Is Social Security a Ponzi Scheme?
marginalrevolution.com
marginalrevolution.com
An so wee have had an intentionally undefended SS-Retirement fund the last 40+ years of the Republican controlled congress, that mostly had the Republican Congressional Majority overlapping many Democrat Controlled executive office tenures! And so Social Security does not work By Republican Party Anti New Deal design, before and especially since 1980!
The Social Security 2100 act needs to get passed so that no low wage retiree gets a SS-Retirement check that's below 100% of the federal poverty level and that Republican Tax Cut for the most wealthy and Corporations in the US needs to be allowed to elapse to pay for that. And really the Corporate Tax Rates in the US needs to be returned to the same levels that they where when Eisenhower was POTUS and to fix the 40+ years of Republican Party intentional underestimating the proper SS-Withholding amount to properly fund Social Security!
> 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)!
I checked this using my work history. I download my wage history from ssa.gov, downloaded the payroll tax history from somewhere, and download one year T-bill rates over my working lifetime so far.
It turns out that if the payments from me and my employer had been used to buy one year T-bills, and when those matured they had been rolled over into new one year T-bills, the amount that would be there now would be enough to pay my SS benefit if I started collecting now (2 years before full retirement age) for around 17 years, which happens to be around the life expectancy of a male my age. That's assume the T-bills stop rolling when I start collecting and so there is an uninvested lump sum of cash. Keep rolling over to new T-bills and it can cover several years beyond my life expectancy.
That suggests that at least for workers with salary history similar to mine you could actually have a sound system--we are contributing enough that it should be possible to cover our benefits.
I'm pretty sure this is just a coincidence. People who made more than me would also likely find results similar to mine, but people making substantially less would probably find their benefit exceeds what their contribution could cover.
That's because your monthly SS benefit depends on what your "averaged index monthly earning" (AIME). That's the average you earned a month during your 35 highest earning years with each year indexed to current dollars. The method to go from AIME to monthly benefit amount looks like this (with the specific numbers depending on what you you become eligible to start receiving benefits):
90% of the first $1000 of your AIME +
32% of the AIME over than but less than $6000 +
15% of the AIME at or above $6000
SS as a system is basically break even, returning the same amount of money adjusted for inflation. This is obfuscated by the fact it also redistributes that money and population dynamics.
* https://en.wikipedia.org/wiki/Canada_Pension_Plan#1998_refor...
A good book on how it happened is Fixing the Future by Bruce Little:
> While the deficit battles have been recounted many times, the story of the reform that rescued the CPP has gone almost entirely untold. In Fixing the Future, Bruce Little explains the CPP overhaul and shows why it stands as one of Canada's most significant public policy success stories, in part because it demanded an almost unparalleled degree of federal-provincial co-operation. Providing an overview of the CPP's entire history from its beginning in 1965, Little pulls together published, and new unpublished, material relating to the CPP reform, and interviews over fifty politicians, government officials, and others who were deeply involved in the reforms for their recollections, insights, and observations.
* https://utppublishing.com/doi/book/10.3138/9780802095831
It is now a hybrid systems: some component of benefits are PAYGO, but a portion are invested in capital markets (and private equity, by owning things like ports and highways). The investment component is run by an arms-length entity with board members being appointed by the feds and provinces:
* https://en.wikipedia.org/wiki/CPP_Investments
There were further reforms in 2017.
Fun fact: it's actually harder to amend the CPP Act than the Canadian Constiution.
To me it points to deeper issues of the use of a fairly inflationary currency. There is no lasting governmental fix to be expected because governments inevitably always dilute their currency.
The imminent collapse of Social Security has been just ahead of us for roughly as long as fusion energy and flying cars have been… while I agree it’s unstable, it’s been sustainable thus far and the imminent tipping point keeps being slightly further off than predicted by everyone with an opinion.
In this case, Stein’s Not-Very-Well-Reasoned-Aphorism conflicts with the Halting Problem, which has formally proven that it’s impossible to know if any given computational process halts once it’s begun.
Social Security is, inherently, a computational process. Moreover, it’s a process the source code of which can be changed (and has been changed) during its runtime… we can’t assume it’s unsustainable except given other conditions that are all three of dynamic, stochastic, and unpredictable.
We do have a pretty good idea of what the demographic trends are: a baby boom, followed by a baby bust. That was why we moved from Social Security as a pay-as-you-go program to having a Trust Fund. We knew when the Trust Fund would top out, with more money going out than coming in (i.e. right about now), and how long it would take to deplete (i.e. roughly a decade).
Life spans have not radically increased. They have slightly decreased, extending the fund a couple of years.
But it's actually the least of our problems. That "trust fund" isn't a pile of money. It's just Treasury Bills. The government "borrowed" the money, and is now having to pay it back. That means we're going to have to either cut the budget dramatically, raise taxes, or borrow from somebody who will give us a worse interest rate than... uh, ourselves.
So indeed, the ~2034 date for the Social Security failure is something of a red herring. But only because it's actually worse than that.
But simply uncapping the tax without other reforms is probably the easiest short-run solution.
from the political perspective, I suppose there is a pretext/misconception that social security is self funded on an individual basis, when payments are already extremely progressive, with higher earners subsidizing the low.
The high bend point already diminishes additional benefit for additional contribution nearly to zero.
Someone's last 50k of SS taxable income is already returning only 20% of their first 50K of SS taxable income.
More specifically, below the first bend point, recipients get 90% of their average taxed income. After the last bend point, they are getting 15% of their marginal taxed income . 15% doesn't leave much room for additional reduction bend points.
The pay-as-you-go idea never anticipated a baby boom and baby bust, but a trust fund wasn't a good solution, either. It just obscured the fact that it was a tax increase on the lower and middle classes.
Water under the bridge, now. The fact is that social security is an entitlement. If the SS budget does not have enough money to pay it, the government is in violation of the law. The money will come from the general fund, and it will be raised by either taxes or borrowing.
Its a wealth transfer regardless of how what you name the pockets the funds pass through on the way to effecting it, another rotation of the names is irrelevant to the function of the solution. The issue is where you get the money (through additional revenue, reduced other spending, or additional debt) to pay for the stabilization, and I think additional revenue in roughly this manner is one of the better ways to do this (I'm actually fine with stopping calling it a separate tax and fund, rolling this tax into income tax, and also making the income tax apply to all income, including capital gains, gifts, and inheritances, equally, and also allowing both voluntary recognition of income for tax purposes in advance of earning/realization and allowing certain taxable events -- especially isolated capital gains windfalls and inheritances -- to be recognized for tax purposes over a period of several years after they occur, but that's getting farther and farther off the immediate topic of funding of Social Security, though the whole set of ideas is interconnected though they aren't all strictly dependent on each other.)
And that was 45 years ago.
It's a mystery to me what it is about social security the makes the over class who don't pay squat into it so absolutely enraged by it. It drives them absolutely apeshit and I don't get it.
They clearly:
1. Do not want us to be poor (or see the effects anyway.)
2. Don’t know the history of shanty towns and almshouses in our nation.
3. Don’t know the difference between the SSI Trust Fund, vs SSI policy.
Otherwise the path forward would be patently obvious, remove the cap and increase payments to match inflation. I’d personally roll up 401ks into voluntary additional contributions that are accessible to anyone regardless of employment status.