The Forgotten Ponzi
By Amit Singh | Sunday, December 21st, 2008 | Policy
I know a lot of folks are rightfully upset at Bernie Madoff, who is now under house arrest in his fancy Upper East Side apartment, for swindling somewhere in the neighborhood of $50,000,000,000 over 2 decades. But the U.S. Government’s Social Security pays 10 times that amount every year to beneficiaries. So far the pyramid has been working because we have enough workers to support the retirees but with the impending retirement of the baby boomers that is likely to change.
Often recent college graduates joke about how they are not going to receive Social Security benefits but we all know they are going to pay into it. So what to do? Is reforming SS by extending the age requirements and reducing the benefits enough?
I won’t get into a discussion of whether we needed Social Security in the first place because at this point we have it and it is a safety net millions of seniors rely on and we cannot abandon them. But for the next generation, what are we going to do to ensure they receive retirement benefits? Bush was unable to privatize Social Security because he didn’t have enough “political capital” given the Iraq War and I am quite sure Obama will not make any gestures to give citizens more control of their own money.
I think the best answer for now is to allow the economy to thrive by letting bad companies go out of business and good companies succeed thereby creating a more substantial and stable tax base. Or we could do what we always do and simply print up more money.
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35 Responses to "The Forgotten Ponzi"
Even without any changes, the Social Security system be pay able to pay out some reduced level of benefits without becoming insolvent. I have heard this reduced level of benefits described as being as little as 70 cents on the dollar however my annual Social Security statement claims it will be 78 cents on the dollar.
With a few changes, such as increasing the retirement age and increasing the maximum wage subject to payroll taxes, the gap between current and future benefits payouts could be narrowed or even eliminated.
Privatizing Social Security is a bad idea. The recent Wall Street meltdown has shown that private investments can turn out to be problematic for the citizen approaching retirement age. Also, instead of 78 cents on the dollar the system might then only be able to pay an even more greatly reduced amount due to the elimination of some income to the system from current wage earners.
I think the problems with Medicare are an even bigger challenge then Social Security itself. Recently Congress has made the looming Medicare problem even worse by expanding promised benefits such as introduction of the prescription benefit. They have been adding fuel to the fire.
Why is it that no one wants to talk solutions? We all know Social Security isn’t working, but we refuse to deal with the real issue, instead looking for stop-gap measures so someone later on down the line can deal with the mess.
You mention “the next generation”, and there, I think, lies the key in freeing our country from the Social Security mess.
Some absolutes:
* Current seniors rely on SS for benefits, they paid into the system in good faith, and it would be the ultimate in scum baggery to deny to them what they paid for.
* A number of non-retired people have passed a “point of no return”; they have been counting on those benefits for a long time now and to ask them to start over would be wrong.
* There are plenty of young people who have plenty of time to retool and invest elsewhere.
My proposal?
1. Refund all of the money paid into Social Security by anyone 35 (age negotiable) or younger, plus a reasonable interest rate (perhaps a bond rate) These people will no longer pay into Social Security specifically.
2. Offer anyone 35-65 the option of receiving their money back. but exempt them from future benefits.
3. Determine the money necessary to fund the remainder of the people eligible for SS. Work it into the budget, cutting where necessary to meet the obligation.
4. Profit, as over time we will phase out a program that never should have existed in the first place.
#2, clarification… if someone accepts a payout, they no longer get the benefits of SS later on down the line. If they refuse a payout, nothing changes.
Chad P,
People are talking about solutions. It is just that the solutions they propose are unacceptable to you.
I guess that is part of the problem.
Take me for example. I look at all of your proposals as being attempts to destroy Social Security (as your #4 points out) and I find this to be completely unacceptable.
Social Security is one of the best things government ever attempted.
Little David,
“Social Security is one of the best things government ever attempted.”
Why is that you and so many think this way? Even if you ignore the fact of the programs deteriorating solvency, the program is still a raw deal. They take you money and earn a paltry 2% annual return or so your whole life. If you die at a younger age, the return is even worse, which includes most minorities on average, because the life expectancy is lower. With all of the money you pay every month, if it were used to by a private annuity you could have multiple times more money payed to you per month by the time you retire. Or even if you did put it in the stock market and even if you unwisely had all your money in stocks (your should have more bonds as you approach retirement) and you were retiring soon, even with the recent stock crash, you would still have more money then you would ever get with social security (if you had been saving your whole life). So what has SS done other then bankrupt our country? Take peoples money by force? Greatly reduce the return on that money, particularly for poorer people and minorities who on average don’t live as long? Destroy your ability to pass down wealth to your heirs which would help break the poverty cycle of many families by giving them a heads start on a education, home or business?
Do you like this program because it gives a small sence of security at the expense of your freedom and prosperity? Do I need to invoke a Franklin quote I’m sure you were fond of with regards to the Patriot Act? Or is it that you have a stroke of classical conservatism in you and are resisting change of social institutions solely for the purpose of not changing anything with the idea of maintaining order and tradition?
Social Security also includes disability coverage for you while you are young. Try factoring that into what your annuity will pay.
Hindsight is wonderful. People should have put their money into bonds? Gee, with hindsight that works as long as they invested in government bonds only and not mortgage backed bonds. As long as they didn’t invest in bonds issued by General Motors, Chrysler or AIG etc etc.
You’re complaining about the 2% return on Social Security? I am sure there are many investors that would trade in what they are left with (did they invest with Madoff and get wiped out) for that 2% sure thing.
I will repeat myself. Social Security is one of the best things government ever attempted.
Kenton,
Your short sightedness is making you miss the point. Even with this crash, over a 40+ year period (the time of your working career), the stock market has still averaged about a 7% annual return. With regards to bonds, I am merely pointing out that it is advised that as you get closer to retirement, you should phase more of your money into bonds and less into stocks. This is standard investment advise. In fact many 401k plans are automatically designed to do this, and if a substitute program were to replace SS, we could easily do that. And just as you diversify stocks, you diversify bonds and those as a whole have done relatively well over this recent period, greatly outperforming stocks. And then you still have the annuity option which guarantees a return if you prefer that. And we’ve know this for decades. Reagan even used it in his “time for choosing” speech in 1964. And I was referring to only the retirement portion of ss. Disability is something like 3/4 of a percent when the combined total employee and employer ss tax is about 14%. (Remember, the employer part would have been your wage in absence of the tax, so you are really loosing 14 percent of your wage.)
If your intent was to respond to me, you did not answer any of my questions. Why is it that you and others like social security so much? Is is the false sence of security you get or are you resistant to change? Or is it something else? I personally would wave all future retirement benefits from ss and medicare if I were able to keep just half of what i pay into it, because i would still be better off.
Oops,
Please do not blame Kenton for his (my) last post. I successfully posted under his name on a different thread to prove a point and thought I had fixed it so my future posts would go back under my name. I failed.
EJ,
While I am not an expert on bond markets, I am aware that currently Treasury Bills are being sold with a 0% return on investment. I doubt the rest of the bond market is so robust that it will deliver what you claim.
I have a solution.
Leave me alone and let me keep my money. If I don’t want to be involved in the tyrannical forced socialism that is better known as social “security,” then I have the right to remove myself.
Stop trying to rule my life with your continued failed government policies. A policy that says
“Give us your money when you’re 25 and 30 years old. We’ll hold it for you and loan it out in the meantime. IF we have it when you decide to retire at 65, then we’ll give it to you, at a substantially lower rate of return than if you invested it in stocks or bonds over the past 30 years.”
And we say… sure, thats fine.
You guys are focusing on numbers and percentages when you should be focused on individual freedom.
How about you give the government all of your money, and let me take my chances investing on my own? If social security is such a great concept, you can increase the amount the government takes from your paycheck each week and that will allow me to remove myself from this system of forced slavery.
Please let me know when you’ve contacted the IRS and completed the paperwork. I’ll wait to start investing until I hear back from you.
The bottom line question to all of this is: do any of us want to see this generation of the elderly, or any generation of the elderly homeless and starving? In a Christian nation? If the answer is no then we need to come up with some kind of a social net.
End the fractional reserve banking system, move to a social credit system whereby the amount of credit needed to purchase the excess products not needed for the use of the producing part of society is given out equally among the legitimate citizens should they have gainful employment. Wages would constitute credit grants against future production and the financial system would resemble more of an accounting and order structure instead of an exchange system. We have enough goods to supply everyone with a basic standard of living, there is no reason people should not be afforded that for the act of working 40 hours a week. How much harder a person works results in higher wages and more production and hence consumption. So long as adequate purchasing power exists huge economic growth is to be expected.
That was a paraphrase of something way more complicated than that paragraph does justice, google CH Douglas “Social Credit” for the entire book.
Mark, I don’t understand what being a “Christian nation” has to do with forcibly making people dependent on the government or making a great country into a nanny state. I would expect a truly “Christian nation” would encourage neighbors and families to assist the elderly and sick through the church and charity. But hey, I’m a Hindu so what do I know about America.
Christ. How many times do we have to go down this path? And really, this is a brilliant time to talk about what a great thing putting your entire life savings into the market is. You might be willing to make old folks suffer for this fairytale ideology of “Freedom!”, but I’m not.
MB, read EJ’s posts. (forgive the typos, he has a problem with that)
on the contrary, I prefer old folks to make their last years their golden years with real disposable income to spoil grandkids and travel all over the country in tacky Winnebagos instead of scraping for coupons to pay for pills and keep the lights on.
How about this, we should be a nation that gives a cr#$p about the elderly – you’d have them scrounging for cat food and living on the street, I guess I’d rather provide some dignity to the remaining days of those who came before us. But whatever, we all have to answer for our choices eventually…
what is so dignified about living off other people’s income when you could have been better off from your own earnings over a 40+ year career?
you mention folks living on the street. who do you think is better at taking care of the homeless? the govt or the Christian churches?
Christian Churches in NYC that are open for the homeless, oh wait did not the government force them to stop doing that…
You all keep suggesting solutions to a result of a problem. The problem is that seniors do not work so they do not have much money to live. The source of that problem is that our financial system is inherently inflationary. Fix the financial system and the need for social security ceases to exist. You fix the underlying cause, not solve the resulting problem.
LittleDavid,
So you’re willing to force future generations to pay 80% of their income to government to prop up a failed system? Could you explain to me how your position in any way reflects the republican creed?
I am absolutely trying to destroy social security… but I also want to pay those who paid into the system in good faith.
The government’s role isn’t to provide you with disability insurance. Considering that disability insurance (should you want it) is many times cheaper than Social Security (1-3% of your income to cover yourself reasonably well), you could buy disability insurance AND have plenty left over to invest… in bonds, stock, property, or beer.
In the spirit of real America, it would be your choice.
Steven Bierfeldt,
You stated:
“Leave me alone and let me keep my money. If I don’t want to be involved in the tyrannical forced socialism that is better known as social “security,” then I have the right to remove myself.”
You do not have that right. If you still think you have that right, and that you are being deprived of that right then take it to the courts.
The problem with your solution is that there will be some winners and some losers. Some who invest their money elsewhere will come out ahead and for every winner there will be a loser. I do not want to see, any more then necessary, 80 year old ladies thrown out into the street because they have no income.
What is paid out in social security, in most areas, is not enough to live on as it is. However it is enough that the elderly will at least have a small stipend they can contribute towards the household if they are forced to move in with their kids after they reach retirement age.
I’m going to continue to insist Social Security is one of the best things ever attempted by government. None of the comments by the naysayers has even dented my firm opinion.
Nearly everything is the best thing attempted by government, it is the implementation that always gets screwed up. That is how this country has been so corrupted, seemingly good ideas implemented in the most corrupt ways that are unseen by the electorate.
I find EJ’s posts entirely unpersuasive, Amit. Government has a solid role to play in ensuring that there is a standard of living floor under our elderly. It can provide assurance of that floor where markets won’t. That’s the sort of society I want to live in, and I’m willing to pay for it. Could I end up with more money in my pocket when I’m 70 by opting out? Maybe. But even if I did, it would leave me richer in a poorer society. No thanks.
Why do people keep going on about the lousy return rate on Social Security? Its not an investment, people, its insurance. You probably will get a better return on SS than your car insurance, another legally mandated insurance. Social Security is social insurance (or poverty insurance, in simple terms). It was intended to keep the individual out of poverty if the other two legs of retirement (personal savings and corporate pensions) somehow failed. If your personal savings was wiped out due to tradgedy, at least you still had your pension and SS. But then if the company you spent most of your working life for (a bygone employment model) collapsed and your pension vanished, SS was there to keep you off the street.
Of course, today, personal saving is at its lowest rate in decades if not longer. Those who do save likely do so mostly in stock portfolios. That’s one leg gone or tied to the stock market. With the creation of the Pension Benefit Guaranty Corporation as part of the Employee Retirement Income Security Act of 1974 (ERISA), the threat of pension loss was somewhat ameliorated. Of course, corporate pensions and other guranteed benefit programs have overall been phased out in preferrence of voluntary contribution 401(k)s and 403(b)s. All too many americans either underfund or opt-out entirely of these programs, often decreasing or suspending their contributions to weather a rough patch, and then never getting back in. And many of those that do contribute favor the high return of the more aggresive growth fund options. So thats two legs of retirement now either missing or tied to the stock market for most of America. Now you guys want to lop off the third, or tie it to the market as well? You look forward to hearing the sound of millions of Americans hitting rock bottom when that final leg is ripped out? Converting SS from a contribution mandated insurance program to a return-focused, market based, volutary contribution program ignores the very nature of Social Security, and corrupts it to nothing more than what its was created to insure against the loss of.
Yes there are funding issues. And perhaps there are more “private and choice focused” options that can and should be looked at to address the shortfalls. But the intent should be to supplement the program, not replace it. The base concept of a guranteed benefit social insurance program needs to remain intact, as the need for it certainly hasn’t vanished.
Max Shapiro,
If you do not like how government attempts are implemented then get involved and improve the implementation.
However remember that you are dealing with a whole lot of voters that are going to work against you when you attempt to destroy certain programs.
Destruction is not synonymous with improvement.
I am involved, the thing is people are so stupid that the only things they take into account are the issues the politicians and media bring up. The real issues are never talked about. Read any of my posts and you will see I always address exactly what is wrong and exactly how to fix it.
Jeremy Hilton,
“Why do people keep going on about the lousy return rate on Social Security? Its not an investment, people, its insurance”
It’s still a really bad insurance program because unlike insurance, where the firm invests the money in short term fixed investments, SS is a ponzi scheme, so their is not real return. An annuity is insurance, only a private one, and it pays out better. You can go and buy one right now that will guarentee you so much income per month when you retire.
If you are indeed worried about creating some saftey net, why can’t we have a system like welfare, foodstamps, medicare etc, where it is means tested instead of having a universal socialist system like SS where everyone must particpate?
How about this as just one possible idea? You pay a much lower percentage, maybe 1 to 2 percent or whatever is calculated to be needed. You are then required to put an additional x percent more of your pay into a 401k type account, where you will have some options between stocks, bonds, annuities, etc. Over the long run, the stock market goes up, where there are many more winners then loosers. For the minority percent that end up loosing or not doing as well, the small percent tax is used to garentee a floor on your account when you retire. But if the program is limited to buying diversified investmenets, this will be very few people, and will likely only be tapped in times like this when the market craches and your too old to wait for it to come back. In which case the lower tax in boom times is actually kept in a reserve fund or rainy day fund like many state governments actually have. The end result, is everyone has more freedom and the vast majority of people make much more money. The national savings rate goes up which has benifits in of itself and the governmnent’s fiscal situation improves. The only way this fails is if the entire economy collapses, in which case SS as is won’t be there either. What is wrong with some type of system that works like this? Must it be universally mandated and controlled?
EJ,
But it is not AIG that is bailing out the government, it is the government that is bailing out AIG.
So much for your answer of getting an insurance policy being rock solid without the intrusion of government.
EJ, if you re-index SS benefits to prices instead of wages (or somewhere in between), you would see an automatic reduction in the percentage of pre-tax dollars required to maintain the system. I doubt it would get to 1-2%, but it would decrease. You could then introduce a program like what you suggest to suppliment the return deficit. Initial funding would be on top of SS, but as SS contributions decreased from reindexing the benefits, overall mandated pre-tax contributions would likely decrease. It would have to be mandatory, but could be personal. I’d add some level of a refundable tax credit up front as a base contribution, with maybe more as a match for the initial level of contributions to encourage additional savings, something like Obama’s proposed variation on the Savers Tax credit. I’m against means testing on the backend as it can foster resentment and defunding(a progran for the poor is a poor progam), but on the front end it may be possible. It’s still possible (actually likely) you’d need to beef up SSI to make up the difference, though as thats again means tested it could face battles as well.
Little David,
You continue to avoid any of my points, you don’t answer questions and all you do is create strawmen. To address on of them, there are guarentees for insurance so even if the firm fails (AIG), your policy is still backed up. But this snark point on your behalf does not critique or argue against my points.
Jeremy Hilton,
Obama’s plan is not designed to reform of convert SS; it is designed to create more forced action on top of the existing program. With a mandatory system of savings (or to a lesser extent a coersed on based on credits) you have some control over your investments, but its still a restriction on your freedom and your options of investment and use of the money are restricted. For instanc,e what if you have a business idea? Money you could have used to help you start it, you are now forced to save i a pension program. Not onyl is thsi restricting your action, but it cuts down on eutreprenurial activity and business ivestment that drives the economy. Now this is better then the current system which destroys both your freedom and your money. However, Obama wishes to keep the existing structure in esence and take even more money that you currently have free reign with and restrict it by creating more “supplimental” mandetory savings. We already are forced to pay 14% of everything we make into a really bad pention program (your half and your employers. When the laws of supply and demand are applied to labor markets, the ocmponent your employer pays is what would have been your wage in absence of the tax). How much more must we be forced to give up?
Though I do agree one of the patches, if you are going to keep the same system in essence, would be to adjust it to prices instead of wages. Thats how most people think it works anyway, so it could be done politically and would helpt he problem somewhat, thogh I doubt it would ever turn into lower tax rates; they just might not increase as much int he future.
Until the factions that use SS as a tool for political power(this is why FDR implemented it in the first place) are defeated politically, all this talk of reform is moot. Conservatives are going to have to buckle down and work to specifically defeat politicians that will never vote for anything resembling a reform or abolition of Social Security. In fact, we are probably getting ready to see the biggest socialist push for creating dependency on govt handouts since the Great Depression.
just my humble opinion
EJ,
I mentioned Obama’s plan only as an example of a govt matched contribution, thats the only scope. And your complaint about increasing the tax burden for a new program would be offset by the reduced contributions to SS as a result of the reindexing. Adjust the benefits, and the contributions will follow. As a whole, pre-tax contributuions would likely go down. As for entrepreneurship, any social safety net dimishes entrepreneurship, by reducing need. But even with our current SS system, we have one of the most entrepreneur driven economies. You want to reduce the bar for startups, structure the new plan with govt in lieu of employer contributions, or a phase in match based on corporate size. Different metrics for self-employment contributions could be done as well. There are all sorts of options.
EJ, also the labor market is much more complex than standard supply and demand laws, look at the effeciency wage model. If you scrapped all payroll taxes today, i doubt you’d see an equal transfer of wealth to the worker.
EJ,
Here’s another snark point from me.
You said:
“…there are guarentees for insurance so even if the firm fails (AIG), your policy is still backed up.”
Oh beautiful. How many billions of tax payer dollars did it take to back up the AIG issued insurance policies that they could no longer cover? Isn’t that why the government had to step in?
http://blogs.indystar.com/varvelblog/12182008.jpg
Do you think highest rates certificates are also responsible for that?
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