More Accurate Inflation Protection. The annual cost of living adjustment (COLA) for Social Security, which protects retirees against inflation, will be based on the Chained Consumer Price Index (C-CPI-U), a measure of inflation that is more accurate than the index used currently. The Bureau of Labor Statistics specifically designed this inflation measure to better reflect the way that consumers buy different items as the prices of various products fluctuate.
A More Reasonable Retirement Age. The plan adjusts the retirement age to reflect increases in life expectancy and those anticipated in the future. Under the plan, these changes are phased in gradually. Those nearing retirement are affected only slightly. Over the next 10 years, the age for full benefits rises to 68 for workers born in or after 1959. Over the next 18 years, the early retirement age rises to 65 for workers born in or after 1964. After that, both early and normal retirement ages will be indexed to longevity, which will add about one month every two years according to current projections.
The plan recognizes that a small proportion of workers will be physically unable to work until these ages. It therefore includes an improved disability system to protect them. The reformed disability system ensures that those who are unable to work longer receive a quick and accurate decision on their benefit application rather than facing today’s long delays, and improves today’s often arbitrary decision-making process.
Incentives to Work Longer. Starting immediately,those who work past their full-benefit age receive a special annual tax deduction of $10,000,regardless of income level. For instance, once the new system is completely phased in, a worker earning $50,000 per year who delays Social Security payments will see a $200 per month increase in spendable income.
The award-winning documentary I.O.U.S.A. opened up America’s eyes to the consequences of our nation’s debt and the need for our government to show more fiscal responsibility. Now that more Americans and elected officials are aware of our fiscal challenges, the producers of I.O.U.S.A. created I.O.U.S.A.: Solutions, a follow-up special focusing on solutions to the fiscal crisis. Learn more at http://www.iousathemovie.com/.
Governor Rick Perry got in trouble for calling Social Security a Ponzi scheme and I totally agree with that. This is a series of articles that look at this issue. The film series IOUSA does a great job of showing that Social Security is a bust. Perry is right on this.
Social Security is currently unsustainable. It began running deficits in 2010 and its trust fund will be exhausted by 2036, which is when seniors will see about a 25 percent cut in benefits. This is the scenario we face if Congress and the President fail to enact meaningful entitlement reform and continue reckless fiscal policies. This course is reversible, however.
At a recent House Budget Committee hearing on the fiscal facts concerning Medicare and Social Security, Members were divided on how to save Social Security. Despite hearing from Steve Goss, Social Security’s chief actuary, that raising taxes is not a necessity, tax hikes remained the leading option among certain lawmakers. Both parties agree that Social Security is insolvent, but they disagree on what to do about it.
Raising taxes, however, is not an option. Amidst the greatest recession in three decades, higher payroll taxes threaten to damage the American economy. Heritage has a new plan for Social Security, as presented in Saving the American Dream. It promises to restore fiscal responsibility and protect Americans from unneeded tax hikes.
At present, workers and their employers each pay 6.2 percent for Social Security retirement and disability benefits, adding up to a 12.4 percent payroll tax that is levied on every single worker’s income. If the government were to increase this tax to pay for Social Security’s deficits, every American worker and his boss would split an increase of at least 2.2 percent. Raising these taxes will discourage employers from hiring new workers and exacerbate unemployment.
Tax-loving lawmakers then turn to the tax cap. Social Security taxes are currently deducted only from the first $106,800 each worker earns. But some lawmakers suggest that any money Americans don’t “need” is fair game for tax hikes. President Obama most recently revealed this philosophy, fundamentally at odds with America’s job creators, during a press conference on the debt limit. Similarly, certain members at the recent House Budget Committee hearing suggested lifting the cap on the Social Security payroll tax to pay for the program’s shortfall. But taking more money out of the private economy limits entrepreneurial exercise—the true source of wealth in any free-market economy.
The Heritage Foundation plan does not call for unnecessary tax increases. Instead, it restores Social Security to its original purpose of being a safeguard against senior poverty. The plan includes both a transition into a flat benefit for those who work more than 35 years, as well as phasing out Social Security benefits for those who have significant non-Social Security retirement income. The plan also contains incentives to encourage Americans to work beyond the age at which they would normally receive benefits. Because Americans are living longer than ever before, they are spending more years in retirement. Therefore, Saving the American Dreamcalls for gradually increasing the retirement age and then indexing it to life expectancy.
Unemployment remains high, and Social Security faces serious fiscal challenges. It simply cannot afford to pay all of the future benefits it has promised. Elected leaders must realize that tax hikes are not the answer and that there are different ways to save both Social Security and the economy. Saving both requires our attention now, and as Heritage’s David John writes, “ [I]nstead of just blindly defending the current program, both Congress and the Obama Administration should propose comprehensive programs that permanently fix Social Security.”
Governor Rick Perry got in trouble for calling Social Security a Ponzi scheme and I totally agree with that. This is a series of articles that look at this issue.
This article appeared on Forbes.com on August 17, 2011.
recently had the pleasure of reading The Declaration of Independents: How Libertarian Politics Can Fix What’s Wrong with America. The authors are Nick Gillespie and Matt Welch, the former and current editors (respectively) of Reason magazine. They follow in the footsteps of Brink “liberaltarian” Lindsey, whose 2007 book The Age of Abundance portrayed libertarianism as the ideology of the sensible center in American politics, equally immune to the left’s enthusiasm for big government and the right’s enthusiasm for theocracy. The basic thrust of the Reasoneditors’ book is that the growing fraction of American voters who identify themselves as independents are really libertarians—at least in temperament if not explicit self-identification—and that what they want first and foremost is for the government to leave them alone.
This is the kind of book you’d expect the editors of a libertarian magazine to write, and they do a good job. The book has three sections. The middle section is the longest, and also the best. It tells some fun stories about ways the world has gotten freer over the last few decades. It tells how Czechoslovakia’s underground (and illegal) music scene inspired dissident Vaclav Havel and hastened the fall of communism. It explains how cartel-busting deregulation in the Carter era made air travel more affordable and beer more delicious. And it tells how the Internet is knocking traditional media off its pedestal.
The final third of the book, called “operationalize it, baby!” (yes, with an exclamation point), takes a curious turn. The opening chapter, called “we are so out of money,” makes two major points: government spends a lot of money on trains, and government spends a lot of money on benefits for public employees.
Timothy B. Lee is an adjunct scholar at the Cato Institute. He covers tech policy for Ars Technica and blogs at Forbes.com.
At this point, a lot of readers must be scratching their heads. Aside from that section on airline deregulation, the first two-thirds of the book doesn’t say anything about transportation policy. Nor is the book a treatise on public pensions. So in what sense do these complaints about government spending “operationalize” the book’s previous arguments about the value of individual liberty?
Of course, I’m playing dumb here. I’m familiar enough with libertarian theory to know what the connection is supposed to be: the government spending more money on transportation infrastructure and the government telling you what kind of beer you can drink are both infringements of economic freedom. This line of reasoning is rooted in the work of hard-core libertarians like Murray Rothbard and Ayn Rand, for whom all taxation was theft. (Rothbard was an anarchist, Rand had some confused ideas about financing government non-coercively)
If all taxation is theft, then the government subsidizing trains is as much an infringement on your freedom as the government banning small breweries. The problem is that Gillespie and Welch insist they’re not that kind of libertarians. In their epilogue, they write that they “went to public schools for all or part of our educations (as do/will our kids), walked without a second’s hesitation on public sidewalks, and are still not averse to calling tax-funded fire departments.” Evidently, they believe there are at least some kinds of public services that should be provided with tax revenues.
But if the government is going to provide fire departments and public sidewalks, then presumably it’s going to have to hire some employees. And those employees will probably expect some health care and retirement benefits. To be sure, there’s a need to reform public pensions, but this is a basically technocratic question that has little to do with economic freedom as such.
As for trains, not only does the subject have no obvious connection to economic freedom, but Gillespie and Welch don’t make a very compelling case that trains are particularly prone to mismanagement and boondoggles. To be sure, there have been a lot of wasteful train projects, but it’s easy to find examples of mismanaged projects involving other modes of transportation, all of which are also heavily regulated and subsidized by the government. The problem is that large bureaucracies are inefficient, not that there’s something uniquely bad about rail transportation.
More to the point, one of the big reasons train-based transit tends to perform poorly is that the government systematically discourages the kind of high-density development patterns that make trains economically viable. Trains are an efficient and popular mode of transportation in cities like New York, Philadelphia, and DC because there’s a critical mass of people within walking distance of each stop. But today, rules about minimum parking, setbacks, maximum building heights, and so forth effectively make it illegal to build neighborhoods like the high-density parts of Northeastern cities. Repeal those rules and wait a couple of decades, and some of these train boondoggles might start to make more sense.
In any event, the perennial argument between people who like trains and people who like cars has about as much to do with individual liberty as the Yankees-vs-Red Socks feud. Decisions about which modes of transportation the government should subsidize, and how, involve boring trade-offs between costs and benefits. There’s no reason libertarians, as such, should have a dog in the fight.
This isn’t really Gillespie and Welch’s fault. There are lots of libertarians who (like Friedman and Hayek) support more government than the night-watchman state, but who haven’t given a ton of thought to what that actually entails. The result tends to be haphazard advocacy of cutting whatever government spending is most visible at any particular point in time. This approach often has unintended consequences. For example, Matt Yglesias points out that efforts to reduce the federal government’s headcount has led to huge windfall profits for federal contractors. Good fiscal policy requires not only cutting wasteful spending (and to be sure there’s a lot to cut) but also making sure that those cuts don’t hinder the performance of the worthwhile government activities that remain. Thinking about government spending as a question of economic liberty can be more a hindrance than a help to that effort.
Governor Rick Perry got in trouble for calling Social Security a Ponzi scheme and I totally agree with that. This is a series of articles that look at this issue.
This article appeared on Forbes.com on September 11, 2011
Rick Perry’s recent comparison of Social Security to a Ponzi scheme has resurrected the long-running debate over the solvency of Social Security. Many libertarians and conservatives advocate shifting from the current pay-as-you-go system — in which taxes on today’s workers finance the Social Security checks of today’s retirees — to a system of personal accounts in which each worker’s retirement funds are set aside for his own retirement. One of the key arguments for such a system is that the stock market’s historically high returns would allow the average worker to retire with more money in his pocket than the meager returns the Social Security system now promises (and projections suggest the system may not even deliver on those promises).
The underlying reason this works is that the money in personal accounts would be invested in private sector businesses, which would use them to create new wealth. In contrast, Social Security taxes are used to finance current government spending. But in a blog post last month, Karl Smith argued that the two situations are more similar than they seem:
I think that sometimes lay people get confused and think that a private retirement system implies that people will only be paying in and thus adding to the capital stock. They forget that on the opposite end people will be extracting and thus depleting the capital stock.
Timothy B. Lee is an adjunct scholar at the Cato Institute. He covers tech policy for Ars Technica and blogs at Forbes.com.
The “investment bonus” is only the time between when the money goes in and when it comes out. I wish I could go into more detail, but you actually get the exact same effect from a Social Security trust fund. Less borrowing by the government — and hence a higher capital stock — when money is going in. More borrowing by the government — and hence a lower capital stock — when money is going out.
To unpack this a bit, the Social Security administration was (until last year) taking in tens of billions of dollars more from payroll taxes than it is sending out in Social Security checks. The difference was lent to the Treasury Department to finance other government programs.
Smith’s point is that if the SSA weren’t running a surplus, then the Treasury Department would have had to go to borrow that money from private bond markets instead, which would have meant less money being invested in private-sector wealth creation. Hence, switching to private accounts doesn’t actually increase the amount of money being invested in the private sector, and hence doesn’t produce any new wealth that can be used to pay future retirees.
In theory, this argument makes sense. But it has a couple of practical problems. First, it assumes that a dollar invested in stocks should have the same wealth-creating effect as a dollar invested in bonds. It’s not obvious that this is true. Stocks have historically generated a higher rate of return than bonds, after all, and it’s not crazy to think this reflects the fact that equity investments generate more wealth per dollar than debt investments.
But the more serious problem with the argument is that it implicitly holds other taxes and government spending constant. That is, it assumes that when the SSA lends a dollar to the Treasury, the result is one less dollar of private-sector borrowing rather than one more dollar of government spending or one more dollar of tax cuts.
But this isn’t a reasonable assumption at all. Consider the late 1990s, the only period in my lifetime the federal government has run a surplus. Bill Clinton began bragging that he’d balanced the budget toward the end of fiscal year 1998. And in that year, the federal governmentdid run a slight surplus of $70 billion dollars. But this surplus is the result of adding a $30 billion “on budget” deficit to Social Security’s $100 billion surplus. If Social Security is ignored, the government didn’t reach a surplus until 1999.
If the US had a system of personal accounts in the 1990s, then elected officials couldn’t have plausibly counted the accumulation of funds in peoples’ accounts as part of a federal budget surplus. And so the deficit would have looked worse than it did. It’s impossible to know how that would have affected the budget debates of the 1990s, but it seems reasonable to assume that politicians would have enacted deeper spending cuts and/or larger tax increases to close what was perceived as a substantially larger deficit.
In other words, one way to think about personal accounts is as a mechanism for Congress to exert self-discipline. As long as Social Security surpluses are saved in a single giant lockbox managed by the government, politicians are going to face irresistable temptations to raid it to finance other programs. It’s simply not credible to think the federal government can “save” money by lending it to itself.
Splitting the lockbox up into millions of individual accounts with peoples’ names on them makes that harder to do, because people are going to be much more sensitive about the government pretending the money in their personal accounts really belongs to the government.
And this means that personal accounts are likely to increase the savings rate. Not because Smith’s technical point is wrong, but because switching to personal accounts changes the political dynamics of the budget process. Without the ability to hide deficits behind Social Security surpluses, politicians in the coming decades would face greater pressure to cut spending and/or raise taxes in order to produce budgets that are actually balanced.
When it comes to Social Security, Republicans should stop treating seniors like the feeble-minded demographic portrayed in commercials written by 13-year-olds on Madison Avenue.
It’s like the home security commercial targeting seniors for a medical alert pendant to be worn around the neck. White-haired “Mom” didn’t want one because “it was for “some old person.” But daughter, seen patting Mom’s hand, “talked Mom into it.” Next we see “Mom” carrying a basket of laundry down a flight of uncarpeted stairs without holding the handrail. Sure enough, Mom’s lying at the bottom of the staircase pressing her alert button because she’s fallen, broken her hip and can’t get up because “the pain was terrible.” “Mom” and daughter are so glad that she was wearing her alert and could summon help.
You expect to see a disclaimer at the end: “Don’t try this at home. These are actors who are paid to behave stupidly. You could hurt yourself.”
Madison Avenue convinced the marketing geniuses at the security company that they can sell more medical alerts by scaring seniors even if it insults them. I don’t patronize a company run by upstarts who think senior is synonymous with senile. I doubt that many seniors do.
Gov. Mitt Romney and political commentators, such as Karl Rove and Dick Morris, are treating seniors as condescendingly as the commercial. To hear them tell it, if Gov. Rick Perry calls Social Security a “Ponzi Scheme,” seniors will have a seizure, and press a political alert hanging around our neck, which will connect us to the Obama campaign.
Not likely, unless we fall down the stairs and land on our head.
Seniors didn’t put Barack Hussein Obama in the White House. Those of us 65 and over are the only voting bloc who chose McCain over Obama—and by eight percentage points.
Obama’s disapproval rating is at 55 percent and his approval rating is 44 percent. It means that other voting blocs are beginning to wise up to what seniors knew in 2008. Seniors are the least likely group to vote for Obama in 2012.
For one thing, we rejected Obama’s outrageous and vague promise to fundamentally transform the greatest nation in history. And certainly not by a community organizer with a resume thinner than our hair who thinks voting “absent” is leadership and that America should repent for its greatness.
Our sight and hearing may be diminished, but we still know bovine scatology when we smell it.
Seniors deal with hard truth every day. Many of us handle it without our beloved spouse at our side. Health and financial concerns are more pressing. We live on a fixed income and still know the checkbook has to balance. We’re not the demographic maxing out credit cards and living beyond our means. Many dear old friends reside only in our memories. We know that our days dwindle down to a precious few. But it doesn’t mean that our minds have departed.
We certainly can handle the truth that Social Security isn’t sustainable for our children and grandchildren. We know that without a major restructuring, it will remain a pyramid scheme deficient of funds and contributors, a sham promise of retirement security for future generations.
The Social Security trustees released a 244-page report on Monday revealing the gravity of the situation. Page 13 states that payroll tax contributions for 2010 were $544.8 billion; total expenditures were $584.9 billion. That’s a $40 billion deficit. The Department of Labor released a report on Monday stating that there are only 1.5 workers supporting Social Security for every one recipient.
During the Republican debate on Monday night, Romney again accused Perry of scaring seniors by calling Social Security a “Ponzi Scheme.” Where does Romney get the idea that we were clueless until Perry mentioned it?
What is over the top is Romney’s pretense or delusion that Perry coined the term. Stanley Kurtz of National Review cites scores of uses of the term by Republicans and Democrats, academics, and journalists, long enough for Romney to have heard it long before Perry said it. Kurtz concludes in “Perry and the Ponzis”:
Our historical tour of the claim that Social Security is a Ponzi scheme confirms what we already knew: Rick Perry’s remarks are uncharacteristically bold for a politician, most especially a candidate in the midst of a presidential race. Yet Perry’s Ponzi-scheme claim is in no way unprecedented. On the contrary, the Ponzi comparison has been a staple of conservative warnings about Social Security’s financial soundness for decades.
So the question today is not simply whether Rick Perry will be punished or rewarded for showing the honesty even many liberal commentators once pined for. The more interesting issue raised by this historical investigation may be the fate of the Democratic Party and the media. Where today are the liberal and centrist Democrats who only yesterday called Social Security a Ponzi scheme and supported bold reforms? Where now are the columnists and editors at Newsweek and the New York Times willing to reward truth-tellers and to criticize reporters who cover for cowardly politicians? The fate of Rick Perry’s blunt talk may tell us more than we want to know, not only about Social Security, but also about who we are and what we have become.
What scares most seniors is that our country will be lying at the bottom of the stairs, broken and unable to get up if it remains in the hands of Barack Obama.
Social Security is a Ponzi scheme (Part 2) John Stossel – Government’s Ponzi Scheme Uploaded by LibertyPen on Apr 21, 2010 A look at the Social Security system. By contrast, Bernie Madoff seems like a shoplifter. http://www.LibertyPen.com Uploaded by LibertyPen on Jan 8, 2009 Professor Williams explains what’s ahead for Social Security ______________________________ Governor Rick […]
Is Social Security a Ponzi Scheme? I just started a series on this subject. In this article below you will see where the name “Ponzi scheme” came from and if it should be applied to the Social Security System. Ponzi! Ponzi! Ponzi! 9/14/2011 | Email John Stossel | Columnist’s Archive Ponzi! Ponzi! Ponzi! There, I […]
Social Security is a Ponzi scheme (Part 1) Governor Rick Perry got in trouble for calling Social Security a Ponzi scheme and I totally agree with that. Max Brantley wants to keep insisting that this will be Perry’s downfall but think that truth will win out this time around. This is a series of articles […]
I have got several comments during the last 35 weeks that my blog has been in existence and the reaction as been positive and negative. My evangelical and conservative political views have generated the most vocal response. Here are some of my favorite blog posts: 27 Club How should we then live? Series by Francis […]
I got this off the internet. I don’t agree with the comments below. For instance, I do think that Security is a Ponzi scheme. Uploaded by PostingsPlus on Sep 8, 2011 Who do you think stood out the most as a leader in this debate? Share you thoughts on http://www.postingsplus.com, a new political social network. […]
Uploaded by LibertyPen on Jan 8, 2009 Professor Williams explains what’s ahead for Social Security Dan Mitchell on Social Security I have said that Social Security is a Ponzi scheme and sometimes you will hear someone in the public say the same thing. Yes, It Is a Ponzi Scheme by Michael D. Tanner Michael Tanner […]
On the Arkansas Times Blog the person using the username “the outlier” noted: Saline, leave SS out of the mix. It is solvent through 2037, and can be made solvent indefinitely with minor tweaks. So many people think that the Social Security is a great investment plan and it may only need a few tweaks. […]
On the Arkansas Times Blog on June 11, 2011 the person going by the username Jake de Snake noted,”Current empirical evidence indicates that the American welfare is successful in reducing poverty, inequality and mortality considerably. Public pensions, for instance, are estimated to keep 40% of American seniors above the poverty line.” If Social Security was […]
Professor Williams explains what’s ahead for Social Security
______________________________
Governor Rick Perry got in trouble for calling Social Security a Ponzi scheme and I totally agree with that. This is a series of articles that look at this issue.
This article appeared on Forbes.com on September 11, 2011.
Rick Perry’s recent comparison of Social Security to a Ponzi scheme has resurrected the long-running debate over the solvency of Social Security. Many libertarians and conservatives advocate shifting from the current pay-as-you-go system — in which taxes on today’s workers finance the Social Security checks of today’s retirees — to a system of personal accounts in which each worker’s retirement funds are set aside for his own retirement. One of the key arguments for such a system is that the stock market’s historically high returns would allow the average worker to retire with more money in his pocket than the meager returns the Social Security system now promises (and projections suggest the system may not even deliver on those promises).
The underlying reason this works is that the money in personal accounts would be invested in private sector businesses, which would use them to create new wealth. In contrast, Social Security taxes are used to finance current government spending. But in a blog post last month, Karl Smith argued that the two situations are more similar than they seem:
I think that sometimes lay people get confused and think that a private retirement system implies that people will only be paying in and thus adding to the capital stock. They forget that on the opposite end people will be extracting and thus depleting the capital stock.
Timothy B. Lee is an adjunct scholar at the Cato Institute. He covers tech policy for Ars Technica and blogs at Forbes.com.
The “investment bonus” is only the time between when the money goes in and when it comes out. I wish I could go into more detail, but you actually get the exact same effect from a Social Security trust fund. Less borrowing by the government — and hence a higher capital stock — when money is going in. More borrowing by the government — and hence a lower capital stock — when money is going out.
To unpack this a bit, the Social Security administration was (until last year) taking in tens of billions of dollars more from payroll taxes than it is sending out in Social Security checks. The difference was lent to the Treasury Department to finance other government programs.
Smith’s point is that if the SSA weren’t running a surplus, then the Treasury Department would have had to go to borrow that money from private bond markets instead, which would have meant less money being invested in private-sector wealth creation. Hence, switching to private accounts doesn’t actually increase the amount of money being invested in the private sector, and hence doesn’t produce any new wealth that can be used to pay future retirees.
In theory, this argument makes sense. But it has a couple of practical problems. First, it assumes that a dollar invested in stocks should have the same wealth-creating effect as a dollar invested in bonds. It’s not obvious that this is true. Stocks have historically generated a higher rate of return than bonds, after all, and it’s not crazy to think this reflects the fact that equity investments generate more wealth per dollar than debt investments.
But the more serious problem with the argument is that it implicitly holds other taxes and government spending constant. That is, it assumes that when the SSA lends a dollar to the Treasury, the result is one less dollar of private-sector borrowing rather than one more dollar of government spending or one more dollar of tax cuts.
But this isn’t a reasonable assumption at all. Consider the late 1990s, the only period in my lifetime the federal government has run a surplus. Bill Clinton began bragging that he’d balanced the budget toward the end of fiscal year 1998. And in that year, the federal governmentdid run a slight surplus of $70 billion dollars. But this surplus is the result of adding a $30 billion “on budget” deficit to Social Security’s $100 billion surplus. If Social Security is ignored, the government didn’t reach a surplus until 1999.
If the US had a system of personal accounts in the 1990s, then elected officials couldn’t have plausibly counted the accumulation of funds in peoples’ accounts as part of a federal budget surplus. And so the deficit would have looked worse than it did. It’s impossible to know how that would have affected the budget debates of the 1990s, but it seems reasonable to assume that politicians would have enacted deeper spending cuts and/or larger tax increases to close what was perceived as a substantially larger deficit.
In other words, one way to think about personal accounts is as a mechanism for Congress to exert self-discipline. As long as Social Security surpluses are saved in a single giant lockbox managed by the government, politicians are going to face irresistable temptations to raid it to finance other programs. It’s simply not credible to think the federal government can “save” money by lending it to itself.
Splitting the lockbox up into millions of individual accounts with peoples’ names on them makes that harder to do, because people are going to be much more sensitive about the government pretending the money in their personal accounts really belongs to the government.
And this means that personal accounts are likely to increase the savings rate. Not because Smith’s technical point is wrong, but because switching to personal accounts changes the political dynamics of the budget process. Without the ability to hide deficits behind Social Security surpluses, politicians in the coming decades would face greater pressure to cut spending and/or raise taxes in order to produce budgets that are actually balanced.
I just started a series on this subject. In this article below you will see where the name “Ponzi scheme” came from and if it should be applied to the Social Security System.
Ponzi! Ponzi! Ponzi! There, I said it. To the extent people believe there are trust funds with their names on them, Social Security is absolutely a Ponzi scheme. So is Medicare. People need to hear it.
Many people think that when the government takes payroll tax from their paychecks, it goes to something like a savings account. Seniors who collect Social Security think they’re just getting back money that they put into their “account.” Or they think it’s like an insurance policy — you win if you live long enough to get more than you paid in. Neither is true. Nothing is invested. The money taken from you was spent by government that year. Right away. There’s no trust fund. The plan is unsustainable. Medicare is worse.
Mitt Romney and other Republicans who scoff at Rick Perry shamelessly pander to older voters. They should tell people the truth.
Still, I’m not convinced Perry has more than a sound bite. In his USA Today op-ed this week, the most he says is, “We must consider reforms to make Social Security financially viable.” He doesn’t say what kind of reforms.
Charles Ponzi promised to make money for investors by taking advantage of price differences in coupons for postage stamps. Trouble is, he paid some early “investors” with money wheedled from later “investors.”
What sustains a Ponzi scheme is deception. If people really knew how it worked, they wouldn’t sign on.
Social Security and Medicare are different. You could say no to Ponzi. I wouldn’t advise saying no to the government. Not if you want to stay out of prison.
Social Security is nothing more than a promise from politicians. The next gang can break the promise.
Twice the government has argued before the Supreme Court that Social Security is not insurance. In 1960, Health, Education and Welfare Secretary Arthur Sherwood Flemming submitted a brief to the courts stating: “The contribution exacted under the Social Security plan is a true tax. It is not comparable to a premium promising the payment of an annuity commencing at a designated age.”
In a ruling that denied a man’s property claim to Social Security benefits, the Supreme Court said, “It is apparent that the noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments.”
So anyone who believes Social Security is an investment plan really has only himself to blame.
If you want evidence, listen to how politicians talk about your Social Security “contributions.” They are taxes and nothing more. No one pretends they are premiums. In fact, President Obama and the Republicans want to stimulate the economy by extending a cut in the payroll tax for workers and cutting the employer’s share of the tax — but without reducing Social Security benefits.
Now, I like tax cuts more than the next person, but as Freeman editor Sheldon Richman points out, this one has a complication the politicians don’t seem to care about:
“President Obama’s jobs program calls for cuts in both sides of the payroll tax. That tax finances Social Security and Medicare. Social Security and Medicare are already taking in less money than they need to pay retirees. So they will have to cash in more of the Treasury IOUs left behind when previous surpluses were used to finance general expenditures. But the Treasury is also already running a deficit, a trillion dollars-plus. So it will have to borrow more in the capital markets in order to pay back the Social Security and Medicare funds. Unless Obama makes up the lost revenue by changing the tax code. But then money will be withdrawn from the economy in the form of higher taxes so it can be put back into the economy through the payroll-tax cut. Somehow that’s supposed to stimulate the economy.”
Like all jobs programs, Obama’s latest plan is a scam. The economy would create ample opportunities to earn income — and make it easier for people to look after themselves in retirement — if the government would just slash spending, taxes, regulation and privilege.
Ponzi scheme or not, we wouldn’t need Social Security.
John Stossel
John Stossel is host of “Stossel” on the Fox Business Network. He’s the author of “Give Me a Break” and of “Myth, Lies, and Downright Stupidity.” To find out more about John Stossel, visit his site at johnstossel.com.
Michael Tanner is a senior fellow at the Cato Institute and coauthor of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.
Texas governor Rick Perry is being criticized for calling Social Security a “Ponzi scheme.” Even Mitt Romney is reportedly preparing to attack him for holding such a radical view. But if anything, Perry was being too kind.
The original Ponzi scheme was the brainchild of Charles Ponzi. Starting in 1916, the poor but enterprising Italian immigrant convinced people to allow him to invest their money. However, Ponzi never actually made any investments. He simply took the money he was given by later investors and gave it to his early investors, providing those early investors with a handsome profit. He then used these satisfied early investors as advertisements to get more investors. Unfortunately, in order to keep paying previous investors, Ponzi had to continue finding more and more new investors. Eventually, he couldn’t expand the number of new investors fast enough, and the scheme collapsed. Ponzi was convicted of fraud and sent to prison.
Social Security, on the other hand, forces people to invest in it through a mandatory payroll tax. A small portion of that money is used to buy special-issue Treasury bonds that the government will eventually have to repay, but the vast majority of the money you pay in Social Security taxes is not invested in anything. Instead, the money you pay into the system is used to pay benefits to those “early investors” who are retired today. When you retire, you will have to rely on the next generation of workers behind you to pay the taxes that will finance your benefits.
As with Ponzi’s scheme, this turns out to be a very good deal for those who got in early. The very first Social Security recipient, Ida Mae Fuller of Vermont, paid just $44 in Social Security taxes, but the long-lived Mrs. Fuller collected $20,993 in benefits. Such high returns were possible because there were many workers paying into the system and only a few retirees taking benefits out of it. In 1950, for instance, there were 16 workers supporting every retiree. Today, there are just over three. By around 2030, we will be down to just two.
As with Ponzi’s scheme, when the number of new contributors dries up, it will become impossible to continue to pay the promised benefits. Those early windfall returns are long gone. When today’s young workers retire, they will receive returns far below what private investments could provide. Many will be lucky to break even.
Eventually the pyramid crumbles.
Of course, Social Security and Ponzi schemes are not perfectly analogous. Ponzi, after all, had to rely on what people were willing to voluntarily invest with him. Once he couldn’t convince enough new investors to join his scheme, it collapsed. Social Security, on the other hand, can rely on the power of the government to tax. As the shrinking number of workers paying into the system makes it harder to continue to sustain benefits, the government can just force young people to pay even more into the system.
In fact, Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase.
In addition, at least until the final collapse of his scheme, Ponzi was more or less obligated to pay his early investors what he promised them. With Social Security, on the other hand, Congress is always able to change or cut those benefits in order to keep the scheme going.
Social Security is facing more than $20 trillion in unfunded future liabilities. Raising taxes and cutting benefits enough to keep the program limping along will obviously mean an ever-worsening deal for younger workers. They will be forced to pay more and get less.
On the Arkansas Times Blog the person using the username “the outlier” noted: Saline, leave SS out of the mix. It is solvent through 2037, and can be made solvent indefinitely with minor tweaks. So many people think that the Social Security is a great investment plan and it may only need a few tweaks. […]
On the Arkansas Times Blog on June 11, 2011 the person going by the username Jake de Snake noted,”Current empirical evidence indicates that the American welfare is successful in reducing poverty, inequality and mortality considerably. Public pensions, for instance, are estimated to keep 40% of American seniors above the poverty line.” If Social Security was […]
If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand. Milton Friedman Ep. 4 – From Cradle to Grave [2/7]. Milton Friedman’s Free to Choose (1980) Since the Depression years of the 1930s, there has been almost continuous expansion of governmental efforts to provide […]
Author Biography Eric Schurenberg is Editor-in-Chief of BNET.com and Editorial Director of CBS MoneyWatch.com. Previously, Eric was managing editor of MONEY. As managing editor, he expanded the editorial focus to new interests including real estate, family finance, health, retirement, and the workplace. Prior to MONEY, Eric was deputy editor of Business 2.0. He was also […]
Limiting Social Security to Those Who Actually Need It. In addition to moving to a flat benefit over time, the plan makes Social Security a properly financed, true insurance program. It starts to do that immediately. This means that the program will concentrate on protecting the economic security of retirees rather than following the current approach of promising unaffordable benefits to all without regard to need.
This new approach means that retirees with substantial non–Social Security retirement income will start receiving a lower benefit on a sliding scale that gradually reduces Social Security checks to zero for those with the highest non–Social Security incomes. This transparent mechanism will apply to benefits received by affluent Americans under both the current system and the flat-rate system. This transparent, sliding-scale approach is a major improvement on today’s taxation of Social Security benefits.
Under the plan, income-adjusted benefits start in 2012 as individual retirees with non–Social Security incomes above $55,000 start to see a slight reduction in benefit payments. Those with higher non–Social Security income will see larger reductions in their checks. Individuals with more than $110,000 in non–Social Security income will receive no Social Security payments. Married couples who file taxes jointly would be subject to higher thresholds, with benefits beginning to phase out at a joint non–Social Security income of $110,000 and ending when income reaches $165,000. Married couples can decide whether they want to qualify for benefits as individuals or jointly as a couple. The income thresholds will be indexed for inflation.
Income-adjusting benefits is not new. It occurs in today’s Social Security system. But it is largely hidden today and hits lower-income seniors, not just the affluent. Seniors with as little as $15,000 in non–Social Security income, or even less in some cases, must pay tax on part of their benefits. Seniors with more income than that pay steadily higher rates of tax on more of their Social Security benefits. The Heritage approach, when fully phased in, would income-adjust benefits transparently and not tax the benefits a senior receives. It also would start income-adjusting at a much higher income. Today, about half of seniors have their checks eroded by taxation. Under the Heritage plan, only about 9 percent of seniors would see their checks reduced and only just over 3.5 percent of seniors would receive no check.
Real insurance also protects seniors from poverty if their financial situation changes. Retirees who suffer a sudden and permanent drop in non–Social Security income would find their benefits rapidly restored.
There are two crises facing Social Security. First the program has a gigantic unfunded liability, largely thanks to demographics. Second, the program is a very bad deal for younger workers, making them pay record amounts of tax in exchange for comparatively meager benefits. This video explains how personal accounts can solve both problems, and also notes that nations as varied as Australia, Chile, Sweden, and Hong Kong have implemented this pro-growth reform.
Social Security Series Part 6
Personal accounts would cause the economy to grow.
Dan Mitchell of the Cato Institute has asserted that three things would happen if Social Security was privatized.
1. Lower tax rate on work, encouraging job creation.
2. Less government spending, leaving more resources in productive sector.
3. More private savings, fueling investment.
Dan Mitchell goes on to say that this “is exactly what you would expect if you replace a tax and transfer entitlement scheme with private savings and wealth accumulation.”
José Piñera discusses privatizing social security on FBN
The Daily Hatch 
Rick Perry’s Ponzi-scheme claim is in no way unprecedented
Rick Perry and Mitt Romney went after each other at the debate over this term “Ponzi scheme.”
Janet M. LaRue
Romney’s Ponzi Phobia
When it comes to Social Security, Republicans should stop treating seniors like the feeble-minded demographic portrayed in commercials written by 13-year-olds on Madison Avenue.
It’s like the home security commercial targeting seniors for a medical alert pendant to be worn around the neck. White-haired “Mom” didn’t want one because “it was for “some old person.” But daughter, seen patting Mom’s hand, “talked Mom into it.” Next we see “Mom” carrying a basket of laundry down a flight of uncarpeted stairs without holding the handrail. Sure enough, Mom’s lying at the bottom of the staircase pressing her alert button because she’s fallen, broken her hip and can’t get up because “the pain was terrible.” “Mom” and daughter are so glad that she was wearing her alert and could summon help.
You expect to see a disclaimer at the end: “Don’t try this at home. These are actors who are paid to behave stupidly. You could hurt yourself.”
Madison Avenue convinced the marketing geniuses at the security company that they can sell more medical alerts by scaring seniors even if it insults them. I don’t patronize a company run by upstarts who think senior is synonymous with senile. I doubt that many seniors do.
Gov. Mitt Romney and political commentators, such as Karl Rove and Dick Morris, are treating seniors as condescendingly as the commercial. To hear them tell it, if Gov. Rick Perry calls Social Security a “Ponzi Scheme,” seniors will have a seizure, and press a political alert hanging around our neck, which will connect us to the Obama campaign.
Not likely, unless we fall down the stairs and land on our head.
Seniors didn’t put Barack Hussein Obama in the White House. Those of us 65 and over are the only voting bloc who chose McCain over Obama—and by eight percentage points.
Obama’s disapproval rating is at 55 percent and his approval rating is 44 percent. It means that other voting blocs are beginning to wise up to what seniors knew in 2008. Seniors are the least likely group to vote for Obama in 2012.
For one thing, we rejected Obama’s outrageous and vague promise to fundamentally transform the greatest nation in history. And certainly not by a community organizer with a resume thinner than our hair who thinks voting “absent” is leadership and that America should repent for its greatness.
Our sight and hearing may be diminished, but we still know bovine scatology when we smell it.
Seniors deal with hard truth every day. Many of us handle it without our beloved spouse at our side. Health and financial concerns are more pressing. We live on a fixed income and still know the checkbook has to balance. We’re not the demographic maxing out credit cards and living beyond our means. Many dear old friends reside only in our memories. We know that our days dwindle down to a precious few. But it doesn’t mean that our minds have departed.
We certainly can handle the truth that Social Security isn’t sustainable for our children and grandchildren. We know that without a major restructuring, it will remain a pyramid scheme deficient of funds and contributors, a sham promise of retirement security for future generations.
The Social Security trustees released a 244-page report on Monday revealing the gravity of the situation. Page 13 states that payroll tax contributions for 2010 were $544.8 billion; total expenditures were $584.9 billion. That’s a $40 billion deficit. The Department of Labor released a report on Monday stating that there are only 1.5 workers supporting Social Security for every one recipient.
During the Republican debate on Monday night, Romney again accused Perry of scaring seniors by calling Social Security a “Ponzi Scheme.” Where does Romney get the idea that we were clueless until Perry mentioned it?
What is over the top is Romney’s pretense or delusion that Perry coined the term. Stanley Kurtz of National Review cites scores of uses of the term by Republicans and Democrats, academics, and journalists, long enough for Romney to have heard it long before Perry said it. Kurtz concludes in “Perry and the Ponzis”:
Our historical tour of the claim that Social Security is a Ponzi scheme confirms what we already knew: Rick Perry’s remarks are uncharacteristically bold for a politician, most especially a candidate in the midst of a presidential race. Yet Perry’s Ponzi-scheme claim is in no way unprecedented. On the contrary, the Ponzi comparison has been a staple of conservative warnings about Social Security’s financial soundness for decades.
So the question today is not simply whether Rick Perry will be punished or rewarded for showing the honesty even many liberal commentators once pined for. The more interesting issue raised by this historical investigation may be the fate of the Democratic Party and the media. Where today are the liberal and centrist Democrats who only yesterday called Social Security a Ponzi scheme and supported bold reforms? Where now are the columnists and editors at Newsweek and the New York Times willing to reward truth-tellers and to criticize reporters who cover for cowardly politicians? The fate of Rick Perry’s blunt talk may tell us more than we want to know, not only about Social Security, but also about who we are and what we have become.
What scares most seniors is that our country will be lying at the bottom of the stairs, broken and unable to get up if it remains in the hands of Barack Obama.
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On the Arkansas Times Blog the person using the username “the outlier” noted: Saline, leave SS out of the mix. It is solvent through 2037, and can be made solvent indefinitely with minor tweaks. So many people think that the Social Security is a great investment plan and it may only need a few tweaks. […]
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On the Arkansas Times Blog on June 11, 2011 the person going by the username Jake de Snake noted,”Current empirical evidence indicates that the American welfare is successful in reducing poverty, inequality and mortality considerably. Public pensions, for instance, are estimated to keep 40% of American seniors above the poverty line.” If Social Security was […]