In his 2010 book, “Fed Up,” Governor Rick Perry called Social Security a “Ponzi scheme.” A Ponzi scheme is an individual investment plan wherein investors are paid “interest” by the principal paid into the scheme by later dupes. A geometrically increating supply of new investor principal is required to pay off the “interest” to previous investors.
Social Security isn’t an individual investment plan, it’s a “pay-as-you-go” government insurance plan. While retirees depend on current workers to fund their benefits, that’s where any similarity to a Ponzi scheme ends. Some retirees will receive more benefits than they paid in payroll taxes and some retirees will receive less. There is no promise of receiving more than you put in. Any deficit is lost to your heirs.
As population demographics rise and fall, the balance of the Social Security Trust Fund will rise and fall. This vulnerability to demographic variability is one of the problems with pay-as-you-go systems. The amount going into, and the benefits going out of, the system must be adjusted to maintain the system. But, there is no unsustainable progression, unlike pyramid or Ponzi schemes.
Using current demographic estimates, the Social Security Trust Fund would become exhausted between 2036 and 2041. To maintain a 75-year solvency, Sen. Bernie Sanders (I-Vermont), has introduced legislation, Keeping Our Social Security Promises Act (pdf), that would remove the income cap on payroll taxes for those making more than $250,000. The wealthiest Americans would then pay payroll taxes on the same percentage of their income as the middle class, namely 100%. The bill is co-sponsored by Boxer, Whitehouse, Akaka, McCaskill, Blumenthal, Leahy, and Franken.
Perry has some noted company: Nobel prize winner Paul Samuelson who wrote “Social Security is a Ponzi Scheme that Works,” and Nobel prize winner Milton Friedman called Social Security “The Biggest Ponzi Scheme on Earth.” Even Nobel prize winner Paul Krugman said that Social Security had a “Ponzi game aspect.” Krugman says he was emulating Samuelson who was trying to be cute. There’s no cute in political theater.
The lifeblood of a politician is money, in the form of campaign contributions. The wealthy can invest in politicians to prevent any increase in their payroll taxes. Until the lifeblood of politicians is votes, the wealthy will continue to win the class warfare.
A lengthy snippet from a very long read that is well worth your time if you want to be able to effectively deflect this criticism:
here is a cartoon curtsey of the Mercatus Center
Now this is supposed to offend/embarrass proponents of Social Security. Its supposed to allow opponents an opportunity to snicker. However, lets take it seriously and look at the points its making.
I’ll just note a couple of important things about the two pictures first and then we can discuss.
- Payer in the Ponzi picture is rich, while the payer in the social security picture is poor
- The payer in the Ponzi picture is handing over his money voluntarily while the payer in the Social Security picture is doing so at gun point
- The person receiving the money in the Ponzi picture is a private citizen, were the person receiving it in the Social Security picture is the federal government
So, I think that point (1) is not particularly relevant to this analysis. Its relevant to the potentially regressive nature of the payroll tax but that is somewhat orthogonal to the point about “Ponzi schemes.”
What we really want to focus on are points (2) and (3). They are important.
First, point (2) is important because one has to ask why the investor is voluntarily handing over money. In the SS picture it is clear that he has no choice. He is being forced to.
However, in the (2) he is choosing to.
Well, in general because the Ponzi scheme architect has mislead him. He has caused him to believe that the money will be used to create enforceable claims on real resources. This claims will be worth more in the future than the cash is to today. Thus the Ponzi is a good investment.
Indeed, however there are no enforceable claims. Either there is outright deceit as in the case of Madoff and Stanford or there is trickery as in the case of chain letter. The Madoff case takes advantage of the principle of lying.
Lying works by telling someone something that is not true. If they believe you then you can get them to operate on the basis of a state of nature which is not in accordance with the actual state of nature.
Trickery works by taking advantage of someone innate confusion over the state of nature. The victim in this case does not understand the difference between a “hope” and a “legally enforceable claim” and you use that to sell hope as if it were legally enforceable claims.
This misdirection is the key problem with Ponzi like schemes. The problem is not that they are unsustainable and will come crashing down, as I will address later. Indeed, a Ponzi scheme need not crash. Indeed, legalized gambling is effectively an open Ponzi scheme structured so that it will never crash.
Click through the link to read the entire article. In sum: the problem with a Ponzi scheme is the fact that is essentially a Fraudulent action based on a theoretically unsustainable premise. Social Security, on the other hand, is not fraudulent (recipients of SS benefits have a legally enforceable claim to those benefits), and is sustainable in as much as we adjust its outlays, whether through reductions in benefits or increases in revenues. Somebody always loses once a Ponzi scheme comes to an end. But we could theoretically end Social Security in such a way that the last entitled benefit recipient receives every dollar of benefits they are entitled to.
|ROMNEY:||"But the real question is does Governor Perry continue to believe that Social Security should not be a federal program, that it's unconstitutional and it should be returned to the states or is he going to retreat from that view?"|
|CNN'S WOLF BLITZER:||"Let's let Governor Perry respond. You have 30 seconds."|
|PERRY:||"If what you're trying to say is that back in the '30s and the '40s that the federal government made all the right decision, I disagree with you. And it's time for us to get back to the constitution and a program that's been there 70 or 80 years, obviously we're not going to take that program away. But for people to stand up and support what they did in the '30s or what they're doing in the 2010s is not appropriate for America."|
|ROMNEY:||"But the question is, do you still believe that Social Security should be ended as a federal program as you did six months ago when your book came out and returned to the states or do you want to retreat from that?"|
|PERRY:||"I think we ought to have a conversation."|
|ROMNEY:||"We're having that right now, governor. We're running for president."|
|PERRY:||"And I'll finish this conversation. But the issue is, are there ways to move the states into Social Security for state employees or for retirees? We did in the state of Texas back in the 1980s. I think those types of thoughtful conversations with America, rather than trying to scare seniors like you're doing and other people, it's time to have a legitimate conversation in this country about how to fix that program where it's not bankrupt and our children actually know that there's going to be a retirement program there for them."|
|ROMNEY:||"Governor, the term ponzi scheme is what scared seniors, number one. And number two, suggesting that Social Security should no longer be a federal program and returned to the states and unconstitutional is likewise frightening."|
The Congressional Budget Office’s whole chart on Social Security is massive, but we’ve cut out a few choice bits here. What’s the take away? Here are a few:
- Something’s got to give. As the number of workers supporting every person drawing on social security declines precipitously over the next quarter century, a (relatively) smaller group of individuals is going to be supporting an ever-larger group of recipients. Which influences…
- Tax rates. To get Social Security to 75 years of solvency, the US would need to bump up the current payroll tax by 1.6 percentage points. That would take the rate from 12.4 percent (half paid by the employee, half by the employer) to 14 percent. That would stave off…
- A nearly 20 percent reduction in benefits in 2038 if the Social Security trust fund is exhausted at that time, as the CBO projects.
- Finally, Social Security could continue apace through 2038. As America has seen in the last 27 years (taking us back to the presidency of Ronald Reagan), plenty can change in almost three decades.
Take action: Find out your own estimated Social Security benefits using the Social Security administration’s handy calculator.
The big difference between the budget compromise put forward by Senator Harry Reid last Friday and the version that came together on Sunday is that the Reid bill met the main demand of each party: For Republicans, there was no mention of tax increases. For Democrats, there were no cuts to entitlement programs (Social Security, Medicare and Medicaid). All the cuts would come from the category of spending known as discretionary, where Congress decides each year what to spend. The emerging alternative, which provoked a sharp backlash from many congressional Democrats and liberal activists, includes a commission which would have some power to force cuts in entitlement spending.
The difference reveals where liberals draw the line. It is not about spending or a government actively investing in economic growth. It is about a particular form of spending: entitlements. There is an odd asymmetry between the two parties’ non-negotiable demands. For the right, tax increases in any form are off limits. But for the left, it’s a particular spending category that’s become sacred. Rallies have been held to protect entitlements. Coalitions have been formed. But how did a particular category of spending, entitlements, come to matter more than who it helps or what it does?
Once the process of negotiating on long-term deficit reduction has begun, the only alternative to cutting entitlements or raising taxes, as in Reid’s original plan, is to place all the burden on discretionary spending. Reid’s original plan assumed significant cuts in defense spending from ending the wars in Iraq and Afghanistan. But the budget won’t force an end to those wars, and if they continue, that spending will not be cut. Thus most of the burden of Reid’s discretionary spending caps would fall on the category known as domestic discretionary spending. Even though that category includes just about everything the government does other than defense, it represents only one tenth of the total federal budget over the next decade, and has been unchanged, adjusted for inflation and population growth, since 2001. Even deeper cuts to domestic discretionary will result in real cuts to everything from home heating assistance to cancer research to K-12 education funding.
The reason why these cuts are deemed acceptable, while proposals to curb entitlement spending regularly elicit liberal outrage, isn’t really hard to explain: The three big entitlements have symbolic power as the monuments of the New Deal and the Great Society. Social Security survived the attacks of Ronald Reagan and George W. Bush, and the defeat of Bush’s privatization plan, when Democrats simply refused to play along, was a key moment in the revitalization of progressive politics. Medicare survived Newt Gingrich’s plan to have it “wither on the vine” and, apparently, Representative Paul Ryan’s clumsy recent assault as well. And needless to say, the programs are fundamental to the economic security of all seniors, as well as younger people who depend on them for survivor or disability benefits, or as a base of security to plan for the future. No limited discretionary program comes close to the scale of support provided by the entitlements.
They also have an outsized political significance. While each discretionary program, whether Pell Grants or HeadStart, assists a particular group of vulnerable people, the entitlements are universal. Even Medicaid, the health program for the poor, provides nursing home care for millions of seniors who were middle class. They exemplify the political sociologist Theda Skocpol’s aphorism that programs that reach “a broad cross-class constituency” last and cement an allegiance to government. More immediately, Democrats are eager to go into 2012 with an uncluttered message, inspired by their successful special-election campaign in a Republican congressional district in New York: We protect Social Security and Medicare. Republicans voted for Paul Ryan’s plan to dismantle Medicare. (That’s assuming anyone still remembers the Ryan plan.)
But treating the entitlements as sacred comes at a huge cost in all the other programs. While there’s surely waste in domestic discretionary programs, from agriculture subsidies to the occasional National Science Foundation grant that sounds silly, it also includes education, energy research, transportation—and basically everything that constitutes the investment in economic growth that we need far more than we need budget austerity. And while it might make some sense to insist on holding Social Security untouchable (its long-term funding shortfall is self-contained, and won’t affect the larger budget picture unless it is still unresolved in two decades), it’s very strange to take the same approach to Medicare, which is projected to consume 5.5 percent of GDP by 2035, up from 3.6 percent today, without providing better services or serving significantly more people. Protecting the current Medicare cost curve cannot be considered a fundamental progressive principle. While there are bad ways to reduce Medicare spending, such as raising the eligibility age without an alternative universal health program to fill in for those younger seniors (an option that Obama and Boehner reportedly considered in their “grand bargain” sessions), there are also plenty of good ways to reduce Medicare costs, such as by bringing down overall health inflation, bundling services, and dozens of more technical measures.
A “clean” political message on Medicare isn’t possible anyway. Obama already cut Medicare spending in health reform, and Republicans didn’t hesitate to attack him for it. The distinction between the Ryan plan, which dismantles Medicare and gives seniors a coupon in its place, and modest, responsible changes to Medicare is the only political message available, and while it’s not black and white, let’s assume that voters are smart enough to understand it.
Finally, the ultimate victim of a budget deal that holds entitlements sacred is going to be entitlements themselves. For years, advocates of budget austerity such as the billionaire Peter G. Peterson and his eponymous foundation have sought to construct an alliance of the beneficiaries of discretionary programs—advocates for children, education, health research, etc.—to argue that their priorities are threatened by an “entitlement crisis.” It wasn’t true. But if Medicare spending were protected and allowed to almost double over ten years, while domestic programs were squeezed by the Reid caps, it would certainly become true. The political alliance to cut those programs would become broader and more powerful, and the eventual cuts could be clumsy or destructive. It’s the nature of entitlement programs, especially Social Security and Medicare, that the earlier changes are made, the less painful they have to be.
The White House has called for a “balanced” approach to deficit reduction, meaning both revenues and spending cuts should be part of the deal. A deal without revenues or entitlement cuts, one that puts all the burden on those domestic programs, is far out of balance and would hardly have been a victory for progressives. It would have been a disaster for the economy and for the idea of an active government that can expand the scope of prosperity.
Mark Schmitt is a senior fellow at the Roosevelt Institute and former editor of The American Prospect.
One of the reasons that Autocracies take hold so easily in the Middle East, and that extremist movements are so appealing, is because wide swathes of the population are impoverished and desperate. This means a) they have less to lose to violence and instability, and b) less access to education. These two things combine to allow strongmen and fundamentalists, who are good at appealing to the emotion of crowds, to take advantage of both the desperation and naivete of the electorate. America combats this by giving our poorest citizens access to education via a publicly-funded education system. We also combat this by creating safety nets in the form of Social Security and Medicare; even if you live a hard life, you can look forward to a minimally reasonable standard of living when you’re old. This type of economic security and universal access to education is what keeps the autocrats out of power. America isn’t perfect, but we do well by our poorer citizens by asking those who have been successful to contribute to their welfare and education. Some call it punishing success. I call it an insurance policy against political an economic instability. Does the welfare state result in some people being rewarded for not working? absolutely. But anyone who’s worked in an office knows there’s waste, fraud and theft in the private sector as well. The phrase “NSFW” is a perpetual monument to how much work people *aren’t* doing when their at their jobs. And you can thank the internet for that!
Michele Bachmann: … all the surplus in Social Security is a big vault stuffed with IOU notes, there’s not one dime sitting in there.
Anthony Weiner: Are you surprised to learn, Congresswoman Bachmann, that we don’t have a room filled with dimes?
1. Dodges the subject at hand? Check.
2. Is meaninglessly condescending? Check.
Yep, that’s definitely Anthony Weiner.
Anthony Weiner, the face of the modern democrat party. Utterly fact free.
wow who would have ever guessed, a man named Weiner is being a Dick
also, it’d probably be a good idea to fill a room full of pre-1964 dimes to fund social security. At least then our government would ahve tangible assets with a concrete value
Butbutbutbut GUUUUUIIIIZE!!! HE’S THE DEFENDER OF THE UTERI!!!
I’m totally pro choice but that doesn’t give you a free pass to be an economically illiterate and assholeish moron
If Congress stopped raiding the SS fund for other projects it would be right as rain, notwithstanding a few modest reforms to adjust for the baby boomers.
Honestly I laughed pretty hard at that comment. I don’t think Wiener was dodging the question at all, merely responding to an inane metaphor with inane humor. As far as politicians go he’s usually pretty good at using data to back himself up.
Perhaps that is the case, but I think you’re suffering from a case of the Is/Ought fallacy: yes, what you’re saying may be correct, but the matter of fact is the way things are, Social Security’s days are numbered, and we have to make changes to do something about it. The damage has already been done, even if the Congress were to cease and decist their borrowing from the trust.
I don’t think there’s any basis for an Is/ought fallacy comparison in my prior statements (my “ought” follows from my “is;” see below). But I do agree that Social Security is unsustainable under current policy trajectories. Hence why I said “notwithstanding a few modest reforms to adjust for the babyboomers.”
As I’ve pointed out in the past, the SS Trust Fund has been running a surplus for a very long time. The primary problem is that a) Congress raids the surplus, and b) the SS benefit pool has been expanding from both sides; people are living longer and taking retirement sooner. This is really just a complicated way of saying that input is being artificially hampered and output is expanding; so either the input into SS must increase, or the output of SS must decrease.
There’s obviously a lot of nuance involved in how you can accomplish either of these things (means-testing, increasing the age at which full benefits can be received, etc), but in the end, it’s an input/output problem. Suffice to say that I agree that reforms past simply stopping the raiding of the fund are necessary.
SO who here is aware that the Social Security Trust Fund has been running a surplus every year since 1983?
Don’t believe me? here’s a graph:
So why is everyone screaming that Social Security is going to run out of money?
Well, here’s another graph:
The reason why Social Security’s outlays are insolvent is because the size of the benefit pool is increasing. The SS Trust Fund is doing phenomenally well. It runs a surplus every year. But the sustainability of Social Security is being threatened by the fact that, over time, people have begun taking retirement earlier, and also living longer in aggregate. So the benefit pool is being expanded from both sides. This is compounded by the fact that people who retire earlier also stop paying SS payroll taxes earlier; so the changing demographics of the benefit pool have an impact on both the revenue stream and benefit outlays.
There are two ways to approach this: increase SS payroll contributions, or decrease the amount of benefits being paid out at any given point in time. Increasing SS payroll contributions can be done by either increasing the OASDI tax rate, or raising the cap on OASDI-taxable income. You can reduce benefit payouts by decreasing the amount of money in people’s SS checks, or by raising the retirement age for receiving SS benefits. You can also means-test Social Security, so that people who retire with comfortable pensions and/or retirement plans don’t get benefits they don’t need.
There’s not a whole lot else you can do: obviously lowering unemployment increases the revenues being paid into the fund. But even a large swing in unemployment won’t sufficient to address the expanding benefit pool. The system, as it currently stands, wasn’t made to handle the Benefit load that it currently has. And it’s going to be solved by either cutting benefits in some way, raising taxes, or a little bit of both.
This is part of the reason why I continue to harp on Simpson-Bowles: it offered the most feasible compromise that both sides could agree to: it raised the retirement age (acknowledging the expanding benefit pool) AND increased tax contributions. By doing a bit of both, you eliminate the necessity of a massive reduction in benefits, or a politically unmanageable tax increase. It spreads the pain out, so everybody gives a little, but nobody has to give a lot.
It also continues to bug me that many Liberals opposed the S-B plan because it increased the retirement age for Social Security. I think they should re-examine the plan’s finer points: Currently, the more you pay into Social Security, the more you get out of it. This means that high earners get a fatter SS check at the end of their lives than working class individuals do. From an income inequality standpoint, Low-income workers actually won under the Simpson-Bowles plan, because it reduces the disparity in benefit profiles between low and high income workers.
I continue to view the rejection of Simpson-Bowles as the greatest political tragedy of the 111th Congress. This was the first actual bi-partisan attempt to solve the Federal Government’s budget woes. More importantly, it was feasible. By spreading the pain around, it made the necessary sacrifices easier to swallow for both sides.
What happened instead? We got a tax compromise that did the exact opposite: cut taxes and increased spending. To be fair, there are plenty of people who believe that the economy is still too fragile, and private investors still too timid to enact any sort of austerity program. I’m definitely sympathetic to that argument. But what are the chances that another opportunity like this is going to present itself? Simpson-Bowles was the first serious deficit reduction plan we’ve seen make it anywhere close to the floor of congress in a long time. The political moment was there, and we should’ve seized it. But thanks to folks like Paul Ryan, we are now back to the usual penny theater politics, arguing about things that are symbolic at best, and having debates that do more to threaten our fiscal future than actually fix it. And of course, now that Paul Ryan has offered an alternative that is infinitely worse than Simpson-Bowles, Obama has an opportunity to seize the political moment and reintroduce Simpson-Bowles style reforms, 1-up republicans on the budget debate, and regain some of the political capital he’s lost.
Does he seriously not understand that outside the Halperin/Scarborough universe, he looks like a complete innumerate clown? Can his ideology really be blinding him to this extent? Is he simply incapable of absorbing anything that Krugman, Chait, and others point out? Is he really this easily fooled into what constitutes “courage” and “bravery?” Paul Ryan and the GOP just proposed massive tax cuts for the well off on the shoulders of the American people while ending Medicare and Medicaid, and Sullivan honestly thinks this is “brave” and a conversation starter?"
John Cole, as always, a fiery Liberal Advocate.
I am not existentially opposed to entitlement cuts so long as they are matched with tax increases to spread the pain around; At the heart of Cole’s hyperbole is an important observation: Ryan’s budget artificially increases the scope of the deficit problem by lowering taxes without any revenue offsets, and thus increasing the amount of spending that needs to be cut to balance the books. This is as opposed to, say, Simpson-Bowles style tax reform, which lowers marginal rates but increases revenues by removing most deductions and credits from the code; thus widening the tax base. the S-B reforms also creates government savings by reducing the manpower needed to process tax returns burdened by a complicated panoply of credits and deductions.
Simpson-Bowles > the Paul Ryan budget. I continue to pine for its revival; Obama could regain a lot of his lost political capital of he used S-B reforms to get a budget deal in place, emphasizing the tax burden increase on the wealthy to get intransigent Liberals on board. We’re all going to have to swallow bitter pills, Liberal and Conservative, if we’re ever going to get a deal in place that fix the long-term budget situation.
A Daily Dish Reader, responding to comments made by Rush Limbaugh about disabled Americans, Writes:
As a disabled American, I have read with particular interest your commentary on Limbaugh’s latest attack on the most vulnerable members of our society. Without citing any evidence, Limbaugh does not hesitate to assert that many, if not most, people receiving Social Security disability benefits are frauds who are freeloading on the taxpayers. You correctly point out, however, that Limbaugh has difficulty defending his position when confronted by a real human being living with a serious disability. Here’s my story.
I was raised in the Bronx in a secure and loving family living in very modest economic conditions. Blessed with academic abilities and strongly influenced by my parents teaching me the value of hard work, I became the first member of my family to earn a college degree and then went on to earn a law degree. I did well enough in law school to be selected for the Law Review. I received an appointment as a law clerk at a federal circuit court of appeals, which led to my being hired by a major international law firm.
Before I reached my thirtieth birthday, I was earning a six-figure income. I worked very hard for my success. Seventy hour weeks under stressful conditions were the norm. Perhaps most importantly, I genuinely loved my chosen career at a firm that gave me the opportunity to work on challenging legal matters for both major corporations and indigent prison inmates. In my early thirties, my career was flourishing. My wife and I were approaching the closing of the purchase of our first home and eagerly anticipating the birth of our first child.
Then I began to notice that I was having difficulties with my body’s coordination. I had been an above average athlete all my life, but now I was becoming clumsy with the simplest of tasks.
My doctor sent me to a specialist, who ordered a series of increasingly invasive tests. After a month of testing, my wife and I sat in the specialist’s office. We held hands as we listened to the words no one ever wants to hear from a doctor, “I am very sorry to have to tell you that … .” What I learned was that I had a disease that was causing the neurons in my central nervous system to die slowly. There was no cure or even effective treatment. The disease would cause increasing disabilities and eventually death. Blessed with an incredibly brave wife, and supportive family members and friends, I knew I would not have to face the future alone.
I continued to work full time for almost two years, making the adjustments required by my failing health. When I could no longer work full time at my office, I continued to work as best I could from my home. Eventually, despite my best efforts, I came to the difficult realization that the state of my health would no longer allow me to meet my clients’ needs. My application for Social Security disability benefits (and the vitally important Medicare coverage that goes with them) was approved.
I will not live long enough to collect Social Security retirement benefits. My disability benefits and Medicare coverage have allowed me to remain in my home without bankrupting my family.
While there may be cases of people fraudulently obtaining Social Security disability benefits, it is hard for me to believe that they are more than a very small percentage of the total claims. I am grateful that I live in a country that still believes in providing a system of social insurance for all its citizens. I paid my premiums into that system for more than a decade, and I do not believe I am a “freeloader” now that I have been forced to claim the benefits of that social insurance.
- “We are announcing today that we have reverted back to our prior legal terms, which contain no mention of arbitration.”—
A statement from General Mills...
- “The necessity of political philosophy arises because most policies are good for some people and bad for others.”—
That’s Harvard economist N. Gregory...