Social Security, Ponzi Schemes, and Realistic Expectations

Recent political debates have brought up comparisons between Social Security and Ponzi schemes. (Have you read the book about the real Ponzi?) Even though seemingly every single economist on Earth has weighed in, this discussion has been around for so long that the Social Security website already has an entire page dedicated to addressing it. To summarize, yes Social Security shares some traits with Ponzi schemes in that money from new participants goes to earlier participants. However, it relies on a rather straightforward transfer and does not depend on an exponential growth of new participants to be sustainable. It is, however, sensitive to demographics.

Social Security is a pay-as-you-go system. What I pay into Social Security today goes straight to a current retiree’s Social Security check. When I retire, my paycheck will be supported by a younger worker’s taxes. It is not an investment. It is not a savings account. The problem is, that the ratio of workers to retirees is getting rather low. In 1950, there were 7.3 working-age people for each person over 65; now, the ratio is 4.7 to 1, and it is scheduled to drop to 2.7 to 1 by 2035. [Source]

Since people are living longer as well, the reality is that for a 30-something like me, the math works out that there is little chance that we will get the same level of relative benefits that current retirees get. However, there will be no sudden Ponzi-like implosion. Now, the government could smooth this transition out even more if they do the hard thing and do some combination of higher taxes, extending retirement ages with higher life expectancy, or lowering benefits. But politicians are usually reactive as opposed to proactive, so don’t count on it. That’s too bad, because people are more dependent on Social Security than ever. 70% of all eligible folks can’t even wait until 65 to start taking benefits, many as early as 62, even though that means lower payments and likely a lower total benefit. This is why in general financial experts say you should wait as late as possible to get a higher payment for the rest of your life.

Of course, Medicare is even worse. Take this analysis via this WaPo article:

Consider an average-wage two-earner couple together earning $89,000 a year. Upon retiring in 2011, they would have paid $114,000 in Medicare payroll taxes during their careers. But they can expect to receive medical services – including prescriptions and hospital care – worth $355,000, or about three times what they put in. [...] The same hypothetical couple retiring in 2011 will have paid $614,000 in Social Security taxes, and can expect to collect $555,000 in benefits.

Comments

  1. I would add that it’s worse than a Ponzi scheme because it’s compulsory and men with guns will come for you if you don’t pay. Kind of combination of a Ponzi scheme and protection racket. I want off this stupid roller coaster, but we’re too far in now.

  2. Someone forgot to tell the SEC, because their definition of a ponzi scheme almost certainly includes Social Security, ie

    http://www.forbes.com/sites/merrillmatthews/2011/09/14/ponzi-is-as-ponzi-does-the-governments-case-against-social-security/

    SEC does not require exponential growth of new participants to be defined as a ponzi scheme, only that it not generate profits itself and that it requires a constant flow of money from new investors.

    Mike

  3. According to some economists, like Dean Baker, the problems facing social security are more political than economic. “If all wage income were subject to the tax then it would leave Social Security fully solvent for its 75-year planning period.” And “By 2040, average wages are projected to be 45 percent higher than today, adjusting for the impact of inflation. If just 5 percent of the projected wage growth over this period was used to finance Social Security, the program would be fully solvent for the rest of the century.” [http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/why-is-president-obama-so-anxious-to-cut-social-security] As you say, though, it’s unlikely for Congress to raise taxes, even if it reduces the regressive nature of the SSDI tax.

    Medicare’s problems stem mostly from the explosion in health care costs. [http://www.cepr.net/calculators/hc/hc-calculator.html] Yet I hear very little about trying to reduce costs. Or worse, the provisions in Obamacare that are aimed at reducing costs are vilified as cuts, death panels, or any number of other horrible things. *Shrug* Politics.

  4. What a mess! Here’s the issue as IMO “Now, the government could smooth this transition out even more if they do the hard thing and do some combination of higher taxes, extending retirement ages with higher life expectancy, or lowering benefits.” I think the government has the obvious obligation to do something because they started SS. The problem with higher taxes is that we are adding to the burden of SS on a shinking ratio of people paying. WIth the baby boomers hitting retirement age and going to be recieveing benefits I dont think they will allow politicians (without facing political suicide) to extend the retirement age or lower benefits in the forseeable future. I think what is coming is a “needs based” system, essentially changing it into welfare. At which time people will then be clamoring for both lowering benefits and increasing retirment age, thus lowing SS tax.

  5. Either which way, we 20-40 year olds are going to be the ones screwed.

  6. regarding “…Upon retiring in 2011, they would have paid $114,000 in Medicare payroll taxes during their careers. But they can expect to receive medical services – including prescriptions and hospital care – worth $355,000, or about three times what they put in….”

    What about the time value of money calculation. Some of that 114k was paid long ago and potentially could have been invested/loaned out and therefore would have grown to the value being taken by said couple.

    Certainly when the 401k training group comes to my company next week to push their wares they will be telling us that on average investments have grown (implying they will grow). Wouldn’t that be true in this case?

  7. While the demographic math (and the failure to anticipate and react to it) is troubling, the part that bothers me the most about Social Security is the “Trust Fund”. It reminds me of that part in Dumb and Dumber where the bad guys finally get their suitcase back, open it, and find that Lloyd and Harry have taken all the money and spent it, replacing it all with a pile of worthless IOUs.

    That is essentially what our government has done with the Social Security trust fund. They have not saved any of the contributions people have made over the years and invested them in tangible, marketable assets, they have “lent” them to the government to spend, thus obligating future taxpayers to pay it back with interest.

    So, this means that future taxpayers will not only be supporting future beneficiaries with their payroll taxes, they will also be paying for benefits of current beneficiaries through income taxes, or inflation (hidden taxes) if the debt is monetized.

  8. Thank you, YouTube. Here’s the Trust Fund illustration from my previous comment => http://www.youtube.com/watch?v=7GSXbgfKFWg

  9. The Trust Fund is indeed a mess. Check out this article from Scott Burns.

    Who Stole the Money in the Social Security Trust Fund?
    http://assetbuilder.com/blogs/scott_burns/archive/2011/08/26/who-stole-the-money-in-the-social-security-trust-fund.aspx

  10. Thanks for the very informative links to the SSA and SEC explanations of Ponzi scheme. It seems that the technical differentiators between SS and a Ponzi scheme are that 1) SS was not intended to be fraudulent 2) SS is not exponential. But the bottom line remains that SS depends on new participants to pay old participants, and it is unsustainable when new participants are less than old participants. Further complicating this debate is that it has turned highly political.

    CNN had a ridiculous article where it stated that SS was not a Ponzi scheme because it would be sustainable if contribution levels were raised. Um, hello? Even if doesn’t fit the strict definition of Ponzi scheme, it has the essential ingredients.
    http://www.cnn.com/2011/POLITICS/09/12/truth.squad.social.security/index.html

  11. Yes…lets rely on the politicians that created the problem and plundered the system to fix it it in our interest…..I’ll take my chances with Charles Ponzi or Bernie Madoff.
    There is not one town, city, state, national program, procurement contract or war that doesn’t have both the paw prints of the Democratic and Republican National Committees on them. From the bankrupt Post Office to Medicare, to Social Security to the US Treasury to $100 billion that has been misspent in Afghanistan.
    And THEY are going to fix! And like everything it will be at our inconvenience and expense…..because we hold them accountable for nothing…..Just be good sheep and do your meaningless blogging as if had anything to with truth, justice and democracy.

  12. This is not a popular view but I really think the program should start changing…
    People who are between 50-60, they will be eligible for SocSec when they’re 70.
    40-49 – make it 75
    30-39 – make it 80
    20-29 – make it 90
    10-19 – make it 100

    Essentially, phase it out over time. The burden will shrink and the people who are 40 and under have plenty of notice that they’re not gonna get any of it until they’re much, much older. You’re still eligible, just highly unlikely to ever get it. Right now it’s just a tax we all pay and it’s not going away because the boomers feel entitled to it (annoying to hear this same group blast entitlements and then say they are entitled to medicare and social security). The Gen X and Y group needs to be mature and just say, “hell, we’re not getting any. “

  13. @Mark – healthcare costs are amusing as everybody in the industry wants a cut. insurance, hospitals, manufacturers, billers, pharma, coders, docs…they all are trying to make a profit off healthcare. Hmm. What incentive is there to provide quality healthcare if it cuts dollars from the bottom line? It makes the oil industry seem clean in comparison.

  14. It is NOT an investment. It is NOT a savings account. Therefore it is NOT a Ponzi scheme.

    Its a TAX that funds a retirement benefit and other benefits for eligible participants.

  15. “It is NOT an investment. It is NOT a savings account. Therefore it is NOT a Ponzi scheme.”

    You can say that is not technically a Ponzi scheme, but at the end of the day, people are paying into a program with the promise that they will receive retirement benefits. But actually their money is paying current retirees. And eventually, the money will run out because this model is unsustainable. So fine, it doesn’t technically fit the definition of Ponzi scheme, but it has similar characteristics to one.

  16. Social Security is not a tax, it is a mandatory social insurance program. It is funded by the payroll tax. See wikipedia if this is unclear. You can claim it’s not an investment, but I personally would consider a forced retirement plan an investment.

    http://en.wikipedia.org/wiki/Social_Security_(United_States)
    http://en.wikipedia.org/wiki/Payroll_tax#In_the_United_States

    Mike

  17. I don’t think anyone is getting rich off of collecting Social Security, how could it be considered a ponzi scheme? A ponzi scheme benefits the initial participants greatly, while others get screwed. We only get screwed on social security if they don’t fix it… it can be fixed. Also Social Security used to have a greater surplus which would have funded it much longer, but that surplus was borrowed against– I don’t think they should be borrowing against the fund.

  18. @Ben, others – The number of workers per retiree is not important, really. What matters is the real wages being taxed per retiree. If wages grow faster than expected, we won’t have a problem. The demographic changes were largely planned for back in the 80′s. The main problem is again Congress – very little has been changed about Social Security since then. How many other plans from the 80′s will get us by until ~2036? Actually pretty impressive.

    @Jonathan, others – The Trust Fund was filled with special Treasury bonds, backed by the full faith and credit of the U.S. government. If you don’t trust that they will be paid back, I suggest altering your asset allocation to avoid all other Treasury bonds, as they fail together. I’m not saying it was a good thing we spent the money, but it’s a problem of government spending outside of Social Security, and not a problem with the Social Security Trust Fund itself.

    @Ben – Inflation is not a bad thing in moderation. Moderate levels of inflation are generally agreed to benefit the economy. Inflation hurts lenders (and helps debtors), though. Lenders are people with money, which are generally people with power, and so there has been a big push to promote fear of inflation. It’s actually very difficult to have runaway inflation at the same time as high unemployment – prices inflate because demand increases, and when unemployment is high, there are less people with money creating demand. Coupled with a Fed hellbent on keeping inflation really low (their 2% target is well below the historic average inflation over the past long time), I don’t see a big threat from inflation.

  19. OK, forget trying to compare SS to a Ponzi scheme, because one can always point to some technicality that differentiates SS from a Ponzi scheme. But that’s like saying: technically, the sky isn’t blue and polar bears aren’t white. (They’re both actually colorless, it’s the refraction of light that makes them appear blue and white.)

    Just answer this question: Without changing anything (benefits nor contributions), will new participants receive the benefits that they are promised when they retire?

  20. Mark,

    I think the US will pay back the trust fund.. it’s the way they must pay it back that bothers me. Either through higher taxes or monetization (causing inflation, a hidden tax) it will be on the back of future taxpayers. This is NOT pay as you go. At least Treasury bonds (which I do avoid like the plague) are marketable in secondary markets. Treasuries in the trust fund cannot be sold, and thus ONLY have value as a claim on future taxpayers.

    If your definition of inflation is “rising prices”, you can say that many things cause inflation. However, the primary cause throughout history has and continues to be monetary policy. Inflation will happen if the Fed decides to monetize debt. Whether that will happen in the future, I don’t know. But if it does, inflation will follow.

    CPI is a flawed and manipulated by the government. http://www.shadowstats.com/alternate_data/inflation-charts

  21. Speaking of Ponzi schemes, plz read the book ‘No One Would Listen’ and write a review about it :)

  22. carmageddon says:

    Actually, Polar Bears are black and their outer coat is transparent.

    The only difference between SS and a Ponzi scheme is that SS doesn’t promise you an ever growing rate of return, which is why it gets to live on in perpetual crisis.

    But the SS problem is peanuts compared to Medicare. With SS some people come out ahead and some some pay in far more than they get out. With Medicare, everybody comes out ahead – even two income families with both spouses earning the maximum $106,800/yr!!

    http://money.usnews.com/money/blogs/the-best-life/2011/01/05/social-security-medicare-a-bargain-for-many

  23. Wow, reading here I see a lot of spoiled 20- and 30-somethings posting. A lot of “ME, ME, ME” I don’t know nothing about history and want to be stupid rhetoric.

    Before SSA and Medicare/Medicaid, living in poverty in old age or disability was a real possibility for many Americans. In the ten years following Medicare/Medicaid, the percentage of elderly living in poverty was cut in half.

    Want to fix the system? Eliminate the cap of SSA contributions. ENTIRELY. Enact single payer health care – gets people healthy and productive, eliminates the parasite insurance industry, cuts costs for employers DRAMATICALLY

  24. All taxes are evil. The gubmint is evil. Let the poor die – sick now or just old later on. I’m putting all my money into gold ammunition. Just you try and take it from me!

  25. @Mark Adams:

    “If all wage income were subject to the tax then it would leave Social Security fully solvent for its 75-year planning period.” And “By 2040, average wages are projected to be 45 percent higher than today, adjusting for the impact of inflation.

    The problem with this statement is that it assumes wage growth with keep up with or outpaces inflation. Historically, it has not unless you include the impact of massive numbers of women entering the workforce in the 1970’s-1980. Our wives are already working. What’s next? Take our children out of school so they can help support the family too? Also, it is important to keep in mind that the government has tinkered around with the way they measure inflation. In the past, you had a basket of goods at some starting number compared to the same basket of goods with an ending number. For instance, if you start with steak but the price of steak goes up, the substitute the steak for hamburger and say there is no inflation. Or if the price of a new computer stays the same, but gets 2X faster, they say the price of computers went down 50%. Check out shadowstats.com for more information on this.

    “Medicare’s problems stem mostly from the explosion in health care costs.”’
    The main problem is that the person receiving the benefits is not directly paying for them too. As a result, they do not shop around for the best deal because no matter which medical provider they choose, they have the same deductable (assuming it meets the qualifications of their insurance program). Additionally, because the government makes health insurance tax deductable, it is provided by employers. Employees cannot shop around for insurance like they would with their car insurance…and when they change jobs, they lose coverage and cannot get covered for pre-existing conditions. Things would be so much better if the government was not involved in this and we had our health insurance just like we have car insurance.

    @Matt:
    “Either which way, we 20-40 year olds are going to be the ones screwed.”
    This is not necessarily true. I fit into that age range and I’m pissed off – not only because of the social security situation, but because we have the same problem with government involvement in the education and healthcare industries. Student loans and health insurance is way too expensive. I may decide to just leave the country and default on the student loans, stop paying into SSI, and stop paying into Medicare. Then, my parents generation is the one that gets screwed because I won’t be around to pay into the system. I do not have to stay in the USA and take this fiscal abuse.

    @bgdc:

    Phasing out social security over time is a good idea, but doing it by increasing retirement ages is insane and unfair. So you would honestly advocate that people age 19 right now start paying into social security for the next 90 years (if they live that long) and then finally get to collect when they reach age 100?
    Keep in mind that people today only have a few years left of life expectancy to collect fully SSI benefits. So, even if you raise the retirement age a little bit, it looks like a small number compared to the number of years they have already lived. However, it is a HUGE number compared to the number of years they have left to live (on average).

    A much better way to phase the system out is to determine what the Net Present Value of their current benefits are and cut a buy-out check to everybody who opts out. For the people that choose to not opt-out, pass a law that puts an absolute cap on their benefits. The point is this, social security is broke and it is unfair to make the younger generation pay a disproportionately higher amount of the bill.

  26. @Me:
    “I don’t think anyone is getting rich off of collecting Social Security, how could it be considered a ponzi scheme? A ponzi scheme benefits the initial participants greatly, while others get screwed. We only get screwed on social security if they don’t fix it… it can be fixed.”

    Ida May Fuller was the first person to receive social security. She retired in 1939, having paid only three years worth of payroll taxes. She collected $924.80 worth of benefits for every $1.00 she contributed. Sounds to me that she benefited greatly. It helps when you are at the top of the pyramid!

    Because the taxes we pay into social security are not used to purchase investments that earn a return like a 401k, the benefits paid by the system as a whole cannot exceed the contributions the public has paid in, as a whole. Because there are administrative costs running the program, the average participant in social security is a net-loser. Obviously, the people that got in first were big net winners and the people getting in near the end will be big net losers.

    The only way to “fix” social security is by doing something that amounts to increasing contributions and decreasing benefits. This is like saying the Titanic was a success because at least some of the passengers made it to NY. The real fix to SS is to end the program immediately and provide buy-outs to all participants.

    @Mark Adams:
    “What matters is the real wages being taxed per retiree. If wages grow faster than expected, we won’t have a problem.”

    I agree with your statement, however, it also highlights the fact that we WILL have a certain problem because real wages are declining while at the same time the worker to retiree ratio is also declining.

    “If you don’t trust that they will be paid back, I suggest altering your asset allocation to avoid all other Treasury bonds, as they fail together.”

    This is a suggestion I took a long time ago. Gold is a far safer store of value right now than Treasuries because the real yield (adjusted for inflation) on treasuries is negative.

    “Inflation is not a bad thing in moderation.”

    All inflation is bad. Deflation is actually good because it reduces the costs of the products and services consumers need and want. Falling prices are good because it means that we are getting more efficient. When the government prints money, we lose the benefit of falling prices. In fact, we have to keep getting more and more efficient just to tread water while the government sucks up all the benefits of the American people through the hidden tax called inflation.

    “It’s actually very difficult to have runaway inflation at the same time as high unemployment – prices inflate because demand increases, and when unemployment is high, there are less people with money creating demand.”

    DO YOU NOT UNDERSTAND ECONOMICS?!? The easiest time to have runaway inflation is exactly the same time unemployment is high. If you take any basic economics course, you will learn that price is a function of BOTH SUPPLY and demand. When unemployment is high, people are not working. Goods and services are not being produced. Production dries up and SUPPLY rapidly decreases. Meanwhile, you have the government “stimulating” the economy by printing more and more money. This means you have more money which equates to more demand because more dollars are chasing fewer goods/services. High unemployment means MORE DEMAND and LESS SUPPLY = HIGHER PRICES.

  27. @Ron – So, they voted themselves the fruits of our labor in return for promises they knew had no plan to keep, and if we criticize such a system then we’re selfish inhumane bastards that couldn’t possibly have opened a history book. Am I understanding your argument correctly ?

    Mike

  28. @Ron:

    “Wow, reading here I see a lot of spoiled 20- and 30-somethings posting. A lot of “ME, ME, ME” I don’t know nothing about history and want to be stupid rhetoric.”

    My generation is the first generation in this country’s history that will be worse off than our parents generation. This is not by chance. It is a direct result of the poor decisions older generations and their representatives have made.”

    “Before SSA and Medicare/Medicaid, living in poverty in old age or disability was a real possibility for many Americans. In the ten years following Medicare/Medicaid, the percentage of elderly living in poverty was cut in half.”

    Sure, when you take money from younger generations, it will certainly benefit the generation that is doing the taking.

    “Want to fix the system? Eliminate the cap of SSA contributions. ENTIRELY.”

    If you do this, then you also need to eliminate the cap on SSA benefits. The reason contributions are capped is because benefits are capped. Why should some people pay a lot more into SSA but not get any additional benefits when it comes time to collect? It is unfair and immoral.

    “Enact single payer health care – gets people healthy and productive, eliminates the parasite insurance industry, cuts costs for employers DRAMATICALLY”

    The sliver of profits the insurance industry makes does not account for the massive healthcare inflation we have in this country. The solution is far simpler. Make health insurance like life insurance. Everybody buys their own, it is only for catastrophic events, and the premiums never go up for as long as the policy is valid, and pre-existing conditions are no longer an issue because the policy would transfer with the person regardless of employment status.

  29. Tommy Z claims to understand economics and yet gets the relation between unemployment and inflation as wrong as possible. Somebody slept through his “basic economics course.”

    wikipedia.org/wiki/Phillips_curve

    Gotta love internet economists. Jonathan can’t make one political post without the comments section going full tard-mode.

  30. I think to be drawn into the meaningless and always deceptive media babble of whether Social Security is a Ponzi scheme or not is irrelevant.
    What is relevant, is that a group of politicians that are paid $170,000 or so per year, who have a fiduciary responsibility to manage the Social Security Trust properly have instead plundered the system for their own benefit. They have have left Social Security with trillions of dollars of worthless US bonds which legally the government has no obligation to repay. Its unbelievable but true….who would buy a bond that at maturity has no legal requirement to be repaid?
    And like our $14 trillion national deficit or the funds that disappeared in Iraq and Afghanistan or the money that goes to the Palestinian Authority or Pakistan whats really going on other then out and out theft of US taxpayer money. Are we so naive to believe that only Arab despots have Swiss bank accounts?

  31. Like Medicare, public education and even Obama’s healthcare program, Social Security is an attempt to spread out the costs of things that our society deems important. These costs would impact our society anyway; the point is to soften the blow on the individual for the greater good of the society as a whole. Even Libertarians believe that government has the right to use coercion to collect taxes for the things that Libertarians think government should be doing. ( e.g., police, military, perhaps copyright?) It’s simply a question of what we want our society to resemble more – Sweden or Honduras. I think many people imagine that we can resemble Sweden without paying what that level of civilization actually requires. Others are more intellectually honest and would not mind if we resembled Honduras, but I don’t think that a politician could succeed while stating such a position openly.

    Does anyone really believe that churches and private charities would fill the void if Social Security and Medicare disappeared?

  32. Chris in Boston says:
  33. “there will be no sudden Ponzi-like implosion”

    Yes, true, but only because the government forces people to participate in the system. The reason a private ponzi scheme can collapse rapidly is that when people realize they won’t get a return on their “investment” or indeed even get back off of their money, people pull out of the system and it becomes impossible to find new suckers to sign up. But when people have no choice but to pay in — voila! — no rapid collapse. That doesn’t mean benefits won’t plummet and taxes go up, but the system will continue to exist so long as the alternative to not paying in is (at the end of the day) prison. The real point question is why we want to maintain a system that is guaranteed to give young people a horrible (or negative) return on their mandatory payments. Other countries have done it better with some combination of regulated but real investment and a minimum benefit financed with transfer payments. We should be able to do the same.

  34. @Mark G.

    Learn the truth about the Phillips Curve. Check out this video starting at 3:17:

    http://www.youtube.com/watch?v=HAuwt5-evtw

    @Donald:

    “Even Libertarians believe that government has the right to use coercion to collect taxes for the things that Libertarians think government should be doing.”

    This is not true. Most Libertarians think the government should be doing only what is authorized by the law of the land, the Constitution. You are also going to want to learn more about Sweden here:

    http://www.youtube.com/watch?v=mvtxT0qPJoQ

    “Does anyone really believe that churches and private charities would fill the void if Social Security and Medicare disappeared?”

    Churches, private charities, and extended family can and will step in to fill the void just like was done before we had Social Security and Medicare. They would also do a better job at it and nobody would need to be having discussions on how to fix churches/charities/etc like we are having now with SS and Medicare.

  35. I knew Ida May Fuller was going to come up. Unlike a ponzi scheme, she didn’t start Social Security, and was forced into contributing towards it, as we all are. She received a subsidized benefit without a doubt, but didn’t become rich off of social security. Her monthly social security check was something like $23 initially, and she lived 35 years in retirement to age 100 and never married and lived alone. Her total collection from Social Security over a 35 year span was almost $23,000.

    Now, I don’t classify Social Security as a ponzi scheme, but if you were, then I think you would also consider a pension plan a ponzi scheme. And by the same logic, I guess insurance would be another ponzi scheme. I could go on and on using that logic…

    As far a 401k is concerned, it’s a great investment vehicle, but I don’t think it’s a singular replacement for social security. Unlike Social Security, there’s no required use of a 401k program, not all businesses offer a 401k, there’s no minimum contribution and there’s no guaranteed retirement return. Most people underfund it. Many don’t understand it. And those just a decade or so ago, may have barely used it. There have been some that have lost significant savings in their 401k. Enron employees come to mind, because their 401k used company stock. You really don’t have a say in overall investments that are available in your 401k A 401k can certainly lose value. And you can easily mismanage your 401k.

  36. “Now, I don’t classify Social Security as a ponzi scheme, but if you were, then I think you would also consider a pension plan a ponzi scheme.”

    A pension is where the employer and employee each contribute to a fund and when it comes time, the employee gets a guaranteed income stream. Unlike a Ponzi scheme and Social Security, the funds for a pension are invested and stashed away so they are available to redeem later. The problem with many pension funds (like social security and a Ponzi) is that the benefits promised are greatly than what is realistically affordable. Employers do not contribute enough to the pension funds and the initial assumptions on rates of return on investments were too rosy. The bottom line is that while pensions have some similar problems that Ponzi schemes and Social Security have, the difference between a Pension and a Ponzi is larger compared to SS & a Ponzi.

    ” And by the same logic, I guess insurance would be another ponzi scheme.”

    No, insurance is not a ponzi scheme. A few differences:

    1. There is no intent to defraud.
    2. Contributions are invested in legit investments.
    3. Most people receive no benefits (other than peace of mind) and they know this up front.
    4. For the people that do get benefits, it is only to cover losses…not to make profits.

    “As far a 401k is concerned, it’s a great investment vehicle, but I don’t think it’s a singular replacement for social security.”

    Agreed. However, a 401k is a better and more honest option than social security. I would rather have the social security taxes people pay now go directly into an account with their name on it than to politicians that have access to those funds to spend for wars based on lies.

  37. Several people above are wrongly assuming that there is a connection between paying the SSI Tax *now* and getting an SSI benefit later. SSI is not an investment – there is no connection between what you pay into the system and what you will get for payments in the future.

    However, there is a connection between your *wages* and your future SSI checks. SSI payments are based on your historical wages.

    In other words, whether the current SSI tax is 2% or 10%, your future theoretical payment would not change, since it is based on your wage history.

  38. I would be all for optional privitization. Even if the government forced a .5% penalty to help subsidize SS, the ability to earn a return over 30-40 years of working and being in control of my retirement is a lot more appealing than waiting 30 years only to have benefits cut and the retirement age continually raised.

  39. I’m in my 20s. Can I just voluntarily opt-out of all government programs? I don’t pay and I don’t benefit. Please?

  40. I think I read somewhere that you can opt of Social Security if you become a priest.

  41. @ Naveen: Yes. Move to another country.

    If you live here, you benefit from the common goods: roads, clean water, the research and practice of the CDC to get contagious diseases under control through the development and deployment of vaccinations (even if you DON’T get vaccinated, your health is enhanced because those in the herd around you DO and are less likely to infect you), a military that protects us, fire and police, public schools which may not educate your children but do educate your employees as well as the kid who rings up your slurpee at 7/11, regulators who make sure manufacturers make efforts to protect their community, employees and environment, etc., etc., etc. The list is endless. Simply by living in the United States, you are standing on the shoulders of those before you and out of the pocket of those next to you. Period.

    Is it perfect? No, not even close. But it is still the destination country from many who don’t have citizenship, so most things must be going better here than elsewhere.

    As for “we’re the first generation who will be worse off …” We thought the same thing in the ’80s when we were in our 20s. Jury is still out.

  42. @Ron:

    “@ Naveen: Yes. Move to another country.”

    Why should Naveen or anybody else move to another country? Why is it too much to ask that our government simply follows the limits imposed by the Constitution?

    Social Security was ruled unconstitutional when it was being launched. It then went to the Supreme Court which was freshly stacked with FDR’s shills. The Supreme Court ruled that it was constitutional because it bought the government’s arguement that social security is nothing more than welfare. There is no connection between the contributions paid in SS tax and the benefits recieved.

    Look – just because a biased Supreme Court says something is constitutional or not does not mean that they are right.

  43. Wow, Ron. Thanks for the hospitality. By the way, I never knew that my federal Social Security contributions went toward funding infrastructure, water purification, medical ressearch, the military, fire fighters, police officers, public schools, 7-Eleven employees, and bureaucratic regulation agencies. Who knew? I guess I can learn something new every day. Here I was basking in naieveté under the assumption that the contributions went into a Social Security Trust Fund to pay the current beneficiaries of this government program.

    Count me in with Tommy Z. I’m pretty sure that he and I are not relying on other people (or each other) to fund our own retirements. All I want is to keep my contributions and invest them myself.

  44. I believe it was James Madison, father of our constitution who said, ‘If men were angels, no government would be necessary’

    I, for one, am glad we have Social Security.

    Social Security is an insurance program for old age, survivors, and disability. When you think about it, it’s basically an annuity that is indexed for inflation.

    What’s great about America is that if you don’t like Social Security or believe you can do better, you do have the option to pursue other investments if you can afford to do so. I think what’s tricky is that not everyone is able to invest on their own. It’s not understood by all.

    As far as the moving to another country comment, I don’t believe he was trying to be harsh, but rather bring up a possible option. It certainly crossed my mind from the original question, but I didn’t mention it. I like where I live.

    Thing is, we’re all different people. We’re not going to see eye to eye on everything. We’re not living in the 1700′s– in fact I couldn’t even imagine that. What we have today is all I’ve ever known. My goal is pretty much live a happy, and healthy life, and someday, when I can, retire. It’s from this blog and through interaction with others, that I hope I can plan successfully for when I do retire.

  45. The full quote by James Madison, in context, occurs in Federalist No. 51 and is as follows:

    “It may be a reflection on human nature, that such devices [he's referring to separation of powers, the topic of this paper] should be necessary to control the abuses of government. But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.”

    So, he’s writing in extremely cautious terms about granting power to any of the various branches of government.

    Lore, I understand and appreciate the ability to be able to invest disposable income I have above and beyond what is contributed to Social Security. My argument is that I don’t think it’s right for anyone to be forced to participate in Social Security. In this sense, it’s worse than a Ponzi scheme, which at least has voluntary participation. The amount of my income that is available for my own investment is immediately reduced by the amount that is siphoned off to go to Social Security. Since you’re reading this blog, I’m confident that you already know about the power of compounding that can happen when we start saving in our 20s. That money will never be compounded. I’m not rich by any stretch of the imagination, but I am trying very hard to get there. Why should some American involuntarily bear the burden of funding the retirement of another American?

  46. Why should I involuntarily bear the burden of educating someone else’s children? Why should I involuntarily bear the burden of putting out the fire in someone else’s burning house? Why should I involuntarily bear the burden of fighting wars that I don’t believe are just or necessary? Once you head down this road you have to ask a lot of similar questions and finally ask yourself what kind of society you want. Social Security is a tax like any other, however it may be dressed up to make people think it is something else. It would be better if everyone would just be honest about this, but we are so afraid of being called socialists.

  47. Tommy Z writes, “Social Security was ruled unconstitutional when it was being launched. It then went to the Supreme Court which was freshly stacked with FDR’s shills.”

    Wow, this could not be more wrong. First off, in the cases in which the Supreme Court ruled Social Security as constitutional (Steward Machine Company v. Davis and Helvering v. Davis), they affirmed the lower court ruling, they didn’t overturn it.

    Second, not a single member of that court was appointed by FDR, NOT ONE. Those cases were decided in May of 1937, and FDR didn’t send his first judge – Hugo Black – until August of 1937.

    You are close to right with a later statement, “There is no connection between the contributions paid in SS tax and the benefits recieved. (sic)” Given that Social Security is an insurance program (and not just retirement income insurance, but disability and survivors, too) and not a retirement fund, that’s pretty much to be expected.

  48. @Donald:

    You cannot compare the taxes to pay for education, fire safety, and national defense to the taxes used to pay for welfare (social security).

    Everybody benefits from an education:

    A. School children (yes, even you were a child)
    B. Well-trained employees
    C. Employers with a capable workforce

    Everybody benefits from the fire department too. You don’t want your neighbor’s burning house to spread to yours, do you?

    National defense is also clearly in the common interest of everybody. It is not like a foreign invader is only going to invade the homes of people not paying for protection. So, we combine our resources and defend a common boarder (except for the boarder with Mexico lol).

    With social security, the taxes paid by hard working American families are going directly to people not working or doing anything to further the nation under the guise that they deserve a comfortable retirement where nobody over a certain age has to lift a thumb ever again. I agree that older Americans deserve a comfortable retirement, but not at the expense of hard working young families just struggling to pay the bills. If you want a comfortable retirement, each person should have the right to save and plan for that retirement instead of getting a bailout from other Americans via social security.

    I would not be so critical of social security if I knew the system we have now was fiscally sound. The reality is that in order to preserve social security, my taxes must go up and my benefits must go down. Not only have we already done this in the 1980′s and we are going to do it again soon, but between today and when I retire, we are probably going to have to do it again. More taxes & less benefits (increase retirement age, etc).

    What really bothers me is that not all Americans will share in this sacrifice. The older you are, the less pain you get to share…in fact, you will not have any pain if you are already getting a government check. The vast majority of the burden on social security is being placed on America’s youngest generation – a generation that was too young to vote (or not even born yet) to have a say in the matter.

    The end result is the people that go into the system first got far more benefits than they put in. The people getting into the system later get the opposite. Not only that, the people getting into the system later and getting into it later through no fault of their own and never had a voice on the matter.

  49. @Tommy Z

    In my opinion you can compare Social Security to these other things. One could say that the entire society benefits from not having a lot of old people living in poverty. It’s all a question of where you draw the line on the role of government and what we are willing to pay for. The consequences of not having Social Security would not be cost-free either.

  50. @Donald:

    Does society benefit from not having a lot of old people in poverty? I would say yes. Does society benefit from not having anybody in poverty? I would say yes to that too. Hell, why not give everybody social security and make poverty a thing of the past?

    While the intentions are good, the logic is not. When you look at the big picture, the net effect of social security to society is negative as a whole (total benefits vs. total costs). On an individual basis, it is much more negative for later participants, just like a ponzi.

    Without social security:

    A. All the costs of running the program would be immediately eliminated.

    B. The ability of our government to borrow money against the social security trust fund would not exist and it would force the government to be more efficient in the other services it provides.

    C. People are PLANNING on getting social security…especially the people that are getting it now. This makes them dependent on the government, even as the government is struggling to find a way to honor all of the promises from past politicians. If people did not depend on the government, they would be much stronger and be in a better financial position.

    D. Taxes paid into social security are not invested like a 401k, pension, or IRA. Taxes paid are simply used for current government spending. As a result, all participants are robbed from getting a return on their investment (mandatory ss taxes).

    E. Because taxes paid into social security are not in the name of the individuals contributing, there are big winners and losers. People who die early get screwed. People who have terminal cancer are still forced to pay into the system, will not get any benefits from it, and do not have acceess to that cash for medical bills or otherwise. Whereas if those ss taxes were put into a 401k, they could at least borrow against that money to have some benefit while they were still living.

    I do not think it is a question of where “I” draw the line on the role of government. It IS a question of where the “Constitution” draws the line. SS is clearly and obviously over that line and the Supreme Court was wrong to ever let it exist.

  51. @ttfiz:

    Potentially the most serious threat came from rulings invalidating the Agricultural Adjustment Act (AAA), which used the same broad power to levy taxes for the general welfare as the basis for its program of agricultural price supports and controls. Lower courts ruled this unconstitutional and the Supreme Court followed in January 1936, ruling that “. . .a statutory plan to regulate and control agricultural production, [is] a matter beyond the powers delegated to the federal government. . .”

    As expected, the Social Security Act was challenged on constitutional grounds. But by the time the case had reached the Supreme Court, Roosevelt, clearly frustrated by a “horse- and-buggy” court that had overturned so much of his prized legislation, had advanced his court-packing plan to add one judge to the Supreme Court and lower federal courts for every sitting judge who would remain on the bench beyond age 70. The plan would allow the expansion of the Supreme Court to a maximum of 15 members and add up to 44 judges on the lower courts.

    The year was 1937 and Roosevelt had just won reelection in a landslide, carrying 46 of the 48 states in 1936. Democrats enjoyed large majorities in both houses of Congress. Expanding the Court to allow Roosevelt to nominate more justices certain to be confirmed by the Democratic Senate would virtually assure that any New Deal legislation would receive the Court’s imprimatur. Obviously, the justices of the Supreme Court, and especially its conservative jurists, were not pleased at the prospect of having the judicial branch of government remade to accommodate the agenda of the other two. A substantial portion of his own party saw the proposal as an excessive reach for power and Congress refused to pass the plan.

    As it turned out, Congress didn’t have to. Roosevelt’s strategy worked. While the controversial plan was still before Congress, the Supreme Court reversed course. Justice Owen Roberts, who had usually sided with the Court’s conservative block, switched sides, and a number of 5-4 decisions began going Roosevelt’s way. An indication of the way the winds were blowing came in March when Roberts voted to uphold a minimum wage law in the state of Washington that was virtually identical to the one he had found to be unconstitutional in New York. Two weeks later he was part of a court majority voting to uphold the National Labor Relations Act. By the end of March, the Court had affirmed the constitutionality of the Railway Labor Act, the National Firearms Act and a revised Farm Mortgage Act.

    By a 7-2 vote, the Court upheld the government’s position that the Social Security Act represented a legitimate exercise by Congress of the taxing power to provide for “the general welfare.” We may not know for certain whether or to what extent the justices were influenced by the court-packing plan, but it was hanging over their heads as they deliberated. Social Security was popular with the Congress and the public and a ruling against it might well have created momentum in favor of Roosevelt’s court plan. Thus in “saving” Social Security the Court may have saved itself and entire federal judiciary from the grand design of Roosevelt’s “reform.” The shift by Justice Roberts, which altered the center of gravity on the court, was memorably described as “the switch in time that saved nine.”

  52. BTW, leaving the country does not allow you to escape federal income taxes (depending on where you go you may be able to escape SS taxes). Only by rescinding your citizenship can you (legally) escape, which may make it difficult to impossible to ever visit this US again. For those of us with family and friends and business associates living in the US, this is hardly a choice.

  53. @Tommy Z
    It’s always meant as a conversation-stopper to invoke the Constitution and the wishes of the Founding Fathers as if we the people have no right to govern ourselves today but must submit to the supposed intent of a group of politicians living over 200 years ago. I know, there are mechanisms of changing the Constitution, and perhaps FDR should have or would have pursued that route if the Supreme Court had opposed him. But really, I much prefer the arguments against Social Security based on effectiveness, efficiency and fairness. Appealing to Holy Scripture, i.e., the Constitution, is just a way of getting people to stop arguing with you. It works well, actually, I’m done.

  54. Tommy Z,

    Oh, good, you’ve done some research this time. So you’ve gone from “…the Supreme Court which was freshly stacked with FDR’s shills” to FDR WANTED to pack the court (which never passed, and as your research showed, actually failed to get through Congress). Much closer to the truth – undermines your whole argument about why it passed Supreme Court muster, but definitely more accurate.

    Oh, and by the way, when you cut-and-paste the words of another person, you should give attribution to that person – otherwise it is clearly plagiarism. Unless you are in fact Jack Kenny – http://www.thenewamerican.com/usnews/constitution/8974-how-fdrs-court-packing-plan-saved-social-security – you have copied word for word from someone else’s work.

    I’m giving you a bit of a pass on the cut-and-paste that your first paragraph was, given that you took it – directly, again, mind you – from the Social Security Administration website, so there isn’t one specific person you stole from. Of course, you left out the second half of the paragraph since it didn’t support your viewpoint, but I guess that’s to be expected.

    Best I can tell, though, not a word of your response to me was in fact written by you. Given that copyright is right there in the Constitution, I’d expect better from you.

  55. @Donald:

    Invoking the Constitution is not meant to end a conversation. However, it is important to note that the Constitution is not a living and breathing document that flexes to allow today’s politicians to get away with whatever they want. The Constitution can be changed and amended, provided it follows the proper process. The reason for following the proper process is so that the rights of the people are protected. The problem is that the Supreme Court has twisted and bent the words and meanings of the Constitution so that it flexes to accept just about anything; as a result, the people of this country are losing their freedom and rights.

    @ttfitz:

    The Supreme Court WAS stacked with FDR shills…except the shills were not newly appointed, they were existing judges that were newly turned into shills for FDR due to FDR’s dictator-like threats. Either way you look at it, the effect was the same. FDR was over the line and effectively the executive branch of the government exceeded its power.

  56. Tommy Z – I’m not sure from your usage that you understand the meaning of “shill” or “dictator” (or even “stacked”, given the narrow majority that some of these votes had), but at least this time it appears to be your own words, so that’s an improvement.

    In any case, I don’t see any use in continuing to debate someone who considers a president submitting a bill to Congress – which was defeated and never enacted – as a “dictator-like threat”, so I guess I’m done.

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