Social Security. It's Insolvent Now.

Tom Blumen writes an article on how Social Security is likely to be insolvent six years earlier than expected.

Are you kidding me? It's insolvent now like any Ponzi scheme. Just because Madoff made payments to investors doesn't mean his operation was solvent at any point. It became insolvent the minute it used new investor money to pay old investors. That's exactly what Social Security does.

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SS is NOT an investment scheme

SS has two independent sections. First, it is a very successful universal welfare program. Second, it is a flat and capped income tax, the kind of tax that Republicans love.

The funds from the tax portion have always gone into the Treasury and have allways been spent for current budget (and off budget) needs because that is how the law is written.

Why is the Army never described as "bankrupt?" No government program can be considered bankrupt because the Treasury will always write checks as ordered by Congress and the President.

Social Security

Social Security is an insurance program, not an investment program.

I suppose anyone who thinks

I suppose anyone who thinks medical insurance is insurance might also thing that SS is insurance.

Exactly which insurance principles does SS meet? NONE! SS are welfare payments.

Insolvent - unable to meet

Insolvent - unable to meet debts or liabilities.

We are certainly meeting our payouts on SS, so I wouldn't call it insolvent. Or fine, call it insolvent, but then this "insolvency" as you define it means that almost every single government program is insolvent.

The point is the "Ponzi Scheme," as you put it, takes money from one group to help out another group. Just because the worker to beneficiary ratio was high in the past doesn't mean it can't function. We put all our kids through school at a W/B ratio of 2-1 (the 2041 projection of SS), is primary education a Ponzi Scheme? Sure it cost less to send someone to school, but then again we don't have a dedicated "Education tax" on our paychecks either. So just because we take one group to help out another group, don't think it's impossible to make this work.

Yes, it does have a moderate long term problem.

http://www.nybooks.com/images/tables/20050310img1.gif

Look how the graph goes up about %2. This is certainly something to worry about, but it most certainly can be fixed.

Yes, it's a ponzi scheme and no regular govt. spending isn't.

"We are certainly meeting our payouts on SS, so I wouldn't call it insolvent."

By that definition Madoff's Ponzi scheme was solvent also.

"Or fine, call it insolvent, but then this "insolvency" as you define it means that almost every single government program is insolvent."

No, other government programs are pay as you go. They don't have ongoing obligations, nor do they pretend to be holding funds in trust for individuals.

Sorry but you are deeply in denial about this. The SS "trust fund" will not be able to truly pay for the kinds of retirement that the paper assets and current prices would make you believe. If madoff was above the law and could print worthless paper then he could have paid of his investors too, with depreciated notes.

I'm with billwald & annon.

Or fine, call it insolvent, but then this "insolvency" as you define it means that almost every single government program is insolvent.

No, other government programs are pay as you go.

And what is the relationship between “pay as you go” and solvency? “Pay as you go” just means that, in any given year, government must raise during the year the funds to pay for the costs incurred for that year. That’s what the US does with most budget commitments – including Social Security.

Admittedly, the US has also created the FICA tax and the “trust fund” around Social Security. I guess it’s possible to get exercised about the problems of Social Security finance if you seriously regard the program as some stand-alone entity separate from the rest of the US government. I don’t. I see no evidence that the US is prohibited from making Social Security payments out of general revenues if FICA + trust fund prove to be insufficient. Social Security obligations are backed up by the full faith and credit of the US government – no different than the paychecks of every federal employee. For practical purposes, I find the FICA/trust fund mechanism to be unrelated to Social Security. FICA is just another tax (a rather regressive one) funding general government operations; the trust fund is merely an accounting illusion.

Now, is the US budget structurally unsound, with anticipated revenues insufficient to cover anticipated obligations? Sure; has been for at least the last eight years. But Social Security is among the least of the problems. Medicare/Medicaid are projected to be much bigger budget-killers.

In short, I see no reason to be more alarmed about solvency of Social Security than about the solvency of the US government in general. And I think we all have cause for concern about the latter.

I disagree, pay as you go tax and fee systems are not Ponzi like

So you would say that private cooperatives that have "pay as you go" yearly fees for maintaining roads and common facilities are practicing a Ponzi scheme? I don't think so. Certainly such a cooperative could be mismanaged where the fees didn't cover the spending and the difference made up by borrowing. That however doesn't make it resemble a Ponzi scheme.

There are many things about SS that make it a Ponzi scheme. The idea that there is a "lock box" and that we each are contributing to our retirement which then supposedly gets invested. Meanwhile it is not being invested and is in fact the funds [other than those needed for payouts to keep the fraud going] are instead spent on the the people running the fraud and their friends. The whole mess depressing the true level of investment in this country because people think they have true financial backing for retirement. However they don't as there is no true productive capital ownership to provide revenue to back the funds.

Instead it relies entirely on the demographic game of having more people joining and paying than people leaving and withdrawing. Just like a Ponzi scheme. The only difference is that there are involuntary rules about who has to join, and when they can withdraw the funds. Rules that make it so that the Ponzi scheme can be run for a much longer time period. [Just like a central bank can allow the fraud of fractional reserve run longer before it collapses into a depression.]

This particular Ponzi scheme, SS, is highly dependent on demographics. It would have collapsed long ago if it were not mandatory. I certainly would not have contributed a dime to it if I had a choice. Given that I was forced in, and if I could withdraw now I would also do so. Do you think they have my funds?

Ponzi Scheme semantics

To be sure, whether or not you regard Social Security as a Ponzi scheme is heavily influenced by how you define “Ponzi scheme.” Thus I haven’t tried to discourage you from regarding Social Security in this manner. I merely point out that Social Security has many of the same qualities as other pay-as-you-go systems, whether or not you call them a Ponzi scheme.

To me, a Ponzi scheme is one that is fundamentally unsound because the stream of outflowing revenues exceeds the source of revenues. I don’t regard Social Security as a Ponzi scheme because I believe the source of revenues is the US government, which has adequate taxing powers to cover the cost of Social Security. (I am more open to the idea that the US government as a whole is a Ponzi scheme, in that the government’s ability to fulfill ALL its commitments may bump up against its practical ability to raise the necessary revenues, but that’s a whole ‘nuther thread.)

There are many things about SS that make it a Ponzi scheme. The idea that there is a "lock box" and that we each are contributing to our retirement which then supposedly gets invested....

This language suggests that you employ a more subjective definition of “Ponzi scheme.” Like beauty, perhaps a Ponzi scheme is in the eye of the beholder. That is, we call something a Ponzi scheme when we discover to our chagrin that we held mistaken beliefs about the nature of some fund’s costs and revenues. By that definition, to the extent you harbor a belief that FICA taxes would cover Social Security obligations, current forecasts suggest that you have some justification in calling the system a Ponzi scheme. Because I have no such expectations, I would not be so justified.

My larger hangup is that I regard the phrase “Ponzi scheme” as pejorative, something bad. But bad relative to what? Even if I were to regard Social Security payments to be tied to FICA taxes, I can’t see the merit in attaching a pejorative epithet to a program that has some funding mechanism, even if inadequate, more than I would to the US Military, which has none. (Except general revenues – the same general revenues that are available to finance Social Security payments.)

For what it’s worth, because I don’t regard FICA taxes to be related to Social Security payments, I don’t understand arguments about “returns” on Social Security investments. What kind of return do you get on your income tax payments, or property tax payments?

Finally, beware of the common mistakes made by people trying to analyze the consequences of the Social Security program. Recall that surplus FICA taxes have been financing US government operations for decades. Thus, if Social Security had never been invented, ceteris paribus, some other federal taxes would have had to have been higher. Plus, ceteris paribus, you would have been paying for your own death and disability insurance, been subject to greater risk of market fluctuations, etc. It’s a complex calculation.