
Social Security: The Biggest Ponzi Scheme on Earth (By Milton Friedman) - chaostheory
http://www.hoover.org/publications/digest/3512061.html
======
mattmaroon
It's not really a Ponzi scheme. A Ponzi scheme pays interest to attract
investors so it needs significantly more customers with each iteration.
Madoff's infamous one paid out 12% annually, so it needed to grow by 12% each
year just to achieve stasis (or it would have if cash outs equaled profits
anyway, some years it was probably more or less).

Social Security isn't a Ponzi scheme because it would work perfectly well if
the population remained stable over time, or shrank. And it would even be
alright if it grew slowly and linearly.

What really throws a wrench in the cogs is when the generation retiring is
much larger than the ones still working, especially the one or two before it.
This is why the Baby Boomers leaving the work force is so problematic.

The good news (in a sick sort of way) is that our diet and health care are so
bad that we save a little due to lifespans actually shrinking. People
mistakenly attribute the problem to longer lifespans, but the expectancy of a
working-age adult (the only group that matters for the purposes of
entitlements) has barely budged since before Social Security was invented, and
is now quite possibly shrinking. Lifespan from birth (as it is typically
expressed) has risen almost entirely due to lower infant mortality.

~~~
chaostheory
the main problem with Social Security isn't really changes in population size
(though it still is a problem). The core problem of Social Security is this:

"Taxes paid by today’s workers are used to pay today’s retirees. If money is
left over, it finances other government spending—though, to maintain the
insurance fiction, paper entries are created in a “trust fund” that is
simultaneously an asset and a liability of the government. When the benefits
that are due exceed the proceeds from payroll taxes, as they will in the not
very distant future, the difference will have to be financed by raising taxes,
borrowing, creating money, or reducing other government spending."

Basically politicians (of both parties) raid the Social Security fund and just
leave IOU notes behind to fund their pork projects. If the money was
untouchable and only used for Social Security, the problems we'd see with just
population changes wouldn't be nearly as bad... hence (I could be wrong but I
feel) this is one of the core arguments that Social Security is a Ponzi
scheme.

~~~
mattmaroon
No, that is entirely incorrect. The government borrowing from SS is no
different than them borrowing from the Chinese, either way it has to be
repaid. At least this way the interest is going to Americans. Government
borrowing itself may be a problem, but it's an entirely separate one.

The kicker is the first sentence. Today's workers pay today's retirees. The
payments are designed to ensure a consistent, inflation adjusted standard of
living for retirees. If the ratio of retirees to workers stayed the same, the
payments would. But when there fewer retirees per worker, workers pay less,
and when there are more, they pay more. It's the system's fatal flaw.

The problem now is that baby boomers paid much lower Social Security taxes
than us, but they still need to receive the same standard of living that we
will. You can see the historical rates here:

[http://www.taxpolicycenter.org/taxfacts/Content/PDF/ssrate_h...](http://www.taxpolicycenter.org/taxfacts/Content/PDF/ssrate_historical.pdf)

They paid a lower % with a much lower cap, even adjusted for inflation. They
did so because the retiree to worker ratio was lower. If they paid the same
percentage and cap that we do now, Social Security would be sitting on enough
money to cover the shortfall in the future.

In 20 years, that ratio will be much higher than today, meaning the workers of
2018 would have to pay far higher taxes still for the system to fund itself.
This would, of course, be unbearable (it's already close) so the government
will have to seek other solutions, such as borrowing money or printing.

~~~
byrneseyeview
_The government borrowing from SS is no different than them borrowing from the
Chinese, either way it has to be repaid._

I'd like to offer you an annuity. Here's how it works: you give me about 15%
of your paycheck every year, and I spend the money on whatever I feel like. I
replace it with a piece of paper that says "Dear Byrneseyeview: Please tender
to the bearer -- Byrneseyeview -- an amount equal to the sum borrowed)." See
how this 100% foolproof scheme might break down?

~~~
mattmaroon
Here's 2 scenarios.

a) Government borrows $4 trillion from the Chinese at 2% annually.

b) Government borrows $4 trillion from Americans, by way of Social Security,
at 2% annually.

What's the difference in what the government owes after 10 years? Either way
the government has to raise $4 trillion (plus interest) in taxes, borrow it,
or print it to pay it off. Either way everyone is in the exact same boat,
except in boat b, Americans get the interest. In boat a the Chinese do.
(Unless you count borrowing from the Chinese, leaving the Social Security
money in a CD, and defaulting to on the borrowed money while paying out SS an
option, which it isn't.)

I wasn't suggesting that government borrowing is not a problem. It is. They
probably should just not borrow the $4 trillion from anywhere. But that's just
a different issue that has nothing to do with Social Security, as many
economists have pointed out.

~~~
byrneseyeview
The problem is not with the borrowing; the problem is that Social Security's
asset base consists of the government's ability to borrow money. It is usually
a really bad sign when someone says "I totally can't pay off this loan, but I
know this guy who is willing to lend me more money because he has no idea how
financially irresponsible I am."

~~~
mattmaroon
No, the problem is with the borrowing. When our nation borrows that much,
everyone's asset base consists of the government's further ability to get
money (by borrowing, printing, etc.). That's the way free floating currency
works. Having to print $4 trillion to put the money back in Social Security is
the same to every American as having to print $4 trillion to give to China.

------
gislebertus
As a long-time entrepreneur, I'm concerned most about a market: are there
people able and willing to buy what I'm selling?

Social Security helps with the "able" part, by making sure that no American
lives in abject poverty if they're old or crippled.

Before Social Security, this was a big problem. About a quarter of Americans
lived in poverty, and about half of old people.

More people with more money to spend means a bigger market for whatever I'm
selling. That's why Social Security is good. That's why markets are bigger in
places with lots of Social Security-type programs (Europe, the U.S.) than in
places without them (South America, Africa).

Social Security also helps make it possible for me to be an entrepreneur. I
know that I can take risks and not plunge my family into abject poverty if I'm
crippled and can't work.

Why did I write about Conservatism in relation to this article? Because when
someone is attacking Social Security, it's almost always as part of a larger
political agenda they're promoting: Conservatism.

This article was from the Hoover Institution, a politically Conservative
organization that pushes to eliminate New Deal programs like Social Security
(not just SS). They also push for unregulated markets, and flat or regressive
taxes. So does the American Enterprise Institute. So does the Heritage
Foundation.

These groups call themselves "think tanks," which implies objective research.
Unfortunately, they aren't averse to pushing false information or abandoning
their principles to promote their interests.

For example, For example, the Heritage Foundation sharply criticized
Malaysia's government for years. After a consulting firm owned by Heritage's
president began representing Malaysian business interests, Heritage
assessments of Malaysia turned positive.
(<http://thinkprogress.org/2005/04/17/money-talks-at-heritage/>)

~~~
antiismist
I'm not sure why you are writing about the Heritage Foundation or
"Conservatism": Milton Friedman is a classic liberal
(<http://en.wikipedia.org/wiki/Classical_liberalism>), so it's a strange
vicarious ad hominem attack.

His laissez-faire ideas have been extremely influential and have a stunning
track record of success where they have been used.

~~~
tptacek
I don't think you can, with any intellectual honesty, call Milton Friedman a
"liberal" economist without pointing out that you're using a different
definition of the term than the mainstream. If he's a "classic liberal", he's
also an "anti-progressive".

~~~
antiismist
Isn't that what I did by busting out with the wikipedia link?

~~~
tptacek
No.

------
spkthed
It may not technically be a Ponzi scheme but it is in effect. If you're not
able to take out what you put in, you're losing money. If you work 40 years,
putting in 12% of your salary (companies have to pay it, otherwise it would be
part of your salary) you should get all that 12% back for 40 years. Since most
people don't live to 108, SS pays very low monthly payments and pays back
about half of a lifetime.

If you die however, you don't. Sure there's exceptions but... you can do
better on our own. Mutual funds, Money Market accounts... heck, even bonds and
CD's would enable you to pass it down. In addition, from 15 on, 12% of your
income even if you only make $8 an hour for 52 years and only invest it in
something that nets 10% would easily make you a multi-millionaire. You could
retire comfortably and still pass it down.

Since we're facing massive shortfalls, isn't that about the same as a Ponzi
scheme?

Also, I've been reading this site for probably close to a year. I greatly
appreciate having intelligent people post comments. Sites like Digg or Reddit
not only have very biased commenters, they also usually only parrot whatever
HuffingtonPost or Keith Olbermann said the night before. It's mindless.

Intellectual comments, even if they're not ones I agree with are interesting
to read. Kudos to you guys!

~~~
tptacek
First, the words "ponzi scheme" don't mean "anything where you put X in and
get X - n out."

Second, Social Security isn't an investment program. The goal of Social
Security is to provide each generation of retirees with a baseline level of
income. It has succeeded at this task.

Third, we're not facing massive shortfalls. We raised taxes on the baby
boomers in the early '80s to build up the social security trust fund to pay
for their retirement. As it stands, social security is a small part of the
entitlements problem moving forward --- Medicare has more than 7 times its
liabilities in the projected future.

Fourth, this "small payments" thing is a myth. 2/3rds of Social Security
beneficiaries derive more than half their income from Social Security; more
than 1/3rd of them derive the overwhelming majority of their income from it.

~~~
dantheman
There is no such thing as a social security trust fund. The government uses
that money to fund other programs and puts IOUs in there; that means when more
are receiving than contributing there will be a massive tax burden on those
contributing they get hit with both their normal SS tax, plus the taxes to
cover the shortfall.

~~~
tptacek
If there's no such thing as a social security trust fund --- in which case,
Reagan and Greenspan's baby boomer FICA tax hike was a huge scam --- then
there's no social security crisis. There's just a general budget issue. But in
the general budget, Social Security is dwarfed both by other entitlement
programs and by a host of other programs.

If you don't believe in the Social Security trust fund, then we should be
discussing Medicare. Or out-of-control defense spending. Social Security is
irrelevant.

~~~
spkthed
Well, SS and Medicare are over 40% of the annual Federal budget and will
quickly rise as the funding issues start appearing.

SS is actually the biggest program and percentage of the annual budget we
have. Medicare is second, defense is the third.

~~~
tptacek
[citation needed]

Social Security is 21% of the budget currently. That's:

* at par with Medicare and related medical entitlements.

* rapidly going to be outpaced by Medicare liabilities

* less than we spend on defense

* funded from the Social Security trust fund, unlike those other two

------
tokenadult
"The present discounted value of the promises embedded in the Social Security
law greatly exceeds the present discounted value of the expected proceeds from
the payroll tax. The difference is an unfunded liability variously estimated
at from $4 trillion to $11 trillion--or from slightly larger than the funded
federal debt that is in the hands of the public to three times as large."

The mismatch between the promised benefits that many voters think they have
"earned" by "saving" money in their personal "Social Security accounts" and
the actual funding capacity of the Social Security system is why it looks like
Mr. Ponzi was the designer of the system. The overall societal effect of
Social Security as it is currently funded is a massive wealth transfer from
the working young to the nonworking old, which is excellent politics but
rather poor economics.

~~~
mattmaroon
Even if it wasn't for the anomalous population boom that is causing the
problem, you would essentially be being forced by the government to put a
portion of your salary into an investment with a 0% interest rate. Which
granted, would look good to a lot of people right now, but is bad financial
planning on the whole.

On the other hand, I reject his cries of paternalism for the simple reason
that other people's poverty has a negative effect on my life, liberty, and
pursuit of happiness. Poor people have incredibly high rates of criminal
activity, drug use, etc. Granted, I don't see a lot of retirees selling crack
or robbing banks, but the effect it could have on their families, who
sometimes they support or sometimes support them, could create a serious
ripple down through generations.

Which doesn't necessarily mean I'm for Social Security or forced savings of
any kind, but the issue is not nearly so simple as paternalism.

~~~
Retric
In defense of social security:

It pays significant disability and survives benefits which has little to do
with investing and everything to do with insurance. So consider SS as
insurance in case of a long life.

Some people will live well over 100 so finding the "correct" amount of money
to save is overkill for most people who die far younger than that. If you
invested a portion of your savings each year and pooled you money with 10,000
other people your age then paid dividends from that to the survivors you could
save less money and still not worry about running out. Granted if to many
people lived until retirement age you might need to reduce benefits. Granted
you would not be able to give people money at the time of your death but if
your single what's the point?

Now the implementation of social security is broken in several ways but minor
changes in retirement age will fix the "benefit gap" long before it runs out
of money. The basic problem is people are living longer so they need to
increase average retirement age. The surplus was also invested in government
bonds with terrible long term returns etc, but when you consider how much more
important the first 20k/year is over the next you might consider guaranteed
benefits even at high cost are worth a lot more than the simple math would
suggest.

PS: There are a lot of things I hate about SS, but it's not really a Ponzi
scheme.

~~~
tptacek
This was one of the intellectual flaws of the Bush privatization scheme; they
calibrated returns from individual private accounts to the average lifespan,
without noting that a pretty large contingent of social security beneficiaries
would outlive the average.

Current estimates are that many of us will be long retired before there even
is a "gap" between Social Security funding and Social Security benefits. The
trust fund, for instance, doesn't run out until the 2040's.

~~~
mmmurf
The privatization plan would give the beneficiary ownership over the
investment, so there is not a problem, it just means that the investment has
longer to grow. Ideally someone doesn't just build up a pile of money and
intend to die with $0, he/she intends to leave some to the next generation or
to charity.

~~~
Retric
I am single why should I give my money to charity, my will is going to say
take it out into the forest and burn it.

Only slightly kidding. A close friend of mine had a trust fund worth a little
over 6 million and was looking to inherent a lot more when his grandmother
died. He is dead now and imo money really messed up his life.

------
gislebertus
Seems like there's an awful lot of polemical posts on Hacker News lately from
Conservative political organizations. Guess they figured out that here they
could promote their agenda for free.

Is that really what Hacker News wants to be? A political forum? If so, I'll
encourage the folks at Media Matters, Center for American Progress, and
Campaign for America's Future to start posting here.

It's bad enough that Conservative political groups are hijacking a startup
news aggregator. It's worse that the ideas they're pushing don't work.

Conservatism--the political philosophy promoted by AEI, Hoover, Heritage et al
--is the flip side of Communism. With Communism, the purpose of people is to
serve The State. In Conservatism, the purpose of people is to serve The
Market. Thus, popular New Deal programs such as Social Security are anathema
to them.

Both Communism and Conservatism work badly, producing similar effects. Our
unregulated Conservative markets have crashed and burned just as badly as the
Russians' hyper-regulated Communist markets did. States and countries run on
Conservative principles are typically backward and stagnant:

\--Mississippi and Alabama have Conservative state governments, and have
practically no startup activity. Massachusetts and New York are not
Conservative, which makes them capable of spawning MIT and Silicon Alley.

\--Conservatives say that the keys to a strong economy is low taxes on rich
people and unregulated markets. We've had them for the past decade, just as we
did in the 1920s, and just as it did in the 1920s, our economy has melted
down. What happened when we had sky-high taxes on rich people, and highly
regulated markets? We got the U.S. economic boom of the 40s, 50s, and 60s, and
built the world's biggest middle class.

The fact that their political philosophy has produced poor results doesn't
give the folks at AEI/Hoover/Heritage pause, however. Just like the old
Communists, these Conservatives are now complaining that "Conservatism DOES
work! It's just never been tried!" Just as with Communism, Conservatism never
fails, it is only failed.

As for the ideas of Milton Friedman that these Hacker News Hijackers are
pushing, we may want to read what a Nobel Prize-winning economist has to say
about them:

<http://www.nybooks.com/articles/19857>

~~~
lionhearted
In a site populated by hackers and entrepreneurs, you're going to get people
with a strong preference for individualism over collectivism - that's the
nature of the beast here. People are going to be very free action-oriented,
anti-paternalistic, and not too many of us are going to like the government.
We've also got the smart people thing going on where we think politicians are
numbskills that spend more time politicking than doing anything intelligent.

So you've got that. But past that, it's hard to find intelligent discussion on
economics, government, and society, and a bit coming into HN is healthy for
the discussion.

What I'm impressed about is that we get practically no political current
events here - and that's pretty cool. Most of the ideas we talk about in terms
of economics, society, and government are pretty broad, intellectual strokes
instead of inflamed stuff. And for the record, I'm all up for talking about
market failure, monopolozation, and unfair initial distribution of resources.
And we can have some good discussion.

Edit: This was originally a reply to someone who said HN was being invaded by
Conservative lobbyists getting free publicity or some such. byrneseyeview
replied to the same guy quoting some of it before he deleted it if you're
curious as to the gist of it.

~~~
tptacek
A social safety net isn't "collectivism". "Collectivism" is an emotional
button hard libertarians try to push. Agree or disagree with Social Security,
but please don't tar "hackers and entrepreneurs" with a single political
brush.

~~~
lionhearted
Pardon me, I didn't know it was a politically-loaded term these days. I meant
it as a more general term the way people would make the broad statement that
"Eastern societies are more collectivist, and Western societies are more
individualist." More responsibility to the group, with the associated pros and
cons of that.

I was making the point to the original poster who said HN has a conservative
lean. My point was you're going to tend to see more individualistic people on
the whole here, and more individualistic people tend to dislike the government
having a larger role in their lives. That's true on the whole in my
experience, but certainly not for everyone.

Anyway, thanks for pointing that out. I'm just here for good discussion and
the free cookies, not to push any emotional buttons or tar people I respect
with a single political brush :)

~~~
tptacek
Every time people write sentences that start with "Hackers tend to" and
involve "the government", I throw up a little in my mouth. You could use the
same logic about "individualist hackers" to argue against gun control. But
then you'd be Eric Raymond.

Hackers are people who like to build things. That's all. They don't all think
like you. Some of our country's greatest entrepreneurs are also its strongest
believers in the social safety net. You might consider starting with Warren
Buffett.

~~~
lionhearted
No worries, I feel like I've learned an important lesson here about
generalizing. For the record, you don't need to talk about being tarred,
throwing up in your mouth, for me to get your point - but it does get across
that how you feel about this. I'll be more careful about broad generalizations
going forwards, and best wishes.

~~~
tptacek
Sokay. You're being nicer than I am at this point.

------
patrickg-zill
SS started as a scam and will end as a scam.

SS was set up with rules based on actuarial tables, used by all insurance
companies.

The rules for 65 as the start of collection were because the actuarial tables
at the time showed that only about 25% of the population would reach that age.
And since white women live the longest, black men were paying for a benefit it
was unlikely they would ever receive.

SS did not originally have survivor benefits and disability either, those were
added by FDR in the years after SS originally passed.

Unlike either term or whole life insurance, SS pays nothing if you die before
your time for payments to start. With term, you would get paid, with whole
life, there would be other investment benefits involved, like the ability to
borrow against a certain amount of the policy while still alive.

------
harpastum
"In 1964, Barry Goldwater was much reviled for suggesting that participation
in Social Security be voluntary. I thought it was a good idea then. I still
think so."

A guess why Goldwater was reviled? Voluntary Social Security would be DOA. It
doesn't make fiscal sense for the upper class to pay social security, so they
wouldn't. That leaves the lower class' taxes going to pay for it--somehow I
don't think there's enough there.

.

Yes, Social Security as is sucks.

No, we shouldn't kick it while it's down.

~~~
byrneseyeview
I don't understand why it would only make sense for one class to buy into
Social Security. If it's a good investment, it's a good investment; 'rich'
means less than 'has a particular set of risk/return preferences'.

And I think you validate his point if you claim that social security is only
solvent because it redistributes money from the rich to the poor. If the
system is unsustainable without giving some people a lower return to subsidize
other investors (i.e. soaking the rich to pay off the electorate), it's a
ponzi scheme.

~~~
mattmaroon
Social Security isn't a good investment for anyone and it never has been. It
wasn't meant to be. It was meant to prevent our seniors from plunging into
poverty because that would have many negative effects on society as a whole.

If you made it opt out, people would fall into two categories. One would be
smart enough to manage their own money and opt out because they can get a
better rate of return putting it in a money market. One would be too dumb to
manage their own money and opt out because they don't want to pay 12.4% extra
income tax. Either way, Social Security would be opted out by almost everyone
and totally fail to accomplish the objectives it was created for. At least the
way it is, it has a chance, assuming it can remain adequately funded.

I'm actually against Social Security (at least in its current incarnation) but
recognize the need for some form of it that is forced.

~~~
dantheman
Why can't we let people live with their decisions? Obviously those who opt out
have better things to do with their money @ least from thier pov?

~~~
tptacek
Because pooling risk and providing a baseline standard of living helps
everyone, not just the direct beneficiaries of entitlements; for instance,
current entrepreneurs aren't paralyzed in steady corporate jobs out of fear
that they will need to supplement their parents income to prevent them from
eating cat food.

Again: of course it is true that skilled investors can net a better return on
their FICA dollars than Social Security can. Social Security isn't an
investment program.

~~~
dantheman
I'm still going to have to disagree. You are only looking at one side of the
equation, those receiving the benefits and ignoring those who are harmed. How
many companies go out of business because they can't compete due to these
taxes, how much investment is lost/misdirected since an individual cannot
decide where to invest their funds. I could have invested in a store in my
neighborhood, but instead the money will be spent by someone in some other
area. It's hard to know exactly what we're missing out on because of the
massive amount of wealth redirection.

~~~
tptacek
I don't know how many businesses fail because of FICA taxes, but I'm not super
sympathetic to the argument, since me and my partners make W2 payroll for a
decent sized group of people, and we're doing OK. Relative to much of the
industrialized world, the US has an attractive tax rate and an attractive
standard of living.

What I do know is that prior to Social Security, young workers being a
prisoner to the financial circumstances of their aging extended family was a
real problem, and it's not one we think about that much anymore. So I'm pretty
happy with that.

------
tptacek
Once every couple years, a "new" group of people gets all huffy about the fact
that Social Security taxes "aren't really invested at all", but rather pay off
current retirees. It's a false controversy. _That's the intent of the system._
The people collecting Social Security today paid for the previous generation's
baseline defined benefit retirement.

Social security isn't an investment plan, and it isn't a welfare plan. It's
not a sports car either. It's an easy, cheap, intellectually flimsy argument
to snipe at it by saying it's bad at being something it isn't intended to be.

~~~
mmmurf
You may be right, but the intent of the system doesn't really matter. When SS
began the tax was 1%, now it's 12.5% and benefits have been decreasing every
year.

Sadly, the planners didn't anticipate just how population trends would play
out, and so the initial idea -- that everyone pays 1% and then no old folks
have to worry about poverty if they choose to retire -- just doesn't quite
work out any longer.

The trouble is that people can't really rely on social security for (guess
what?) security!

Will congress increase the payroll tax to 30%? Will it decrease social
security benefits drastically? Will it fund SS out of general revenue at the
expense of other programs? Will American taxpayers decide that SS is worth a
middle class income tax rate of 55%?

The answer to all of these things is the same: maybe.

But that's not security. Obama has wisely advocated converting SS into a
welfare program, but that hasn't gotten much traction.

The point is, with population trends doing what they are, somthing has to
give. When people running for office talk aobut "saving Social Security" they
are not honest about the impending outcome of obvious demographic trends.
Meanwhile, all of us pay 12.5% of every paycheck into something that will
probably offer us ZERO security in retirement.

------
alecco
A shame it is impossible to down-vote stories.

