I’ve looked up a few definitions of what a Ponzi scheme is. This one is from an excellent source. The Securities and Exchange Commission defines a Ponzi as:
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.
Does Social Security constitute a Ponzi based on that definition? I think it does.
There are two ways to look at this:
I) If there are no changes in the current laws regarding Social Security does the projected future financial results support the conclusion that it is a Ponzi?
II) If changes are made to Social Security will the consequence of those changes result in the conclusion that it is still a Ponzi?
(I) is easy to answer. Based on the SEC definition, Social Security is a Ponzi. If you want proof of that go to the Social Security Trust Fund May 2011 report to Congress. On page 10 (of the report) you find the following chart. Somewhere around 2036 (I think much sooner) SS benefits will be cut by 25%. That is the law as it is written today.
Conclusion: Anyone under 45 today is paying for something that they should expect to get 75 cent on the dollar. Clearly a Ponzi.
To answer (II) requires that one make some assumptions regarding what changes to SS are coming. I rely on the recommendations from a variety of sources. Both Republicans and Democrats (including the President) have supported the recommendations made by the Fiscal Commission report. SS has it’s own set of recommendations. “Independent” private groups have made their thoughts public. While it is not clear what (if any) changes are coming at SS, the following covers the options that are being given serious consideration:
1) Gradually raise the age limit to 70.
2) Gradually increase FICA taxes.
3) Change the formula that indexes SS benefits to inflation. The consequence would be to slow the current projected growth rate of SS payouts.
4) Gradually increase the cap on incomes subject to FICA. (Currently $106,500).
Of all of these options the one that has had the most support is to gradually increase the age limit to 70. What does that do for SS on the charge that it is a Ponzi?
Assume I am 65 and getting $2,000 a month from SS. On paper I should die at age 77. By the numbers I will get 12 years of benefits.
Now assume that the age limit is extended to 70. Assume further that this will be effective is 15 years. Based on what we know today the average life expectancy of a 65 year old male will be 13 years in 2026.
This means that a person who reaches age 65 in 2026 will not get benefits for another 5 years (70). That same person will die at age 78. They will get benefits for only 8 years while I get mine for 12. I will get benefits for 50% longer than they do.
Conclusion: Anyone who is under 50 today is getting screwed when that age limit goes up. For those folks, SS meets the definition of a Ponzi.
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Raising FICA makes things worse. Not only would younger workers pay more into the system as a % of their income, they will get benefits for a shorter period of time.They pay more for less when taxes are raised
Conclusion: Increasing FICA taxes is a solution that forces the conclusion that a Ponzi is afoot.
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Changing the COLA formula has lots of support from the “deep thinkers”. I agree that if this were done it would have a very significant consequence to SS over a 30-40 year period.
The desired effect is to reduce the inflation adjusted cost of benefits. I get $2,000 a month. We know what that buys today. In 30 years a retiree will get $4,000 a month, but because of the changes to COLA that $4,000 will have a purchasing power equal to only $1,000 today. This is the objective of the proposed changes.
Conclusion: Changing the COLA formula devalues future benefits versus those receiving them today. Anyone under 40 is going to feel the full brunt of this. For them, SS is a Ponzi.
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Increasing the wage cap is just another way of increasing the current tax burden on workers. Yes, this increase will be targeted to those who make a decent buck, so this is a popular approach. The consequences will be felt by about 10% of all workers.
Conclusion: For those in this group the consequences of #’s 1,2 and 3 are just magnified. I don’t feel sorry for those high-income earners but it’s certain that this group is facing the biggest Ponzi of them all.
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SS is, and always will be, an inter-generational transfer of wealth. By itself that does not have to mean it is a Ponzi. If the total population were symmetrical across all age groups the inter-generational impact would be both fair and reasonable. But that is not what we have in America today. We have a stable population that is rapidly aging. Given that dynamic anyone who is under 55 (and especially those who aspire for a high lifetime income) are going to get hit with the biggest inter-generational wealth transfer in history. For all in that group, SS is a Ponzi. They will pay in more than they get back. The extent that each age group is impacted varies. Those who are not yet born are the ones who will feel this the most.
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I’m not sure if Rick Perry is crazy or just crazy smart. There are 50 odd million Americans who are getting SS checks. That’s a hell of a lot of voters. That’s why SS is called the third rail.
But if Perry asked himself, “How do I win this election?” He could well answer with a strategy that relied on young people who would cheer/support him. He could also look to all those swing voters under 55 who pay a fortune in SS and will not get their fair share back. It's an odd political alliance. But it just might work. Mr. Romney seems to be doing well with the seniors. But he falls flat when he gets to a campus. The base that Perry is chasing after is the same one that got Obama elected.
Note:
In my definition of a Ponzi there has to be intent to defraud. I’m not sure that this condition has been met. Every year for the past five the SS Trust Fund has told Congress that significant changes must be immediately implemented. SSA has not mislead anyone, so no fraud from them. The deciders who looked at these reports and chose to ignore what has been written are probably not guilty of fraud either. But they sure were remiss in their responsibilities.
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Nice analysis as usual, Bruce, but I think you're missing the larger point. SS is not a Ponzi scheme because it is not an investment fund at all. The balance in the SSTF is simply a marker of how much more the government has received in FICA taxes than it has sent out.
ReplyDeleteThe simplest method I can think of explaining it is this: when we pay FICA taxes, they go to the US Treasury. When SS checks go out, they come from the US Treasury. I suppose you could claim that the Treasury gives the FICA contributions to the SSTF and then sells it notes in exchange for the money, but this is functionally no different than simply issuing some notes without an actual exchange of cash. Also, during the debt ceiling fiasco, the Treasury essentially suspended the net new issuance of notes to the trust fund while keeping the cash it had collected for SSTF. The tidal wave of issuance that occurred after the ceiling increase passed on August 2 is the reason we're butting up against the limit again.
If the SSTF were able to be invested in anything other than Treasuries it would be a Ponzi scheme--I'm not sure there is a good name for how it operates.
"If Bernard Madoff distributed money received from new investors to older investors
ReplyDeleteuntil there wasn’t enough money to continue,
does Social Security operate under the same structure with mandatory participation?"
Abner Doon/George Hartzman
If there’s more than $8.6 trillion held by the public,
ReplyDeletebut more than $13.2 Trillion in Federal Debt as of June 30, 2010,
where’s the rest?
If there are at least 15,000 professional American Economists,
and less than 1% foresaw the financial crisis,
should many financial industry and government paid prognosticators
be relied on for honesty concerning national finances?
Is it justifiable for a nations elders
to promise themselves tens of trillions of unfunded benefits,
like Social Security, Medicare, Medicaid and state level obligations,
for future generations to pay for?
If Social Security taxes were increased in 1983
to ease the burden of a smaller generation
tasked with providing benefits to a larger number of longer living elders,
why would elected leaders borrow and spend the surplus?
Should costs exceed incoming revenues sooner,
if millions of Boomers involuntarily retire
and apply for early Social Security benefits during an economic decline,
as average income falls and debt and medical costs to income ratios spike?
Are some younger Americans who paid increased taxes to build surplus,
ReplyDeletegoing to be asked to pay more,
as tax revenues fall short of promised benefits?
Are Baby Boomers going to get more or less than they think,
if the supply of what they want to sell exceeds demand
as they exchange assets for needed goods and services in the same era?
"intent to defraud."
ReplyDeleteI believe the fraud occured
when any elected official since 1983
voted to spend any of the surplus.
Now I am going to get taxed twice
for the same thing.
Abner Doon
You guys are right on.
ReplyDeleteThe fraud comes in not with the new paying for the old in a pay-as-you-go system.
The disconnect occurs in that when in 2010, the outgo exceeded the income, why didn't the interest in the $2.6 trillion trust fund make up the shortfall? The answer is that to access the interest, new revenues must be raised AS IF THE TRUST FUND DID NOT EXIST.
An even more serious problem resides in the trust fund for federal retirees, their defined benefit plan.
As in SS, the trust fund principal and interest has been loaned to the Treasury to pay for current expenses.
The employees' trust fund was funded voluntarily with contributions, not taxes.
The current liability, outgo over income, excluding interest, is in the trillions, and is listed on the federal government's balance sheet as a liability.
I can provide excerpts and links from reputable government web sites for specific statements you would like for me to support.
Don Levit
"Conclusion: Anyone under 45 today is paying for something that they should expect to get 75 cent on the dollar. Clearly a Ponzi."
ReplyDeleteHow does your definition relate to other public pension funds that depend on high rates of investment returns say 8 to 12% in order to met future pay outs and if these investment returns do not meet expectations then the public pensions funds expect the state,city, town etc to raise taxes to fund these pay outs. How many private pension funds have folded and been taken over by the Federal or State Gov?
When is a pension fund not a ponzi by your defination?
An "Inconvenient Truth", for sure.
ReplyDeleteThink the chart you cited is actually Exhibit 4 in CBO report.
ReplyDeletehttp://www.cbo.gov/ftpdocs/119xx/doc11943/10-22-SocialSecurity_chartbook.pdf
IT may also be in Social Social report, but I didn't find it with the link you provided. The 2011 SSI report includes 25 year projection to 2035, and thus doesn't show decline in benefits in 2039.
Call it a “Ponzi” or a "we’ll split the difference" policy mistake. To unravel Social Security will be laborious and require that we take a bitter pill more in sorrow than any finger pointing, as it was built upon with mistake after mistake, such as adding Medicare that then fed the medical industry for SS to work like a prisoner in a work gang, then increasing the prescription drug or other programs to win approval ratings for the president than thinking through for the people’s sake.
ReplyDelete