, or shrank. And it would even be alright if it grew slowly and linearly.
Only if benefits match contributions. If benefits exceed contributions, you do have a Ponzi scheme, and you have to find ways to funnel increasing amounts of money into the system.
Social Security taxes, as a percentage of income, have risen continuously since the program was started, well before the baby boomers started retiring:
Again: that's not what the words "ponzi scheme" means. You could be arguing that "if benefits exceed contributions, you have a budget deficit", but that wouldn't be as emotionally manipulative, and it would also be boring.
Social Security taxes as a percentage of income were raised sharply in the '80s precisely because the baby boomers hadn't retired.
Well, you forgot about the way that benefits are systematically reduced and the retirement age is systematically increased. What about someone who worked hard in his 20s, 30s, 40s, 50s in hopes of retiring at 65 only to see the SS age be increased to 70? Is that security? No, that's a 5 year ripoff.
Now, the SS retirement age is GREATER THAN the average lifespan of African American citizens! You may consider that another "good in a sick sort of way" aspect of the program, but I don't.
As a long-time entrepreneur, I'm concerned most about a market: are there people able and willing to buy what I'm selling?
Social Security helps with the "able" part, by making sure that no American lives in abject poverty if they're old or crippled.
Before Social Security, this was a big problem. About a quarter of Americans lived in poverty, and about half of old people.
More people with more money to spend means a bigger market for whatever I'm selling. That's why Social Security is good. That's why markets are bigger in places with lots of Social Security-type programs (Europe, the U.S.) than in places without them (South America, Africa).
Social Security also helps make it possible for me to be an entrepreneur. I know that I can take risks and not plunge my family into abject poverty if I'm crippled and can't work.
Why did I write about Conservatism in relation to this article? Because when someone is attacking Social Security, it's almost always as part of a larger political agenda they're promoting: Conservatism.
This article was from the Hoover Institution, a politically Conservative organization that pushes to eliminate New Deal programs like Social Security (not just SS). They also push for unregulated markets, and flat or regressive taxes. So does the American Enterprise Institute. So does the Heritage Foundation.
These groups call themselves "think tanks," which implies objective research. Unfortunately, they aren't averse to pushing false information or abandoning their principles to promote their interests.
For example, For example, the Heritage Foundation sharply criticized Malaysia's government for years. After a consulting firm owned by Heritage's president began representing Malaysian business interests, Heritage assessments of Malaysia turned positive. (http://thinkprogress.org/2005/04/17/money-talks-at-heritage/)
I'm not sure why you are writing about the Heritage Foundation or "Conservatism": Milton Friedman is a classic liberal (http://en.wikipedia.org/wiki/Classical_liberalism), so it's a strange vicarious ad hominem attack.
His laissez-faire ideas have been extremely influential and have a stunning track record of success where they have been used.
You shouldn't act like terms exist in a vaccuum. Remember that the Republicans and Democrats were on completely different sides of the political spectrum less than a century ago.
Classical liberalism is a doctrine stressing individual freedom and limited government. This includes the importance of human rationality, individual property rights, natural rights, the protection of civil liberties, individual freedom from restraint, constitutional limitation of government, free markets, and a gold standard to place fiscal constraints on government
In a modern political climate these would sound somewhat conservative (mainly 'free markets' and 'limited government'). I think the best modern-day fit would be Libertarianism, which is considered by many to be far-right.
This is why we as a society should really adopt the two-axis means (political compass) of understanding "ism"s. I really hope the public is smart enough to factor just one more dimension into their political analysis, but mass stupidity is always full of surprises.
I'm just saying that his idea here should not be evaluated by a comparison to a group of people that he isn't even a member of. I do like the two axis chart though.
That's a fair assessment, and I also agree that we shouldn't be assigning people to either side of the aisle in discussions where it's not important. Alas, social security is a very political issue that has many people with strong feelings in either direction, so it is very hard to avoid seeming partisan.
I don't think you can, with any intellectual honesty, call Milton Friedman a "liberal" economist without pointing out that you're using a different definition of the term than the mainstream. If he's a "classic liberal", he's also an "anti-progressive".
...different definition of the term than the mainstream.
Mainstream American English, sure.
In Europe, 'classical liberals' are still just called 'liberals', or sometimes villified as 'neoliberals' by the Euro-left for their adherence to brutish Friedmanesque economic views. I think that usage also dominates in regions of British English. So more English speakers worldwide might agree that Friedman is a 'liberal economist' than parochial Americans would disagree.
More people with more money to spend means a bigger market for whatever I'm selling. That's why Social Security is good. That's why markets are bigger in places with lots of Social Security-type programs (Europe, the U.S.) than in places without them (South America, Africa).
Where to start? Sheesh. Markets are "bigger" in the US than South America because of social security? How on earth did you come up with that notion? Besides being completely upside down (viz, social security draws money from the free market) South America most certainly has its share of SS equivilents:
It may not technically be a Ponzi scheme but it is in effect. If you're not able to take out what you put in, you're losing money. If you work 40 years, putting in 12% of your salary (companies have to pay it, otherwise it would be part of your salary) you should get all that 12% back for 40 years. Since most people don't live to 108, SS pays very low monthly payments and pays back about half of a lifetime.
If you die however, you don't. Sure there's exceptions but... you can do better on our own. Mutual funds, Money Market accounts... heck, even bonds and CD's would enable you to pass it down. In addition, from 15 on, 12% of your income even if you only make $8 an hour for 52 years and only invest it in something that nets 10% would easily make you a multi-millionaire. You could retire comfortably and still pass it down.
Since we're facing massive shortfalls, isn't that about the same as a Ponzi scheme?
Also, I've been reading this site for probably close to a year. I greatly appreciate having intelligent people post comments. Sites like Digg or Reddit not only have very biased commenters, they also usually only parrot whatever HuffingtonPost or Keith Olbermann said the night before. It's mindless.
Intellectual comments, even if they're not ones I agree with are interesting to read. Kudos to you guys!
First, the words "ponzi scheme" don't mean "anything where you put X in and get X - n out."
Second, Social Security isn't an investment program. The goal of Social Security is to provide each generation of retirees with a baseline level of income. It has succeeded at this task.
Third, we're not facing massive shortfalls. We raised taxes on the baby boomers in the early '80s to build up the social security trust fund to pay for their retirement. As it stands, social security is a small part of the entitlements problem moving forward --- Medicare has more than 7 times its liabilities in the projected future.
Fourth, this "small payments" thing is a myth. 2/3rds of Social Security beneficiaries derive more than half their income from Social Security; more than 1/3rd of them derive the overwhelming majority of their income from it.
There is no such thing as a social security trust fund. The government uses that money to fund other programs and puts IOUs in there; that means when more are receiving than contributing there will be a massive tax burden on those contributing they get hit with both their normal SS tax, plus the taxes to cover the shortfall.
If there's no such thing as a social security trust fund --- in which case, Reagan and Greenspan's baby boomer FICA tax hike was a huge scam --- then there's no social security crisis. There's just a general budget issue. But in the general budget, Social Security is dwarfed both by other entitlement programs and by a host of other programs.
If you don't believe in the Social Security trust fund, then we should be discussing Medicare. Or out-of-control defense spending. Social Security is irrelevant.
Defense spending is a lot, but it is actually one of the few things that the federal government is supposed to do and it's only 20% of the federal budget whereas medicare and ss are at 60%
That's not true. The OMB's own figures put Social Security at 20%, and Social Security is funded by a dedicated tax. Medicare is a much bigger problem.
Budget comparisons are also subject to both chicanery (playing around with what you consider a defense expenditure) and bias (Social Security is the largest monolithic expenditure in the budget, just like MadMenSeries2.mp4s.zip is the biggest single file on my filesystem, but a small fraction of what I'm spending my disk on).
I will admit that the numbers can be juggled around quite a bit; but from most charts SS is 20% & medicare/medicate/etc are about 40% dod is about 20..
the fact that SS is funded by a dedicated tax doesn't have any relevance.
On the second point, that baseline is going to drop much, much lower unless they drastically raise taxes. We have what, 8 years until we start taking out more than is going in.
On the third note, agreed. Medicare/Medicaid have massive problems. That doesn't mean that SS doesn't have problems too. They do have issues with workers taking more out than putting in. The birth rate continues to decline.
On the small payments thing, that maximum SS benefit is what, $1,000 monthly? That is NOT enough to live on. Especially not when you consider the cost of nursing homes, medicine, and all the other costs of living when you are partially or wholly unable to take care of yourself.
I don't know about you but I burn $1,000 just on rent, utilities, transportation and food a month. The fact that so many people put so much of their income in it just shows how misled they've been. That's a scary prospect.
If you make $50k annually averaged out from 15-65 you've put in $300,000 into SS. That's a fairly average income, well within middle-class. If you live until 90 you have pulled out everything you've taken in. If you die sooner, that money is just gone. Most people don't live until 90. Now, combine that with the fact that right now it's 3.5 people supporting one person and it starts to look like a Ponzi scheme.
On your first point, the "we have until 2018 before the trust fund runs out" factoid is apocryphal. Present estimates put that date into the 2040s. And that's simply the point at which Social Security starts being funded out the general budget, assuming the retirement age isn't adjusted.
On your second point, there's "birth rate" and there's "productivity", and those are two hugely different things.
On your third point: again, 1/3rd of Social Security recipients derive almost their entire income from it, and fully 2/3rds of recipients derive more than half their income for it. Your anecdote isn't particularly convincing.
Point one: Right, but, depending upon whose numbers you use in 2018 we stop putting money into the trust fund and start pulling from it. Also, it's not really a trust fund. Excess funding does go into a trust fund but it is then lent to the Treasury and spent. Instead of using the power of time to get a decent rate of return it's basically sitting.
Two, I agree, mostly. Since SS depends upon multiple workers for every payee, as the birth rate grows taxes increase or benefits decrease. As either happens it stops being perceived as a retirement plan (which the general public currently does) and starts being perceived as welfare.
On the third point, I don't disagree at all on how many people live off of it. Our generation expects a much, much higher quality of living than our parents and grandparents. $1,000 a month is barely enough to pay for the cost of very basic living. Think no vacations, meager meals, no cable TV, no going out for movies, etc.
The terrible thing is, if that money had been invested instead of sitting like it has, those people could easily be living on man, many times that.
I think far less people would have issues with parking a mandatory 12% of their income into investments than letting the government handle it.
Again on your first point --- the only one I'll engage here --- the trust fund is:
* a fiction only if you believe that the government will default on its own bonds;
* projected solid into the '40s; and
* a red herring, because without it, we're discussing the general federal budget, and any predicted shortfall in Social Security is going to be dwarfed by Medicare-related programs and defense.
"The present discounted value of the promises embedded in the Social Security law greatly exceeds the present discounted value of the expected proceeds from the payroll tax. The difference is an unfunded liability variously estimated at from $4 trillion to $11 trillion--or from slightly larger than the funded federal debt that is in the hands of the public to three times as large."
The mismatch between the promised benefits that many voters think they have "earned" by "saving" money in their personal "Social Security accounts" and the actual funding capacity of the Social Security system is why it looks like Mr. Ponzi was the designer of the system. The overall societal effect of Social Security as it is currently funded is a massive wealth transfer from the working young to the nonworking old, which is excellent politics but rather poor economics.
Even if it wasn't for the anomalous population boom that is causing the problem, you would essentially be being forced by the government to put a portion of your salary into an investment with a 0% interest rate. Which granted, would look good to a lot of people right now, but is bad financial planning on the whole.
On the other hand, I reject his cries of paternalism for the simple reason that other people's poverty has a negative effect on my life, liberty, and pursuit of happiness. Poor people have incredibly high rates of criminal activity, drug use, etc. Granted, I don't see a lot of retirees selling crack or robbing banks, but the effect it could have on their families, who sometimes they support or sometimes support them, could create a serious ripple down through generations.
Which doesn't necessarily mean I'm for Social Security or forced savings of any kind, but the issue is not nearly so simple as paternalism.
It pays significant disability and survives benefits which has little to do with investing and everything to do with insurance. So consider SS as insurance in case of a long life.
Some people will live well over 100 so finding the "correct" amount of money to save is overkill for most people who die far younger than that. If you invested a portion of your savings each year and pooled you money with 10,000 other people your age then paid dividends from that to the survivors you could save less money and still not worry about running out. Granted if to many people lived until retirement age you might need to reduce benefits. Granted you would not be able to give people money at the time of your death but if your single what's the point?
Now the implementation of social security is broken in several ways but minor changes in retirement age will fix the "benefit gap" long before it runs out of money. The basic problem is people are living longer so they need to increase average retirement age. The surplus was also invested in government bonds with terrible long term returns etc, but when you consider how much more important the first 20k/year is over the next you might consider guaranteed benefits even at high cost are worth a lot more than the simple math would suggest.
PS: There are a lot of things I hate about SS, but it's not really a Ponzi scheme.
This was one of the intellectual flaws of the Bush privatization scheme; they calibrated returns from individual private accounts to the average lifespan, without noting that a pretty large contingent of social security beneficiaries would outlive the average.
Current estimates are that many of us will be long retired before there even is a "gap" between Social Security funding and Social Security benefits. The trust fund, for instance, doesn't run out until the 2040's.
The privatization plan would give the beneficiary ownership over the investment, so there is not a problem, it just means that the investment has longer to grow. Ideally someone doesn't just build up a pile of money and intend to die with $0, he/she intends to leave some to the next generation or to charity.
I am single why should I give my money to charity, my will is going to say take it out into the forest and burn it.
Only slightly kidding. A close friend of mine had a trust fund worth a little over 6 million and was looking to inherent a lot more when his grandmother died. He is dead now and imo money really messed up his life.
SS is a Ponzi scheme. Payout for current investors is provided by the payin of future investors.
Then to fool you, a small fraction of the program is devoted to other legitimate purposes. Disability/survivor benefits are an extremely small portion of social security, less than 1% last time I checked.
Incidentally, as far as living to 100, buy a lifetime annuity. Or even just have the government pay for retirement for the poor 90+ crowd. Again, an extremely small part of SS.
SS has collected trillions more than it has paid out. To deal with the post baby boom reduction in the work force. A true Ponzi scheme can't be stable over hundreds of years but SS could be.
PS: I would like to see SS start at ~75 which seems to be the time when most people are incapable of meaningful work. And it's the age where most people who retired young start having major problems with their savings keeping up with inflation. I would also increase benefits slightly because it would be the only source of income for many people. I fear a lot of people retired far younger than the would have because of SS and ended up far poorer because they outlived their savings.
A Ponzi scheme is an investment system where the payout of current investors comes from the payin of future investors. That's the definition of ponzi.
Does SS meet that definition or not? If so, it's a Ponzi scheme. The fact that it lasted longer than other historical Ponzi schemes does not change it's nature.
Social Security isn't an investment system; it's a social insurance program. A Ponzi Scheme is an investment scam; victim investors are, for a short time, paid an unnaturally high rate of return based on the recruitment of an ever-broadening base of new victims.
The retirement component of social security is not insurance. It does not spread the cost of low probability, high cost events among the insured. Only the very small disability insurance part of SS does this. As I mentioned, that is a separate issue.
Tell me; if Madoff called his hedge fund an "insurance program", and actually devoted 1% of it to providing disability insurance, would that make it not a Ponzi scheme? Incidentally, Madoff's returns were not unnaturally high, just unnaturally regular.
As for the fraud, it's true that the nature of SS is quite clear. SS uses force instead; if you don't pay in, you get locked up. So maybe "Ponzi Protection Racket" would be more accurate than "Ponzi Scheme".
You're arguing that Social Security isn't an insurance program. I'm arguing that it isn't an investment system. If we're both right, it's still not a Ponzi Scam. It doesn't blow up like a pyramid scheme, and it doesn't attract victims with returns on investment. What it does is allow a generation of entrepreneurs to start companies instead of working for Geico and Alcoa to keep their parents out of the cat food.
I'm not sure how it isn't an investment system; you put money in because you are forced, but with the hope of getting money out later. That's closer to an investment than to insurance, though I guess the use of force confuses things.
You could be right, I never thought of it this way. Take a scam, then use a gun to force people to participate without disguising your intentions. Is it still a scam? Maybe not, I'll have to think about it.
SS is based on the assumption that people will die at some predictable rate. http://www.ssa.gov/history/genrev.html"If I have anything to say about it, it will always be contributed, both on the part of the employer and the employee, on a sound actuarial basis. It means no money out of the Treasury." It's only a scam if people who live don't get paid.
Anyway, they are projecting problems 40 years into the future if nothing changes. An influenza outbreak could dramatically change those predictions as could moving retirement age back 1 month. Suggesting we know the shape of the economy in 40 years is probably overly optimistic.
Madoff was a Ponzi scheme because he paid 12% interest. That interest meant he had to get new people in the door to fund it. Ponzi himself borrowed money, then paid it back with interest.
What's the odds you live to be 105? What's going to pay your income if you live that long? Ok, what happens in the great depression II shows up in 40 years?
As I noted before, the really old are a small fraction of SS. If SS were really just protecting people against outliving their investments (say, it kicked in at age 90) and against disability, I'd have little objection to it. That's just insurance, and a small portion of SS.
As for GDII, I'm not sure how SS helps there. That sounds like a place where the ponzi-like nature of SS will become readily apparent: not enough money from new investors to pay off the old ones.
I agree that increasing the SS age is a good idea.
Anyway, Employment is vary stable even in the GD I vs. every other asset class. If unemployment goes from 5% to 20% the drop in income does not change much on a year over year basis, but just about every other asset class is going to tank. If unemployment stays over 20% vary long there is not much that can save your retirement.
The reason to fund SS with workers income is it's more stable than just about everything else in the economy. Inflation or deflation and people still make about as much money.
If you have 5x what you need to live off of and it's extremely diversified then it's not a problem but what's the point in waiting that long?
You might have 20% cash on hand but how long is that going to last you? You might have some bonds but if the company tanks your out of luck. You could have some property but who's buying? etc.
PS: How much money do you think you need to save and how would you invest it to have a 99.9% chance to live off of 20k inflation adjusted for the next 30 years?
A Ponzi scheme is a fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors rather than from profit.
SS does not hide the fact that it pays money from dead investors to the living so it's not fraudulent. It does use some money from new investors to payout money but so does life insurance.
PS: While some people get far more out of SS than they pay in many people got zero benefits. With a SS their will would still "own" their money but with SS it diapers into the void. I don't mind calling SS a period scheme, but a lot of 22 year old's are going to die before their 60's so the math can work out just fine.
One point that has not appeared in your dialog, in favor of identifying SS as a Ponzi scheme, is that the excess accumulation of Social Security taxes has been spent on other things and replaced with IOUs by Congress (this is how the Clinton administration produced a so-called budget 'surplus').
First, the Clinton administration did not synthesize a surplus out of the social security trust fund; they simply had the good fortune to take office during a period of historic productivity expansion.
Second of all, the "IOUs" you're talking about are government bonds. For your argument to hold, you have to assert that the government is going to default on its own bonds.
Governments default on their own bonds often enough. Cf. Argentina plus a whole slew of third-world countries.
I'll skip the theory and offer a single data point: the employees of the Social Security Administration do not, themselves, use or pay into SS. Neither do any other US Government employees. That is, the people who know the most about the system think it's so good that they don't want any part of it. It's almost like they know something some of us don't.
I would suggest that the general fund is a Ponzi scheme backed by selling IOU's. We are borrowing more money to pay the interest on money we already borrowed and adding more debt on top of that. Long term we need to start borrowing less than the interest on our debt - inflation. Which is not all that high a number vs GDP.
The life insurance aspect of SS is always overlooked in discussions on its impending collapse. I would guess that it's just not a significant factor. The yearly Social Security/Medicare payments for the average American is something like $7,500. Term Life would be what, $600?
I'm not sure what you meant after that. Actuarial tables take life spans into account. And people are not living longer, see my original comment. That's a myth, and not the problem at all.
The average lifespan is not increasing but the percent of people living into old age is. Someone dieing at 55 vs 60 does not save SS the money of someone dieing at 85 vs 80.
The baby boom also distorted the number of young people supporting old people, but over the next 40 years far more people will reach 95 than did 40 years ago. The other main support of SS was the long term increase in income, but middle class wage stagnation has also impacted SS. Most of the economic growth over the last 20 years has occurred well above the SS cap so it's not capturing that growth.
PS: (technology) Cars kill the young, medicine and sanitation keeps the old alive. Few young people need much in the way of medicine and few old people drive.
You have it backward. The percentage of people living into old age has not changed significantly. The average lifespan from birth has, but that's not relevant to SS. The average lifespan of someone who enters the system (an adult, at let's say age 18) is the same.
The percentage of people who live from the age of 18 to the age of 95 will not be higher than 40 years ago, in fact, it may be lower.
This is an important point you've raised. In particular, lowered infant mortality combined with a poor grasp of statistics makes it look like you and I are living longer, even when those infants that might have died before could end up keeling over at 30 from health problems and we might die a few years earlier than we were likely to a few decades ago.
Also, people who are living longer as a result of advances in life-saving surgery are doing so in poor health as a result of the reasons for the increased necessity of these surgeries such as coronary heart disease and type 2 diabetes. Increasing the retirement age in this context could mean attempting to employ a bunch of people not fit to be productive, in a worst case scenario.
I blame it on the government for citing the worthless stat in the first place. They rarely express it as anything other than from birth expectancy. They should mention it from some stable age like 5, then simply show infant mortality stats separately. Though I guess they don't want to do that because we have one of the worst rates in the developed world.
The average lifespan has not changed much once you hit 18, but your chances of dieing between 30 and 40 have gone up where your chances of dieing between 60 and 70 have gone down. I need to find and old actuarial table from the 50's to show compare with today.
PS: Old age is bad for your heath but 21 vs 31 is about the same because it's mostly accidental death aka car accidents. Just watch the increase from 14 till 23.
That's not worth much in and of itself. It has to be compared with past data to be relevant to the argument. Also, it would have to be that 18-65 has gone down while 66+ has gone up. Seems highly unlikely to have done so significantly.
Edit: Got it: Even more old people in the US: 1990 vs 2000: http://www.infoplease.com/ipa/A0905042.html look at Percent change in the over 75 age range. The US population was not growing anywhere near that fast.
Chomsky may be a bit of a nutcase (which is how I interpret your tag of hardline radical liberal) but his analysis of the Bush administration's propaganda seems spot-on, in the linked article.
How do you at one point in a thread discuss how "liberal" is an ad hominem, and in another part of the thread dismiss someone as a "hardline radical liberal"?
Because I'm not using "liberal" as an insult. I can't tell where you see an ad hominem, I'm "dismissing" Chomsky because he has a long track record plus popular image of being a radical liberal, which was the focus of my reply. I think you are assigning too much tone to a text-based discussion.
The use of "liberal" in the other thread was referring to "classical liberal". I was mainly trying to point out how the definitions that are popularly used these days should be preferred over definitions of "liberal" that might have been accurate two hundred years ago when the original "classical liberals" were contemporary.
Seems like there's an awful lot of polemical posts on Hacker News lately from Conservative political organizations. Guess they figured out that here they could promote their agenda for free.
Is that really what Hacker News wants to be? A political forum? If so, I'll encourage the folks at Media Matters, Center for American Progress, and Campaign for America's Future to start posting here.
It's bad enough that Conservative political groups are hijacking a startup news aggregator. It's worse that the ideas they're pushing don't work.
Conservatism--the political philosophy promoted by AEI, Hoover, Heritage et al--is the flip side of Communism. With Communism, the purpose of people is to serve The State. In Conservatism, the purpose of people is to serve The Market. Thus, popular New Deal programs such as Social Security are anathema to them.
Both Communism and Conservatism work badly, producing similar effects. Our unregulated Conservative markets have crashed and burned just as badly as the Russians' hyper-regulated Communist markets did. States and countries run on Conservative principles are typically backward and stagnant:
--Mississippi and Alabama have Conservative state governments, and have practically no startup activity. Massachusetts and New York are not Conservative, which makes them capable of spawning MIT and Silicon Alley.
--Conservatives say that the keys to a strong economy is low taxes on rich people and unregulated markets. We've had them for the past decade, just as we did in the 1920s, and just as it did in the 1920s, our economy has melted down. What happened when we had sky-high taxes on rich people, and highly regulated markets? We got the U.S. economic boom of the 40s, 50s, and 60s, and built the world's biggest middle class.
The fact that their political philosophy has produced poor results doesn't give the folks at AEI/Hoover/Heritage pause, however. Just like the old Communists, these Conservatives are now complaining that "Conservatism DOES work! It's just never been tried!" Just as with Communism, Conservatism never fails, it is only failed.
As for the ideas of Milton Friedman that these Hacker News Hijackers are pushing, we may want to read what a Nobel Prize-winning economist has to say about them:
for the record I am not a conservative, nor was my account just created today (specifically just a few minutes ago like your account. Let me guess, your past yc news account was NSX2?).
I just feel that hacker news is a forum for posting a wide range of ideas. If you don't agree with an article you can do one of two things:
1) post a logical counter argument like some people already have.
2) ignore it.
I really hate posts that really have nothing to do with the general ideas that articles convey. it tends to become useless noise.
This isn't about conservatism vs liberalism. This is about US Social Security. Please stick with the subject.
"I really hate posts that really have nothing to do with the general ideas that articles convey."
Agreed. You gave us the courtesy of titling the thread in a way that made clear what the thread was about. Anyone commenting here can express one opinion about Social Security or another, preferably with evidence, and then we can all learn something. I just found a link from Harvard
mentioning that Congress has exempted Social Security from a law designed to identify programs that set up "unfunded mandates." That's food for thought.
In a site populated by hackers and entrepreneurs, you're going to get people with a strong preference for individualism over collectivism - that's the nature of the beast here. People are going to be very free action-oriented, anti-paternalistic, and not too many of us are going to like the government. We've also got the smart people thing going on where we think politicians are numbskills that spend more time politicking than doing anything intelligent.
So you've got that. But past that, it's hard to find intelligent discussion on economics, government, and society, and a bit coming into HN is healthy for the discussion.
What I'm impressed about is that we get practically no political current events here - and that's pretty cool. Most of the ideas we talk about in terms of economics, society, and government are pretty broad, intellectual strokes instead of inflamed stuff. And for the record, I'm all up for talking about market failure, monopolozation, and unfair initial distribution of resources. And we can have some good discussion.
Edit: This was originally a reply to someone who said HN was being invaded by Conservative lobbyists getting free publicity or some such. byrneseyeview replied to the same guy quoting some of it before he deleted it if you're curious as to the gist of it.
A social safety net isn't "collectivism". "Collectivism" is an emotional button hard libertarians try to push. Agree or disagree with Social Security, but please don't tar "hackers and entrepreneurs" with a single political brush.
Pardon me, I didn't know it was a politically-loaded term these days. I meant it as a more general term the way people would make the broad statement that "Eastern societies are more collectivist, and Western societies are more individualist." More responsibility to the group, with the associated pros and cons of that.
I was making the point to the original poster who said HN has a conservative lean. My point was you're going to tend to see more individualistic people on the whole here, and more individualistic people tend to dislike the government having a larger role in their lives. That's true on the whole in my experience, but certainly not for everyone.
Anyway, thanks for pointing that out. I'm just here for good discussion and the free cookies, not to push any emotional buttons or tar people I respect with a single political brush :)
Every time people write sentences that start with "Hackers tend to" and involve "the government", I throw up a little in my mouth. You could use the same logic about "individualist hackers" to argue against gun control. But then you'd be Eric Raymond.
Hackers are people who like to build things. That's all. They don't all think like you. Some of our country's greatest entrepreneurs are also its strongest believers in the social safety net. You might consider starting with Warren Buffett.
No worries, I feel like I've learned an important lesson here about generalizing. For the record, you don't need to talk about being tarred, throwing up in your mouth, for me to get your point - but it does get across that how you feel about this. I'll be more careful about broad generalizations going forwards, and best wishes.
I would take your point about there not being many political current events a step further. The broad ideas discussed here are some of the most important issues of our day. I might be overstating things a bit, but I think it's safe to say that the HN audience is largely composed of the people who work to propel society forward through their ventures. The readership here are highly educated and are largely "in the trenches" every day solving problems and building the things society needs. These professional problem solvers and hackers are the very individuals I want to be engaging in healthy debate about the virtues of various policies and their impact on business, innovation, and society as a whole.
The problem is when the policy debate degenerates into the standard political name calling and senseless bickering that does nothing to advance intelligent ideas. If any community can keep that to a minimum, it's this one.
I would be interested in talking to many of the people here about cooking. But this isn't "Hackers Discussing Cooking"; it's "Hacker News". Your idea about what this site should be is a slippery slope.
I have seen a lot from libertarians; few from conservatives or Conservatives. Which particular anti-abortion, pro-war, pro-Drug War, traditionalist, or otherwise conservative articles were you referring to?
I think it's really funny that when you see some viewpoints with which you disagree, it is because some big, anonymous agglomeration ("Conservatives!") must be abusing their freedom of speech by saying things with which many HN readers agree (and your solution -- telling an actual big, anonymous agglomeration to push their viewpoints here -- just seems to exacerbate the problem). A few other points:
In Conservatism, the purpose of people is to serve The Market.
What does it mean to 'serve' the market? The market is an abstraction -- you can't make 'it' better or worse-off, though you can do that to participants.
Our unregulated Conservative markets
You're referring to how the unregulated hedge funds produced much worse returns than the highly-regulated commercial- and investment-banking industries -- and how the only safe spot in the current financial turmoil is the highly-regulated, government-created, government-subsidized mortgage industry, right? Right?
Mississippi and Alabama have Conservative state governments, and have practically no startup activity. Massachusetts and New York are not Conservative, which makes them capable of spawning MIT and Silicon Alley.
Has it not occurred to you that you have the cause and effect wrong, here? New York and California can have more abusive governments because even if you pay 50% of your marginal income in taxes, you're still better off starting a startup in CA than in Mississippi, or trading derivatives in New York rather than Alabama.
What happened when we had sky-high taxes on rich people, and highly regulated markets?
Some day, you will be introduced to the term 'loophole'. You will wonder why the three-martini lunch and the company car used to be so common, and are now so rare. You will run the numbers on the Reagan tax cuts and find that the reduction in nominal rates would imply gigantic cuts in total income received, which is not what happened -- and then you'll realize that, in general, tax cuts are accompanied by loophole-closing, and tax increases are accompanied by loophole creation. That's just how things work.
Thank you for linking to Paul Krugman, well-known as the first person to be awarded the Nobel Memorial Prize for his political rants in a popular newspaper, rather than his academic papers. I haven't actually read what the prize committee said about him, but everyone I've met who agrees with Krugman's polemics seems to see the prize as new evidence in their favor, so I am assuming that this is what the award was for. Right?
SS was set up with rules based on actuarial tables, used by all insurance companies.
The rules for 65 as the start of collection were because the actuarial tables at the time showed that only about 25% of the population would reach that age. And since white women live the longest, black men were paying for a benefit it was unlikely they would ever receive.
SS did not originally have survivor benefits and disability either, those were added by FDR in the years after SS originally passed.
Unlike either term or whole life insurance, SS pays nothing if you die before your time for payments to start. With term, you would get paid, with whole life, there would be other investment benefits involved, like the ability to borrow against a certain amount of the policy while still alive.
"In 1964, Barry Goldwater was much reviled for suggesting that participation in Social Security be voluntary. I thought it was a good idea then. I still think so."
A guess why Goldwater was reviled? Voluntary Social Security would be DOA. It doesn't make fiscal sense for the upper class to pay social security, so they wouldn't. That leaves the lower class' taxes going to pay for it--somehow I don't think there's enough there.
I don't understand why it would only make sense for one class to buy into Social Security. If it's a good investment, it's a good investment; 'rich' means less than 'has a particular set of risk/return preferences'.
And I think you validate his point if you claim that social security is only solvent because it redistributes money from the rich to the poor. If the system is unsustainable without giving some people a lower return to subsidize other investors (i.e. soaking the rich to pay off the electorate), it's a ponzi scheme.
Social Security isn't a good investment for anyone and it never has been. It wasn't meant to be. It was meant to prevent our seniors from plunging into poverty because that would have many negative effects on society as a whole.
If you made it opt out, people would fall into two categories. One would be smart enough to manage their own money and opt out because they can get a better rate of return putting it in a money market. One would be too dumb to manage their own money and opt out because they don't want to pay 12.4% extra income tax. Either way, Social Security would be opted out by almost everyone and totally fail to accomplish the objectives it was created for. At least the way it is, it has a chance, assuming it can remain adequately funded.
I'm actually against Social Security (at least in its current incarnation) but recognize the need for some form of it that is forced.
Because pooling risk and providing a baseline standard of living helps everyone, not just the direct beneficiaries of entitlements; for instance, current entrepreneurs aren't paralyzed in steady corporate jobs out of fear that they will need to supplement their parents income to prevent them from eating cat food.
Again: of course it is true that skilled investors can net a better return on their FICA dollars than Social Security can. Social Security isn't an investment program.
I'm still going to have to disagree. You are only looking at one side of the equation, those receiving the benefits and ignoring those who are harmed. How many companies go out of business because they can't compete due to these taxes, how much investment is lost/misdirected since an individual cannot decide where to invest their funds. I could have invested in a store in my neighborhood, but instead the money will be spent by someone in some other area. It's hard to know exactly what we're missing out on because of the massive amount of wealth redirection.
I don't know how many businesses fail because of FICA taxes, but I'm not super sympathetic to the argument, since me and my partners make W2 payroll for a decent sized group of people, and we're doing OK. Relative to much of the industrialized world, the US has an attractive tax rate and an attractive standard of living.
What I do know is that prior to Social Security, young workers being a prisoner to the financial circumstances of their aging extended family was a real problem, and it's not one we think about that much anymore. So I'm pretty happy with that.
SS is supposed to pay benefits in proportion to how much you put into the system (each dollar YOU specifically put in, you supposed to get out). It wasn't meant as a wealth redistribution scheme and so far it isn't a hardcore redistribution scheme. The "rich" are capped at paying 15% of their income up to ~$100k. Not much money from the rich currently goes to the poor via SS (Medicaid is a different beast)
Now, Obama has floated the idea to remove the $100k cap, WITHOUT paying any additional benefit. With the economy in its current condition, he has backed off that idea, but I won't be surprised if he resurrects the idea if we have a quick recovery.
SS is a scam because on average it pays roughly 1% interest per year, versus an 8% average return in stock market. Furthermore it is scam because the government feels compelled to hide half of the money it takes from you by making your employer pay for half of your FICA taxes.
Once every couple years, a "new" group of people gets all huffy about the fact that Social Security taxes "aren't really invested at all", but rather pay off current retirees. It's a false controversy. That's the intent of the system. The people collecting Social Security today paid for the previous generation's baseline defined benefit retirement.
Social security isn't an investment plan, and it isn't a welfare plan. It's not a sports car either. It's an easy, cheap, intellectually flimsy argument to snipe at it by saying it's bad at being something it isn't intended to be.
You may be right, but the intent of the system doesn't really matter. When SS began the tax was 1%, now it's 12.5% and benefits have been decreasing every year.
Sadly, the planners didn't anticipate just how population trends would play out, and so the initial idea -- that everyone pays 1% and then no old folks have to worry about poverty if they choose to retire -- just doesn't quite work out any longer.
The trouble is that people can't really rely on social security for (guess what?) security!
Will congress increase the payroll tax to 30%? Will it decrease social security benefits drastically? Will it fund SS out of general revenue at the expense of other programs? Will American taxpayers decide that SS is worth a middle class income tax rate of 55%?
The answer to all of these things is the same: maybe.
But that's not security. Obama has wisely advocated converting SS into a welfare program, but that hasn't gotten much traction.
The point is, with population trends doing what they are, somthing has to give. When people running for office talk aobut "saving Social Security" they are not honest about the impending outcome of obvious demographic trends. Meanwhile, all of us pay 12.5% of every paycheck into something that will probably offer us ZERO security in retirement.
Social Security isn't a Ponzi scheme because it would work perfectly well if the population remained stable over time, or shrank. And it would even be alright if it grew slowly and linearly.
What really throws a wrench in the cogs is when the generation retiring is much larger than the ones still working, especially the one or two before it. This is why the Baby Boomers leaving the work force is so problematic.
The good news (in a sick sort of way) is that our diet and health care are so bad that we save a little due to lifespans actually shrinking. People mistakenly attribute the problem to longer lifespans, but the expectancy of a working-age adult (the only group that matters for the purposes of entitlements) has barely budged since before Social Security was invented, and is now quite possibly shrinking. Lifespan from birth (as it is typically expressed) has risen almost entirely due to lower infant mortality.