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Random Link: On Rick Perry, Social Security And Ponzi Schemes…

September 1st, 2011 · 13 Comments
Buyer Beware · Random Links

My latest on About.com regarding whether Rick Perry is totally wrong with his “Social Security is a Ponzi scheme” comments…also, what a Ponzi scheme is.

Plus, a bonus cartoon for your viewing pleasure. From The Dollar Vigilante:

Update: Here is a long-winded link from the Social Security Administration explaining why its system is not a Ponzi scheme. The overall thesis is “it’s not a Ponzi scheme because it’s not unsustainable under the assumption that population demographics don’t change”:

So we could image that at any given time there might be, say, 40 million people receiving benefits at the back end of the pipeline; and as long as we had 40 million people paying taxes in the front end of the pipe, the program could be sustained forever. It does not require a doubling of participants every time a payment is made to a current beneficiary, or a geometric increase in the number of participants. (There does not have to be precisely the same number of workers and beneficiaries at a given time–there just needs to be a fairly stable relationship between the two.) As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out, the system can continue forever. There is no unsustainable progression driving the mechanism of a pay-as-you-go pension system and so it is not a pyramid or Ponzi scheme.

I take issue with this on a number of levels. First, the ratio of workers to beneficiaries is not stable, but rather declining, so that assumption isn’t even reasonable. (This argument is also assuming that wages don’t decrease in relation to benefits, which may or may not be a valid assumption.) Second, the matter of whether a Ponzi scheme is by definition unsustainable is a fairly uninteresting semantic question, in my opinion. Besides, if Social Security is in fact a transfer system and 3 workers each year fund one beneficiary, that’s a really crappy return on investment. It’s like saying “here, pay into this system for 45 or so years so that you can get 3 times as much (inflation-adjusted) per year out later for 18 or so years, if you make it to retirement age in the first place. By my calculations, this is a real (i.e. inflation-adjusted) interest rate of 0.5%, which is crappy even if it is sustainable.

Marty Feldstein puts some more numbers on the Social Security ROI:

With a 3% payroll deduction, someone with $50,000 of real annual earnings during his working years could accumulate enough to fund an annual payout of about $22,000 after age 67, essentially doubling the current Social Security benefit. That assumes a real rate of return of 5.5%, less than the historic average return on a balanced portfolio of stock and bond mutual funds. Someone who was extremely risk averse could instead choose to put all of his personal retirement account into Treasury Inflation Protected Securities, accumulating enough with a 5% savings rate for an annual payout of about $13,000. Different combinations of savings rates and investment strategies would produce different expected benefits in retirement.

So I can get the same result from a 3% per year fairly conservative investment as I can from a 15.3% payroll tax? Thanks, government! Ponzi scheme, transfer system, or whatever else you want to call it, Social Security is inefficient because it doesn’t provide a real opportunity for assets to grow.

I think the Administration’s new slogan should be “Social Security: Maybe an unsustainable Ponzi scheme, definitely a really shitty investment.”

Tags: Buyer Beware · Random Links

13 responses so far ↓

  • 1 Robbie // Sep 1, 2011 at 7:56 pm

    Jodi, do you have any idea what proportion of a median US retiree’s wealth is in social security rather than private savings?

    Is there any interest moving to private retirement accounts like we have here in Australia? It seems a far simpler and more efficient system than handing your savings to the government to manage through a system which, from what I can tell, doesn’t seem to be particularly well understood by the average American.

  • 2 econgirl // Sep 1, 2011 at 8:10 pm

    There was a fairly big push to try to at least partially privatize Social Security back in 2005, led on the economist front by Martin Feldstein and a few others, but it didn’t really go anywhere. The article I linked to in the update above gives a decent overview of his stance on the matter.

  • 3 noiselull // Sep 1, 2011 at 8:31 pm

    Perhaps you should have made the point that Paul Samuelson explicitly stated that it was a Ponzi scheme in the same Newsweek column he supported it.

  • 4 econgirl // Sep 1, 2011 at 8:51 pm

    From what I can tell, Social Security sucked less in 1967 than it does now. 🙂 Here’s the text of the Samuelson quote:

    http://blog.scrivener.net/2005/02/beauty-of-social-security-by-paul.html

    What he’s saying totally works…if overall wage growth far outpaces inflation, there are no baby booms, and life spans don’t increase. Oops times three.

  • 5 Dan // Sep 2, 2011 at 7:59 am

    I love the fact that one unrealistic assumption makes the whole thing ok in the eyes of the Social Security Administration. My suggestion:

    “it’s not a Ponzi scheme because it’s not unsustainable under the assumption that it is sustainable”

  • 6 Punditus Maximus // Sep 4, 2011 at 9:44 pm

    Is this another one of those really boring screeds where someone can’t tell the difference between an investment, where you get paid to take on risk, and insurance, where you pay money to be saved from risk?

    Or is it one of those infuriating ones where someone who knows much better is deliberately obfuscating the two?

  • 7 Christopher Scott // Sep 6, 2011 at 7:12 pm

    A few issues – First Social Security isn’t a retirement saving’s plan. It is a form of Social Insurance. Alot of people buy home and car insurance with the knowledge they will indeed have a negative rate of return (My advanced micro teacher, Don Cambell, told me!!) In addition to paying out retirement savings, Social Security helps the sick, disabled, or other misfortunate people. If we eliminated this program, sure you could get a higher return on your money, but you will be causing uneccesary pain on quite a few people. I know a friend who’s mom had cancer, she was able to use social security benefits to pay for her college education. If we switched to personal accounts or changed them to a retirement account, my friend and her mom would’ve been up a creek without a paddle. But hey, you want a higher return right econgirl??

    Also, there are less workers before supporting SS, but those workers are much more productive than they used to be. Since workers produce more, and in effect earn more, they should be able to support many more people.

    If you want a government sponsored retirement account, I highly reccomend a 401K, IRA, Roth 401K, Roth IRA, or a Keogh Plan. However, it should be pointed out, that a majority of Americans can’t afford one of these accounts and that Social Security will be their primary source or retirement income.

  • 8 Seven // Sep 10, 2011 at 12:21 pm

    I love Ponzi Perry. He tells you something is broken and his solution is to throw it out with nothing to replace it. Great. Has anyone missed the basic ‘math’ of social security? Lets say the average age of death in the future will be 85 (it is quite a bit less right now) and everybody retires at 65 (we already have this number going up). That leaves 20 years to cover someone with social security. Now, how many years does the average worker work? I know I’ll be working 50 years before I retire but lets say it is 40 years. Hmm so we have twice as may people paying social security then we have people taking social security. Oh, and btw, I’ll likely be paying social security tax on my social security and retirement income until I die, so I get to put money back in while I’m taking. Hmm. Seems like we should be able to make this work don’t ya think? But then, Ponzi Perry and the grand old party seem to lack a sense of ‘Math’. (Don’t get me started on global warming, after all, the exponential increase in atmospheric CO2 based on real world data is a myth in their eyes).

    Vote Ponzi Perry for President!

  • 9 Dave // Sep 13, 2011 at 12:44 pm

    Seven,

    So two workers for every one recipient is perfectly doable? How much is this recipient getting? $20,000 per year? If so, that means the two workers are paying $10,000 each, or about 20% of their income. Not exactly workable in my opinion. (Also, you don’t pay SS tax on investment income, but why let facts stand in the way of a perfectly good screed?)

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