Proposition 1: In a Ponzi scheme, the people who invest early get their money out with dividends. But these dividends don’t come from any profitable or productive activity — they consist entirely of money paid in by later participants.
This cannot go on forever because at some point there just aren’t enough new investors to support the earlier entrants. Word gets around that there are no profits, just money transferred from new to old. The merry-go-round stops, the scheme collapses, and the remaining investors lose everything.
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Now, Social Security is a pay-as-you-go program. A current beneficiary isn’t receiving the money she paid in years ago. That money is gone. It went to her parents’ Social Security check. The money in her check is coming from her son’s FICA tax today — i.e., her “investment” was paid out years ago to earlier entrants in the system and her current benefits are coming from the “investment” of the new entrants into the system. Pay-as-you-go is the definition of a Ponzi scheme.
So what’s the difference? Ponzi schemes are illegal, suggested one of my colleagues on Inside Washington.
But this is perfectly irrelevant. Imagine that Charles Ponzi had lived not in Boston but in the lesser parts of Papua New Guinea where the securities and fraud laws were, shall we say, less developed. He runs his same scheme among the locals — give me (“invest”) one goat today, I’ll give (“return”) you two after six full moons — but escapes any legal sanction. Is his legal enterprise any less a Ponzi scheme? Of course not.
So what is the difference?
Proposition 2: The crucial distinction between a Ponzi scheme and Social Security is that Social Security is mandatory.
That’s why Ponzi schemes always collapse and Social Security has not. When it’s mandatory, you’ve ensured an endless supply of new participants. Indeed, if Charles Ponzi had had the benefit of the law forcing people into his scheme, he’d still be going strong — and a perfect candidate for commissioner of the Social Security Administration.
But there’s a catch. Compulsion allows sustainability; it does not guarantee it. Hence . . .
Proposition 3: Even a mandatory Ponzi scheme like Social Security can fail if it cannot rustle up enough new entrants.
You can force young people into Social Security, but if there just aren’t enough young people in existence to support current beneficiaries, the system will collapse anyway.
When Social Security began making monthly distributions in 1940, there were 160 workers for every senior receiving benefits. In 1950, there were 16.5; today, three; in 20 years, there will be but two.
Now, the average senior receives in Social Security about a third of what the average worker makes. Applying that ratio retroactively, this means that in 1940, the average worker had to pay only 0.2 percent of his salary to sustain the older folks of his time; in 1950, 2 percent; today, 11 percent; in 20 years, 17 percent. This is a staggering sum, considering that it is apart from all the other taxes he pays to sustain other functions of government, such as Medicare, whose costs are exploding.
The Treasury already steps in and borrows the money required to cover the gap between what workers pay into Social Security and what seniors take out. When young people were plentiful, Social Security produced a surplus. Starting now and for decades to come, it will add to the deficit, increasingly so as the population ages.
Demography is destiny. Which leads directly to Proposition 4: This is one Ponzi scheme that can be saved by adapting to the new demographics.
Three easy steps: Change the cost-of-living measure, means test for richer recipients, and, most important, raise the retirement age. The current retirement age is an absurd anachronism. Bismarck arbitrarily chose 70 when he created social insurance in 1889. Clever guy: Life expectancy at the time was under 50.
When Franklin Roosevelt created Social Security, choosing 65 as the eligibility age, life expectancy was 62. Today it is almost 80. FDR wanted to prevent the aged few from suffering destitution in their last remaining years. Social Security was not meant to provide two decades of greens fees for baby boomers.
Of course it’s a Ponzi scheme. So what? It’s also the most vital, humane, and fixable of all social programs. The question for the candidates is: Forget Ponzi — are you going to fix Social Security?
Dr. K: How come those of us who have paid into SSI for 90+ years(50 yrs for me and 40+ for my wife)come off looking like the bad guys? Is it our fault that we have exceeded our life expectancy, that the birth rate has fallen for sustainability for this scheme, or that the congress decided that it was better to borrow from this "trust" fund and replace it with IOUs?
The federal government has "promised" to be able to pay out the benefits of SSI and now it can not fulfill this promise and one wonders why the population doesn't trust the federal government. Gosh, the federal government must be the problem, not the solution. Now some future elected officials must make the difficult corrections of this mandatory Ponzi scheme.
Fil-TX: No one is accusing you of being bad guys. However, if one reads the small print, the SS letters that were sent out each year clearly state that benefits are NOT guaranteed. Not for you. Not for me. Not for my daughter or granddaughter. Where the rub comes is that anytime a proposal has been made to implement reforms who screams the loudest. The standard meme is touted that grandma and grandpa will have to eat dog food, etc., etc.. As pointed out in other responses, SS was not meant to be your pension. It was originally designed as a safety net. The reason so many are getting so testy is that the response of a number of people is that "we got ours and scru the rest of you". Where were you on this issue when privatization was brought up a few years ago? Are you concerned about the well being of your children or grandchildren. You will not likely have to take a haircut like the rest of us who have a few years til we get to retirement age. I am not and have not planned on SS being my pension. I would rather pay our for those already in the system and let the rest of us go it on our own. This program is broke and broken.
Step #4 to fix Social Security: Stop referring to the program as a retirement program. It isn't, it is an "old-age emergency net". Too many people think it is the equivalent of a pension, and rely on it instead of making retirement plans of their own. This is why it is the "third rail" of American politics. Change that perception and reform will be much easier.
Jabbo, Krauthammer backstabbed Perry before realizing how silly he looked on this issue. Leading from behind isn't leading. Who said that? Could it have been your most esteemed "Dr. K" (regarding Obama's Libya policy in a WaPo opinion piece).
Our social security dilemma is not a political issue, nor is it even a moral one; it is a mathematical problem that can solved with the same intellectual rigor of an algebra equation. Simply changing a few variables from an “x” to a “y” would go a long way to solving this problem. Increase the age of eligibility to match our increased life span, means test the benefits (those millionaires and billionaires that President Obama constantly hectors might not need this program), and allow participants some control over their investments like most of us working folks have in our 401(k) programs. Only the fear mongers on the left stand in the way of solving this problem.
"The federal Social Security program was the crowning intervention of the New Deal. It has always depended heavily on illusions. The first of these was that money paid in to Social Security was actually being sequestered someplace, subject to convenient materialization when contributors reached senior age. A second illusion was that the program was designed for those who would otherwise be in need. A third illusion was that money paid out would correspond in some way with money paid in, and that the age at which payments would be activated would coincide in some way with the age at which physical decrepitude set in."
WFB NR December 17, 2004 1:30 P.M.
"There is no movement by any organized body of American consumers that is prepared to say: Just give us back what you borrowed from us and we’ll call it quits. You can’t in these days, successfully appeal to Americans to reason in that way. If the accounting goes forward as it now threatens to do, Social Security will give the retired American who lives to age 80 twice or three times what he invested in the Social Security program."
WFB NR May, 3, 2005, 2:36pm.
Unfortunately, our countrymen love their illusions as well as their Ponzi schemes!!!
Put another way, our collective political definition of humane cost of living, means testing and retirement age is unlikely to permit the kind of adjustments needed to balance the payments. Not to mention the unpopularity with a whole new group of people required to pay a significant amount while doing without.
All a product of two phenomena, lowered birthrates and longer living through better healthcare that, by the way, we are addicted to and has no upper limit on cost and is considered inhumane to deny on the basis of cost.
Why? Because so many (like yourself) refuse to acknowledge the obvious. CK is one of the first to actually spell it out so that folks like yourself must finally accept it.
Proposition 5: a government-mandated Ponzi scheme can be semi-stable so long as there is relative plenty in the nation.
When there is relative plenty, these schemes are still at the mercy of demographics, as Mr. Krauthammer observes. Periodic adjustments in the taxes and beneficiaries will be required to accommodate the nature of the population.
In the case of a major economic declines, such as a depression, dramatic reduction in the work force due to wartime attrition, the ability to fund the program will be severely hampered, requiring further curtailment in beneficiaries. In nations that employ fiat currency, the entity controlling the currency can intentionally inflate the currency to mitigate some of the effects, but it is of questionable efficacy as a permanent policy.
In the case of economic collapse, social insurance programs almost surely dissipate into nothingness.
Proposition 5: a government-mandated Ponzi scheme can be semi-stable so long as there is relative plenty in the nation.
When there is relative plenty, these schemes are still at the mercy of demographics, as Mr. Krauthammer observes. Periodic adjustments in the taxes and beneficiaries will be required to accommodate the nature of the population.
In the case of a major economic declines, such as a depression, dramatic reduction in the work force due to wartime attrition, the ability to fund the program will be severely hampered, requiring further curtailment in beneficiaries. In nations that employ fiat currency, the entity controlling the currency can intentionally inflate the currency to mitigate some of the effects, but it is of questionable efficacy as a permanent policy.
In the case of economic collapse, social insurance programs almost surely dissipate into nothingness.
Dr. Krauthammer’s fixes for social security transform the system from a forced savings system into a pure welfare system. If social security is a savings system, then one should be able to withdrawn his money at any age. Also, means testing is an abomination because it punishes saving. For example, two workers make the same salary, but one buys a big home, a new car every year, etc and retires without any savings. The other lives very frugally, saving and investing his money. Upon retirement, Dr. Krauthammer wants to take money from the “rich” person who gave up many niceties throughout his life and give it to the “poor” person.
But what bothers me most was Dr. Krauthammer statement that social security is the “most vital, humane…of all social programs.” What is vital and humane about the government telling you that you are too stupid and irresponsible to save for your own retirement and, therefore, we are going to forcibly take money from you for your own good? Dr. Krauthammer and many others have a distain for the average person and treat them as irresponsible children.
Ponzi scheme indeed. I view President Bush’s attempt to reform Social Security as a high point of his presidency.
I read recently that retirees beginning at some point (2030 or thereabout) will only receive $0.76 for every dollar they contribute to Social Security. (Not sure if that is a constant dollar figure of not.) A common first reaction to that statement might be, “Well, they should get a dollar for every dollar because that is just fair.” But think of it like this: had the Democrats not blocked President Bush’s efforts to privatize Social Security, we would get our dollar, plus a return on our investment. We would make money on our money, not to mention that we would have principal to pass along when we pass on. …and can you imagine the stimulative effect on the economy of private accounts freed up to invest? Where might we be today? President Obama reelection hopes would be brighter (the one possible negative).
However, Democrats (and many Republicans) are not interested in providing better futures. They are more interested in using Social Security as a power play.
GWB did not want to "privatize SS". He wanted to allow people to have some say in the investment of a (very small) portion of their SS 'contribution'.
This could only be seen as "privatization of SS" in the fever swamps of the Left and should not EVER be repeated (a more correct word would be regurgitated).
My goodness. I believe Charles is mistaken. Bismark set the retirement age at 65 and gave the retired worker, if he were alive, a 10% pension. That is why FDR chose 65 for Social Security.
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