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.”