Social Security is Not a Ponzi Scheme, Mr. Perry

[saveliberty]

I love how you guys are ignoring Greece right now. Know why they are in such dire straights? Guaranteed pension benefits. The whole country is poised for default. So to all of you that have no problem with a trust fund with no actual cash in it and interest that has yet to be paid out, wake up.

 

[Toro]

Someone still needs to explain to me how, if there is all this trust fund money still around and the system is so solid, that President Obama would make the kind of statement he did during the debt cieling crisis.

How is it possible that he could not be sure SS checks would be in the mail if the system is safe for the next 25 years.

Looking for some help !!!

The trusts don't own marketable bonds. Nothing can be sold. Instead, you have an account in the trusts in your name which is credited with your contributions and deemed interest.

It's like me borrowing from you except that I give you my word. You can't sell my word to anyone but I still owe you money.

The critics of SS argue that it is a pay as you go system. From an operational standpoint, that is correct. Money coming in is used to pay money going out.

If SS were a real pension fund, money coming in would be used to buy bonds, and bonds would be sold or redeemed to fund money going out. But SS effectively cuts out the middleman and skips the buying and selling of bonds, and instead credits and debits accounts as if it were buying and selling bonds in the trusts. This is why people say SS is an accounting gimmick or there's nothing there. It's because SS is structured like a bond fund but it isn't a real one. Practically, SS is a pay as you go system.

But the economics of the SS trusts are exactly like a government bond pension fund. It works the same way. The critics say "you can't sell assets" for when we have incidences like the debt ceiling debacle. That's true. But the flip side to that is by selling bonds to fund the payout, you would lower the assets in the trust, making it more underfunded, requiring it to raise contributions in the future. It's this kind of shit that politicians play at the state level with government workers pension funds. One could argue that by SS not being a real pension fund, it ties politicians hands and does not allow them to play games like selling assets to pay recipients which just have to be paid for by later generations.

 

[Toro]

I love how you guys are ignoring Greece right now. Know why they are in such dire straights? Guaranteed pension benefits. The whole country is poised for default. So to all of you that have no problem with a trust fund with no actual cash in it and interest that has yet to be paid out, wake up.

That is not the only reason why Greece is on the brink but it is one.

 

[JakeStarkey]

I love how you guys are ignoring Greece right now. Know why they are in such dire straights? Guaranteed pension benefits. The whole country is poised for default. So to all of you that have no problem with a trust fund with no actual cash in it and interest that has yet to be paid out, wake up.

That's one reason, but not the only one, and you have not shown it to be the major one.

As an alternative, if all regulation of business had been removed, the working people of Greece would be in a horrible situation.

saveliberty, address the whole issue. You can begin with the stupid government investment in our stupid mortgage bundled offers; you can add on extensive pension benefits if you wish; but you will have to show, without the failed bundled mortgage securities, that that government would be in the same fix.

 

[Bfgrn]

I love how you guys are ignoring Greece right now. Know why they are in such dire straights? Guaranteed pension benefits. The whole country is poised for default. So to all of you that have no problem with a trust fund with no actual cash in it and interest that has yet to be paid out, wake up.

Anyone who compares Greece to the United States should not be allowed outside after the street lights go on.

 

[boedicca]

Paul Krugman thinks it has Ponzi Game Aspects (which is one of those, if it quacks like a duck things):

Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in).

And Paul Samuelson thinks it is a Ponzi scheme:

Social Security is a Ponzi Scheme that Works

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in — exceed his payments by more than ten times (or five times counting employer payments)!

How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population. More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.

Is Social Security a Ponzi Scheme?


Given how the lefties kowtow to Krugman and Samuelson, they should support Perry's assessment of SS.

 

[flacaltenn]

fecaltenn is full of shit.

If you don't know the difference between T-Bonds and IOUs "backed by the full faith and credit of US" it's not my fault.. NOTHING gets redeemed from the Trust without NEW DEBT being issued. That's a true statement.

You can believe in every bookkeeping gimmick that the US Govt feeds you.. You can believe that "a budget cut" is a reduction in phoney projected increases. You can believe that "a program is paid for when you are actually financing it over 10 years".. There are plenty of slick lies and misrepresentations out there that politicians are proposing to cover their tracks.

You want to call me FOS?? Let's see....

Lakhota:: WHO PAYS that phoney interest on "the Trust Fund"?

Lakhota:: Why did Obama say "he didn't know" if Soc Sec checks would go out during the recent standoff?

Lakhota:: Do you really think that you'll recognize you'll precious program when the left is done uncapping, means testing, raising the retirement age, ect.

Lakhota:: Do you realize that EVERY ASPECT of the program is NOT guaranteed? Including your "right" to recieve any benefits? Do you really trust the "clown college" that much?

Maybe it's you -- that's FOS....

 

[Toro]

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. A pay-as-you-go system can be visualized as a simple pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end.

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 retiree, 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.

Social Security Online - HISTORY, Ponzi Schemes vs. Social Security

 

[Bfgrn]

Social Security, Medicare and Medicaid are the VERY BEST of what We, the People's government does for We, the People.

If Social Security were eliminated, the poverty rate would go from 10% to 48%. Do ANY of your right wingers EVER include a penny of human capital in your calculations? The answer is apparent....NO. With any of your radical social engineering some group of human beings must always just evaporate.

"The legitimate object of Government is to do for a community of people whatever they need to have done but cannot do at all, or cannot so well do, for themselves in their separate and individual capacities. But in all that people can individually do as well for themselves, Government ought not to interfere."
President Abraham Lincoln

 

[Toro]

Paul Krugman thinks it has Ponzi Game Aspects (which is one of those, if it quacks like a duck things):

Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in).

And Paul Samuelson thinks it is a Ponzi scheme:

Social Security is a Ponzi Scheme that Works

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in — exceed his payments by more than ten times (or five times counting employer payments)!

How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population. More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.

Is Social Security a Ponzi Scheme?


Given how the lefties kowtow to Krugman and Samuelson, they should support Perry's assessment of SS.

From the book with the Samuelson quote

The problem with the Ponzi scheme is that it quickly exploded beyond the capacity of any society to keep it going. ...

The future obligations under a system of the sort Ponzi devised simply compounded beyond the capacity of the economy to support it.

This is important. Ponzi was a fraud because there was no economic foundation upon which to support the scheme. If you want to call SS a pay-as-you-go system, or a wealth transfer mechanism, that is all true. But a Ponzi Scheme is one in which there is no economic basis for the returns. That is different from SS, which is based upon the claims to the economy. As long as the economy grows, and the demographics are stable, then the system is sustainable forever. That is not true of a Ponzi Scheme. It may be that changes to demographics requires changes to the system, i.e. people are living longer so we should up the retirement age, but that doesn't mean the system is a fraud.

 

[flacaltenn]

Toro:

I'll give you an example. Lots of people say that "The SS trusts are just filled with IOUs." Never mind that all bonds and debts are merely IOUs with different legal standings, that doesn't change the economics and cash flows of the funds. Let's say I borrow money from you. We can do it two ways. I can promise to pay you back (an IOU) or we can write a contract saying I will pay you back (a bond). Then I pay you back. Between the time when I've borrowed money from you and the time I've paid you back, in the first scenario, you have my promise, the second, you have a bond. That doesn't change the cash flows and economics of the transaction. The only difference is the legal standing of the asset and liability and perhaps the liquidity.

The part you're missing here is there is no "me and you".. The folks who paid EXCESS into FICA created the accounting gimmick of a "trust fund". A "pay as you go" transfer from current workers to past workers does not REQUIRE a "trust fund". That's the way it worked for 30 years except for the SS surplus.

Now the same folks who made those excess contributions that were stolen are the same "me and you" that are on the hook for the missing money, the phoney interest, and the financing charges for generating debt instruments to cover the FICA shortfalls.

They KNEW that excess was the only way to cover future liabilities. And they mismanaged it. They used the fictional accounting to keep almost $3Trill of debt off of the General Accounting books. Deferred it without ANY vehicle of investment that doesn't involve MORE taxpayer contributions.

To equate THAT to a bond fund where there are 2 distinct parties taking risk and reward into account is just too simplistic..

 

[Toro]

I think this is exactly right. All financial assets are claims against something. All financial assets rely on a growing economy to be fully funded. A declining economy will mean declining stocks, bonds, real estate, commodity prices, and SS obligations.

Consider something that nobody says is a Ponzi scheme — your 401(k). What happens here is that you work while you’re working age. You earn money. You take some of that money to buy shares in firms. Your expectation is that at a future date when you’re not working anymore, you’ll be able to exchange those shares for money. More money than you paid for them in the first place. Why would that work? Well, it could work because you were just stupendously lucky. But the reason we anticipate that it will work systematically is that we anticipate that there will be economic growth. In the future, people will in general have more money, so assets will be more valuable. Save today, sell tomorrow.

Social Security is not a prefunded pension plan or a savings scheme. But it’s actuarial situation is just the same as a stock market investment in this regard. If future economic growth is lower than anticipated, it will be impossible to pay the anticipated level of benefits. On the other hand, if future economic growth is faster than anticipated, it would be possible to pay even more benefits than had been promised. As it happens, over the past 25 years economic growth has been slower than was anticipated a few decades ago. This does create a financial problem for Social Security. But it’s the exact same financial problem as exists for private sector savings schemes. But neither Social Security nor being mildly over-optimistic about your stock picks is a “Ponzi scheme.” A Ponzi scheme is a fraud where in the end the whole pyramid goes bust a bunch of people wind up with no money at all. The absolute only reason Social Security could ever go bust like that would be if elected officials decided they wanted to stop paying benefits.

Social Security Is No More A Ponzi Scheme Than Is Anything Else That Relies On Future Economic Growth | ThinkProgress

 

[boedicca]

Paul Krugman thinks it has Ponzi Game Aspects (which is one of those, if it quacks like a duck things):

Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in).

And Paul Samuelson thinks it is a Ponzi scheme:

Social Security is a Ponzi Scheme that Works

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in — exceed his payments by more than ten times (or five times counting employer payments)!

How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population. More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.

Is Social Security a Ponzi Scheme?


Given how the lefties kowtow to Krugman and Samuelson, they should support Perry's assessment of SS.

From the book with the Samuelson quote

The problem with the Ponzi scheme is that it quickly exploded beyond the capacity of any society to keep it going. ...

The future obligations under a system of the sort Ponzi devised simply compounded beyond the capacity of the economy to support it.

This is important. Ponzi was a fraud because there was no economic foundation upon which to support the scheme. If you want to call SS a pay-as-you-go system, or a wealth transfer mechanism, that is all true. But a Ponzi Scheme is one in which there is no economic basis for the returns. That is different from SS, which is based upon the claims to the economy. As long as the economy grows, and the demographics are stable, then the system is sustainable forever. That is not true of a Ponzi Scheme. It may be that changes to demographics requires changes to the system, i.e. people are living longer so we should up the retirement age, but that doesn't mean the system is a fraud.

So what you're saying is that SS is not a Ponzi Scheme because the government can force unwilling participants to continue to contribute to it against their wills.

IMO, that makes it even less moral than a Ponzi Scheme.

 

[Toro]

Toro:

I'll give you an example. Lots of people say that "The SS trusts are just filled with IOUs." Never mind that all bonds and debts are merely IOUs with different legal standings, that doesn't change the economics and cash flows of the funds. Let's say I borrow money from you. We can do it two ways. I can promise to pay you back (an IOU) or we can write a contract saying I will pay you back (a bond). Then I pay you back. Between the time when I've borrowed money from you and the time I've paid you back, in the first scenario, you have my promise, the second, you have a bond. That doesn't change the cash flows and economics of the transaction. The only difference is the legal standing of the asset and liability and perhaps the liquidity.

The part you're missing here is there is no "me and you".. The folks who paid EXCESS into FICA created the accounting gimmick of a "trust fund". A "pay as you go" transfer from current workers to past workers does not REQUIRE a "trust fund". That's the way it worked for 30 years except for the SS surplus.

Now the same folks who made those excess contributions that were stolen are the same "me and you" that are on the hook for the missing money, the phoney interest, and the financing charges for generating debt instruments to cover the FICA shortfalls.

They KNEW that excess was the only way to cover future liabilities. And they mismanaged it. They used the fictional accounting to keep almost $3Trill of debt off of the General Accounting books. Deferred it without ANY vehicle of investment that doesn't involve MORE taxpayer contributions.

To equate THAT to a bond fund where there are 2 distinct parties taking risk and reward into account is just too simplistic..

Whether or not it requires a trust fund, or if there were excess contributions paid, or whatever, misses the point. SS works like how a government bond fund works. If you set up a government bond fund that bought and sold government bonds, the cash flow and economics would work the same as the system is set up now.

I have repeatedly said that SS is a bad system and should be changed. But it is not a Ponzi scheme.

 

[JakeStarkey]

Boedicca should give the complete comment: "In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today's young may well get less than they put in)."

In other words, any Ponzi-like effects will go away, according to Krugman (writing in 1996 ~ did she tell us this was 15 years old?), and did she mention that in the very next paragraph Krugman describes Freidman's policies of being flatly redistributionistic.

So, (1) according to Krugman FIFTEEN years ago, any Ponzi like effects will be remediated, and (2) Friedman is a redistributionist.

In other words, Boedicca, on this issue, can be ignored.

 

[Toro]

So what you're saying is that SS is not a Ponzi Scheme because the government can force unwilling participants to continue to contribute to it against their wills.

IMO, that makes it even less moral than a Ponzi Scheme.

No, I'm saying SS is not a Ponzi scheme because there is an economic basis for the system, unlike a Ponzi scheme which is economically unsustainable.

Your argument is whether or not there should be any government retirement system. That's a different argument. I think there should be, but people should be given the choice in what they wish to invest. And if they want the government to invest for them, it should be run like a real pension fund, not like it is today.

For the critics who say its just a way to finance government spending, that is true, which is why some in government would resist turning it into a real pension fund.

 

[candycorn]

Toro:

I'll give you an example. Lots of people say that "The SS trusts are just filled with IOUs." Never mind that all bonds and debts are merely IOUs with different legal standings, that doesn't change the economics and cash flows of the funds. Let's say I borrow money from you. We can do it two ways. I can promise to pay you back (an IOU) or we can write a contract saying I will pay you back (a bond). Then I pay you back. Between the time when I've borrowed money from you and the time I've paid you back, in the first scenario, you have my promise, the second, you have a bond. That doesn't change the cash flows and economics of the transaction. The only difference is the legal standing of the asset and liability and perhaps the liquidity.

The part you're missing here is there is no "me and you".. The folks who paid EXCESS into FICA created the accounting gimmick of a "trust fund". A "pay as you go" transfer from current workers to past workers does not REQUIRE a "trust fund". That's the way it worked for 30 years except for the SS surplus.

Now the same folks who made those excess contributions that were stolen are the same "me and you" that are on the hook for the missing money, the phoney interest, and the financing charges for generating debt instruments to cover the FICA shortfalls.

They KNEW that excess was the only way to cover future liabilities. And they mismanaged it. They used the fictional accounting to keep almost $3Trill of debt off of the General Accounting books. Deferred it without ANY vehicle of investment that doesn't involve MORE taxpayer contributions.

To equate THAT to a bond fund where there are 2 distinct parties taking risk and reward into account is just too simplistic..

Whether or not it requires a trust fund, or if there were excess contributions paid, or whatever, misses the point. SS works like how a government bond fund works. If you set up a government bond fund that bought and sold government bonds, the cash flow and economics would work the same as the system is set up now.

I have repeatedly said that SS is a bad system and should be changed. But it is not a Ponzi scheme.

It seems as though anytime you try to inject a shade of gray into any debate around here, you get slammed as being a yin or yang.

Doesn't bode well for the country if this is the case outside of this forum.

 

[flacaltenn]

You do understand that's how SS makes interest on the money, right?

Yes I do

Now pay close attention........................................

Government - Interest Expense on the Debt Outstanding

Refute it if you can!!!

The interest earned on the trust fund in 2010 was 108 billion.

2011 Trustees Report: Section IV.A, Short-range estimates

Where did that interest come from? The same taxpayers who already were OVERCHARGED for their FICA.. It comes from nowhere else..

"interest earned on the trust fund" -- no -- mindless cover-up of mismanaging the program.. YOU get to pay twice... AND you forced poorer workers to absorb an additional 3% or so of taxes on their income for the past 30 years with no CASH benefit to show for it.

"I'd gladly pay me Tuesday for a hamburger today" I'll throw in the fries for "interest".

 

[saveliberty]

I love how you guys are ignoring Greece right now. Know why they are in such dire straights? Guaranteed pension benefits. The whole country is poised for default. So to all of you that have no problem with a trust fund with no actual cash in it and interest that has yet to be paid out, wake up.

That is not the only reason why Greece is on the brink but it is one.

No, certainly not the only reason. I find it sadly true, that some parties here do not remember how close we came to a default here just a month ago. Also, that we have not agreed to what will constitute the spending cuts in order to meet our obligations. Sticing your head in the sand and pointing at Republicans is not going to fix any of this.

 

[flacaltenn]

Toro::

But the economics of the SS trusts are exactly like a government bond pension fund

In that case -- it's a good deal because the govt PROVIDES value up front by placing the bond into the pension fund (in lieu of cash or riskier value). The EMPLOYEES did NOT pay full value for that asset. In fact, in general they might have paid NOTHING for it. It's an asset. No assets to show for the Stolen FICA funds that were FULLY PAID FOR by the taxpayers -- only debt. Debt that the taxpayers have to cover.