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Title: Rick Perry is Right: Social Security Really is a Ponzi Scheme
Source:
Dissenting Opinions
URL Source: http://jwpegler.blogspot.com/2011/0 ... -is-right-social-security.html
Published: Sep 10, 2011
Author: Eric Blankenburg
Post Date: 2011-09-10 21:05:00 by jwpegler
Keywords: None
Views: 114504
Comments: 228
Rick Perry's comments during this week's GOP debate at the Reagan library has caused quite a stir in the liberal media. During the debate, Governor Perry defended the words in his book, calling Social Security a "Ponzi scheme". After the debate, the "analysis" on MSNBC was truly fun to watch as every commentator sat shelled shocked over the fact that a politician would dare to use these words to describe America's most sacred welfare program. The only person on the panel who had a clue about what might be going on was Ed Schultz who at one point questioned whether or not whether young people would stick with Obama or jump on the Perry bandwagon. Unlike the political and media establishment in this country, young people understand that they are going to get the short end of the Social Security "inter-generational compact". Schultz surprisingly realized that Perry's message might resonant with young people. Let's take a quick look at the Social Security system and see if Perry might be on to something. The people who got into the Social Security system very early got back on average 15 times the amount of money they paid in. They got a great deal and were raving proponents of the system. The people receiving Social Security benefits today are getting back on average 2 1/2 to 3 times what they paid in. They are also generally strong proponents of the system. Today, Social Security is paying out more every year than it takes it. We are borrowing money from the foreigners, like the Chinese and Saudis to pay current benefits. As the huge Baby Boom generation retires, the amount of debt we incur each year will quickly escalate until it blows up in our face and old people without resources really do wind up in the street. So, what happens when my generation starts to retire in 15 to 20 years and what will happen to my kids? We will all be left holding the bag. There is a financial MODEL that describes this. The model is called a Pyramid scheme or Ponzi scheme or a Bernie Madoff scheme. The people who get it in early make out like bandits and the people who get it late get screwed. That is exactly how the Social Security system will play out. The fact is that the Social Security is a pay-as-you-go welfare system that transfers money from young, struggling families to relatively well-to-do retired people. There isn't any "trust fund". The words "trust fund" are used to describe a mountain of debt. A mountain of debt is NOT a trust fund. It's a mountain of debt. Today, the mountain of debt in the Social Security system is so great that it cannot be paid. Peel away the emotion, the Orwellian language about the "trust fund", and the other political rhetoric, and just look at the financial facts. Then this all becomes very clear. Rick Perry is absolutely right and I am actually impressed that a politician would tell the truth about this. It's truly amazing. The big question is what can be done? Long term, people need to be able to save for their own retirements. Social Security needs to be taken back to it's roots as a program that supplements the income of retirees who are truly poor, through no fault of their own. Today, 25% of people over 65 have pension or investment income that places them in the "wealthy" category. They still get Social Security benefits, so long as they don't work for their income. Why should young struggling families hand money over the wealthy retired people? They shouldn't. Means testing Social Security will go a long way to make it solvent for the future. When Social Security was implemented, the retirement age was 65. The average life expectancy was 59 for men and 61 for women. Most people didn't live long enough to get a check. Today, the retirement age is still 65. However, life expectancy is 73 for men and 78 for women. The math just doesn't work. We need to gradually raise the retirement age to keep up with life expectancy. Bravo to Perry for telling it like it is. I certainly agree with Ed Schultz that a lot of young people will find this message appealing. The other group who should find this message appealing are wealthy retirees who are stealing from their children's and grandchildren's future. Will they finally put their selfishness aside and say: "no more"? Probably not, but we'll see.
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Begin Trace Mode for Comment # 185.
#1. To: All, sneakypete, hondo68, A K A Stone, BorisY, Captialist Eric, CZ82, Murran, no gnu taxes, nolu chan, e_type_jag, We The People (#0)
SS is a retirement insurance program - it does not function like a "Christmas club" account where after a period of deposits you get your money back when the day comes around. You want a ponzi scheme? Invest in the private sector like Wall Street.
It is a government program and does not function like any commercial insurance program. With the government program, the "insurer" can change the benefits at any time and in any manner of its choosing. You can pay in for 40 years, retire, and the government may increase, decrease, or eliminate the benefits. There would be political consequences, but the government has the power to do it. An insurance company cannot unilaterally absolve itself of responsibility. The only government responsibility is to pay in accordance with the effective law, but they can always change the law. The fund itself basically consists of bookkeeping entries. The money collected has been transferred to the general fund and spent. The government is over $14T in debt. The amount in the fund, including any interest, is a bookkeeping entry. It is payable by the U.S. government. If the government does not have the funds, there are few ways to produce the funds on demand. They can just print money which acts like a tax, decreasing the value of all existing U.S. currency, and the value of all savings. They can collect the amount needed with revenue, but that is just handing the bill to the people to pay them what they are owed (or what is due by law). They could borrow the money, or perhaps sell some national infrastructure. In its current form the system will go bust. Effective reform means changing the eligibility or benefits to reduce the overall payment to beneficiaries, or to increase the revenue stream coming in.
Its like an insurance program. No government program functions exactly like a private sector entity.
It is also exhibits characteristics of a Ponzi scheme where early investors are paid with the money of later investors, and it works as long as the number of investors keeps increasing at the necessary rate. When the increase in new investors slows or stops, the system fails. An insurance company cannot unilaterally void or change its liability. The government program (a "social compact") can be changed at the whim of the government and there is no legal recourse. The private insurer is subject to enforcement by the courts. A government program or social compact is not an enforceable promise. It does not really equate to an enforceable contract in commerce, whether one chooses to compare it to a commercial retirement or insurance plan, or any other enforceable contract. It is a thing unto itself, based on the full faith of the government, and the credit of the government.
But the government can always make modifications to raise revenues. Real Ponzi Schemes always fall apart. There is no reason that Social Security must fail. When the increase in new investors slows or stops, the system fails... It does not really equate to an enforceable contract in commerce, whether one chooses to compare it to a commercial retirement or insurance plan, or any other enforceable contract. When an insurance company fails (revenue slows down too much), the state guarantee corporation must pay out benefits and may not pay out as much as originally insured for. Doesn't this indicate that private insurance does have certain characteristics of a Ponzi Scheme as well.
When a Ponzi-like government program requires more money than the government can raise, the funding will fail. The government cannot raise infinite money just by passing confiscatory laws. When the program payments exceed what those paying in can provide, something has to give. Governments can, and do, fail. Without change, the social security program will fail. The proportion of persons paying to persons receiving benefits is diminishing. At some point it becomes unsustainable. I do not see the relationship between this and a Ponzi scheme. In any case, the State does not pay out the benefits from some existing fund. It sells the remaining pieces and pays pennies on the dollar and passes on the remainder of the expense to other surviving insurance companies. http://www.businessweek.com/magazine/content/08_48/b4110100507198.htm Your Life Insurance Policy May Not Be Protected Some major insurance companies are in trouble. If they fail, policyholders shouldn't count on guarantees By Ben Levisohn [excerpt] When insurers do fail, state regulators sell off what they can and bill the remaining life insurers operating in that state to make policyholders whole. "The funds have been pretty good at providing a basic level of consumer protection," says Peter G. Gallanis, president of the National Organization of Life & Health Insurance Guaranty Assns. But the system runs on the assumption that only small insurers are likely to fail, and then only one at a time.
The point is that insurance companies, like in a Ponzi Scheme,depend on continued investments from investors to pay out current benefits. If the insurance company fails, the controlling guarantee corporation is no longer required to pay out all the benefits.
They do not depend on an ever-growing base of customers to pay benefits to earlier customers. An insurance company does not go bust due to failure of an impossible rate of increase in customers, but it may go bankrupt.
Social Security doesn't depend on ever growing base of customers either. In fact it has had a shrinking base of customer but yet it still has survived. And all that is needed is to tweak revenues and benefit to continue. Its no more like a Ponzi Scheme than an insurance company.
You can't be serious.
So this chart shows you from 1960 and beyond This chart shows you the same ratio from 1945 onward. So you can tell that the number of investors to the plan has, for the most part, steadily decreased.
No, your premise is unrelated to your conclusion. The chart shows a declining RATIO of workers to beneficiaries which I have repeatedly said is the case and the problem. The RATIO does not express anything in terms of the quantity of participants, investors, or beneficiaries. To retain the RATIO, the system would have had to sign up 40 new workers for each addition to the rolls of beneficiaries. The number of beneficiaries has risen to 54,032,097. To maintain a 40:1 ratio you would need to find 2,161,283,880 investors to pay in. That is about 7 times the population of the entire United States. The number of people paying in has gone UP. The number of people collecting benefits has gone up at a higher proportional rate. Where there one was over 40 people paying in for each person drawing benefits, it appears there are now between 3 and 4 persons paying in for each person drawing benefits out. The baby boomers are retiring, swelling the number of beneficiaries in numbers the system never could sustain. This is the type of thing that happens in a Ponzi-like system.
Social only needs to be modified to account for the change in demographics. http://www.ssa.gov/history/ponzi.htm The Logic of Pay-As-You-Go Systems In contrast to a Ponzi scheme, dependent upon an unsustainable progression, a common financial arrangement is the so-called "pay-as-you-go" system. Some private pension systems, as well as Social Security, have used this design. A pay-as-you-go system can be visualized as a pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end. There is a superficial analogy between pyramid or Ponzi schemes and pay-as-you- go programs in that in both money from later participants goes to pay the benefits of earlier participants. But that is where the similarity ends. 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. In this context, it would be most accurate to describe Social Security as a transfer payment--transferring income from the generation of workers to the generation of retirees--with the promise that when current workers retire, there will be another generation of workers behind them who will be the source of their Social Security retirement payments. So you could say that Social Security is a transfer payment, but it is not a pyramid scheme. There is a huge difference between the two, and only a superficial similarity. If the demographics of the population were stable, then a pay-as-you-go system would not have demographically-driven financing ups and downs and no thoughtful person would be tempted to compare it to a Ponzi arrangement. However, since population demographics tend to rise and fall, the balance in pay-as-you-go systems tends to rise and fall as well. During periods when more new participants are entering the system than are receiving benefits there tends to be a surplus in funding (as in the early years of Social Security). During periods when beneficiaries are growing faster than new entrants (as will happen when the baby boomers retire), there tends to be a deficit. This vulnerability to demographic ups and downs is one of the problems with pay-as-you-go financing. But this problem has nothing to do with Ponzi schemes, or any other fraudulent form of financing, it is simply the nature of pay-as-you-go systems.
#213. To: NewsJunky (#185)
Your scenario only works if each of your 40 million workers pays the full amount of the average retirement benefit each month. That would be about $1200 per month plus the administrative costs. That is not happening. It is impossible to grow the population enough to support the system, as it is, in a stable and sustainable manner. People have worked and paid in for 40 years and retired and now the government must diminish their benefits or raise taxes to pay for them. A ratio of 2:1 does not work.
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#23. To: jwpegler, e_type_jag, hondo68, lucysmom, nolu chan, NewsJunky, eskimo, mcgowanjm (#1)
The people who got into the Social Security system very early got back on average 15 times the amount of money they paid in. They got a great deal and were raving proponents of the system.
#34. To: Godwinson (#23)
SS is a retirement insurance program - it does not function like a "Christmas club" account
#81. To: nolu chan (#34)
(Edited)
the "insurer" can change the benefits at any time and in any manner of its choosing
#83. To: NewsJunky (#81)
Its like an insurance program. No government program functions exactly like a private sector entity.
#84. To: nolu chan (#83)
It is also exhibits characteristics of a Ponzi scheme where early investors are paid with the money of later investors, and it works as long as the number of investors keeps increasing at the necessary rate. When the increase in new investors slows or stops, the system fails.
#85. To: NewsJunky (#84)
But the government can always make modifications to raise revenues. Real Ponzi Schemes always fall apart. There is no reason that Social Security must fail.
When an insurance company fails (revenue slows down too much), the state guarantee corporation must pay out benefits and may not pay out as much as originally insured for. Doesn't this indicate that private insurance does have certain characteristics of a Ponzi Scheme as well.
Insurance November 20, 2008, 5:00PM EST
#115. To: nolu chan (#85)
I do not see the relationship between this and a Ponzi scheme.
#119. To: NewsJunky (#115)
The point is that insurance companies, like in a Ponzi Scheme,depend on continued investments from investors to pay out current benefits.
#123. To: nolu chan (#119)
(Edited)
They do not depend on an ever-growing base of customers to pay benefits to earlier customers.
#128. To: NewsJunky (#123)
Social Security doesn't depend on ever growing base of customers either. In fact it has had a shrinking base of customer but yet it still has survived.
#138. To: nolu chan (#128)
#144. To: NewsJunky, jwpegler (#138)
This chart shows you the same ratio from 1945 onward. So you can tell that the number of investors to the plan has, for the most part, steadily decreased.
#185. To: nolu chan (#144)
Replies to Comment # 185. 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.
End Trace Mode for Comment # 185.
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