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Opinion

Opinion

Social Security just a mandatory Ponzi scheme

September 17, 2011

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The Great Social Security Debate, Proposition 1: Of course it’s a Ponzi scheme.

In a Ponzi scheme, the people who invest early get their money out with dividends. But these dividends don’t come from any profitable or productive activity; they consist entirely of money paid in by later participants.

This cannot go on forever because at some point there just aren’t enough new investors to support the earlier entrants. Word gets around that there are no profits, just money transferred from new to old. The merry-go-round stops, the scheme collapses and the remaining investors lose everything.

Now, Social Security is a pay-as-you-go program. A current beneficiary isn’t receiving the money she paid in years ago. That money is gone. It went to her parents’ Social Security check. The money in her check is coming from her son’s FICA tax today, i.e., her “investment” was paid out years ago to earlier entrants in the system and her current benefits are coming from the “investment” of the new entrants into the system. Pay-as-you-go is the definition of a Ponzi scheme.

So what’s the difference? Ponzi schemes are illegal, suggested one of my colleagues on “Inside Washington.”

But this is perfectly irrelevant. Imagine that Charles Ponzi had lived not in Boston but in the lesser parts of Papua New Guinea where the securities and fraud laws were, shall we say, less developed. He runs his same scheme among the locals — give me (“invest”) one goat today, I’ll give (“return”) you two after six full moons — but escapes any legal sanction. Is his legal enterprise any less a Ponzi scheme? Of course not.

So what is the difference?

Proposition 2: The crucial distinction between a Ponzi scheme and Social Security is that Social Security is mandatory.

That’s why Ponzi schemes always collapse and Social Security has not. When it’s mandatory, you’ve ensured an endless supply of new participants. Indeed, if Charles Ponzi had had the benefit of the law forcing people into his scheme, he’d still be going strong and would a perfect candidate for commissioner of the Social Security Administration.

But there’s a catch. Compulsion allows sustainability; it does not guarantee it. Hence ...

Proposition 3: Even a mandatory Ponzi scheme like Social Security can fail if it cannot rustle up enough new entrants.

You can force young people into Social Security, but if there just aren’t enough young people in existence to support current beneficiaries, the system will collapse anyway.

When Social Security began making monthly distributions in 1940, there were 160 workers for every senior receiving benefits. In 1950, there were 16.5; today, three; in 20 years, there will be but two.

Now, the average senior receives in Social Security about a third of what the average worker makes. Applying that ratio retroactively, this means that in 1940, the average worker had to pay only 0.2 percent of his salary to sustain the older folks of his time; in 1950, 2 percent; today, 11 percent; in 20 years, 17 percent. This is a staggering sum, considering that it is apart from all the other taxes he pays to sustain other functions of government, such as Medicare whose costs are exploding.

The Treasury already steps in and borrows the money required to cover the gap between what workers pay into Social Security and what seniors take out. When young people were plentiful, Social Security produced a surplus. Starting now and for decades to come, it will add to the deficit, increasingly so as the population ages.

Demography is destiny. Which leads directly to Proposition 4: This is one Ponzi scheme that can be saved by adapting to the new demographics.

Three easy steps: Change the cost-of-living measure, means test for richer recipients and, most important, raise the retirement age. The current retirement age is an absurd anachronism. Bismarck arbitrarily chose 70 when he created social insurance in 1889. Clever guy: Life expectancy at the time was under 50.

When Franklin Roosevelt created Social Security, choosing 65 as the eligibility age, life expectancy was 62. Today it is almost 80. FDR wanted to prevent the aged few from suffering destitution in their last remaining years. Social Security was not meant to provide two decades of greens fees for baby boomers.  

Of course it’s a Ponzi scheme. So what? It’s also the most vital, humane and fixable of all social programs. The question for the candidates is: Forget Ponzi; are you going to fix Social Security?

— Charles Krauthammer is a columnist for Washington Post Writers Group. His email is letters@charleskrauthammer.com.

Comments

Richard Heckler 2 years, 7 months ago

5 Popular Myths

*Myth: Social Security is going broke.

Reality: There is no Social Security crisis. By 2023, Social Security will have a $4.3 trillion surplus (yes, trillion with a 'T'). It can pay out all scheduled benefits for the next quarter-century with no changes whatsoever.1 After 2037, it'll still be able to pay out 75% of scheduled benefits--and again, that's without any changes. The program started preparing for the Baby Boomers retirement decades ago.2 Anyone who insists Social Security is broke probably wants to break it themselves.

*Myth: We have to raise the retirement age because people are living longer.

Reality: This is a red-herring to trick you into agreeing to benefit cuts. Retirees are living about the same amount of time as they were in the 1930s. The reason average life expectancy is higher is mostly because many fewer people die as children than did 70 years ago.3 What's more, what gains there have been are distributed very unevenly--since 1972, life expectancy increased by 6.5 years for workers in the top half of the income brackets, but by less than 2 years for those in the bottom half.4 But those intent on cutting Social Security love this argument because raising the retirement age is the same as an across-the-board benefit cut.

*Myth: Benefit cuts are the only way to fix Social Security.

Reality: Social Security doesn't need to be fixed. But if we want to strengthen it, here's a better way: Make the rich pay their fair share. If the very rich paid taxes on all of their income, Social Security would be sustainable for decades to come.5 Right now, high earners only pay Social Security taxes on the first $106,000 of their income.6 But conservatives insist benefit cuts are the only way because they want to protect the super-rich from paying their fair share.

*Myth: The Social Security Trust Fund has been raided and is full of IOUs

Reality: Not even close to true. The Social Security Trust Fund isn't full of IOUs, it's full of U.S. Treasury Bonds. And those bonds are backed by the full faith and credit of the United States.7 The reason Social Security holds only treasury bonds is the same reason many Americans do: The federal government has never missed a single interest payment on its debts. President Bush wanted to put Social Security funds in the stock market--which would have been disastrous--but luckily, he failed. So the trillions of dollars in the Social Security Trust Fund, which are separate from the regular budget, are as safe as can be.

*Myth: Social Security adds to the deficit

Reality: It's not just wrong -- it's impossible! By law, Social Security funds are separate from the budget, and it must pay its own way. That means that Social Security can't add one penny to the deficit.1

http://pol.moveon.org/ssmyths/

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Richard Heckler 2 years, 7 months ago

Help Save Social Security

Social Security is under attack. Conservatives who want to cut benefits are using 5 popular myths to scare people.

Rumors of Social Security's demise are greatly exaggerated. But some powerful people keep spreading lies about the program to scare people into accepting benefit cuts. Can you check out this list of Social Security myths and share it with your friends, family and coworkers?

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Flap Doodle 2 years, 7 months ago

"merrill (anonymous) says… Why in the hell would anyone want to trust..." Such language on an award-winning website! Also: "...And there is another type of Caps Lock user who doesn’t capitalize whole sentences but INSTEAD capitalizes a few SPECIFIC words for EMPHASIS. Now read a sentence like that aloud, shouting every time you come to a capitalized word, and tell me you do not sound like an absolute freakin’ lunatic. This method can turn even basic known facts into crazy-sounding gibberish (“The SQUARE of the HYPOTENUSE of a RIGHT triangle equals the SUM of the squares of the OTHER two sides”). Similarly, be frugal with your exclamation points! Not every single sentence should end in one! And never use more than one per sentence!!!!11!!eleventy11!1 If you have something useful to say, it should make just as much sense when said in a normal voice..." http://pajamasmedia.com/blog/tips-for-not-appearing-crazy-on-the-internet/

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beatrice 2 years, 7 months ago

Calling Social Security a Ponzi scheme might prove to be Rick Perry's Fonzi scheme -- he may have jumped the shark with that one.

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Richard Heckler 2 years, 7 months ago

Why in the hell would anyone want to trust Wall Street with trillions upon trillions of our tax dollars after watching BUSHCO and Wall Street destroy the economy plus put 11 million out of work and ruin retirement plans?

Millions upon millions upon millions upon millions have enjoyed their Social Security Insurance money for decades upon decades upon decades upon decades.

Not even the wealthy turn down this $1000 a month for any reason

How many will say NO it is evil money? Certainly NOT I !!!

Why in the world are so many allowing bank robbing politicians tell us WE should NOT enjoy the safety net of virtually risk free Social Security Insurance? That which becomes a worthwhile supplement to our retirement plans.

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Richard Heckler 2 years, 7 months ago

Social Security is going broke.

Reality: There is no Social Security crisis. By 2023, Social Security will have a $4.6 trillion surplus (yes, trillion with a 'T'). It can pay out all scheduled benefits for the next quarter-century with no changes whatsoever.

Again there is no dire situation. We and the people and congress have a minimum of 25 years to fix it if fixing is necessary.

After 2037, it'll still be able to pay out 75% of scheduled benefits—and again, that's without any changes. The program started preparing for the Baby Boomers' retirement decades ago. Anyone who insists Social Security is broke probably wants to break it themselves.

Social Security adds to the deficit Reality: It's not just wrong—it's impossible! By law, Social Security's funds are separate from the budget, and it must pay its own way. That means that Social Security can't add one penny to the deficit.

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jayhawxrok 2 years, 7 months ago

This columnist is a nutjob, a right wing clown and nothing more. He couldn't tell the truth if his life depended on it.

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Flap Doodle 2 years, 7 months ago

merrill, are you on some sort of affiliate program with that site you've been plugging so heavily the past few days? Hmmmmmm

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Mike Ford 2 years, 7 months ago

SS was created after the republican clowns of the twenties and their laissez faire economic policies left this country in shambles. Anyone remember Harding, Coolidge, and Hoover? before that there was the split between the thinking Republicans like Teddy Roosevelt and Mr. Taft who backed up the robber barons of the day. The message is, screw the rest of them I got mine. Like the There will be Blood oil baron....who trusts these people??? dumblicans...

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Richard Heckler 2 years, 7 months ago

Former President Bush claimed the trust fund is just a bunch of government IOUs and therefore worthless. Is this true?

The trust fund does just contain IOUs, but they’re not worthless.

If they are, someone should tell that to the very smart and very rich people, and the central banks of Japan, China, and many other countries that hold a large share of their assets in U.S. government bonds.

When the trust fund was created in 1935, the law stipulated that any excess revenues coming into the Social Security system must be used to purchase federal government bonds.

(At the time, the stock market had just lost over 75% of its value and was understood to be unsafe.)

Federal bonds are absolutely safe; the government of the United States has never defaulted on any bond obligation.

Former President Bush appeared to be ready to break this tradition. He appeared to want the Treasury to “selectively default” on the bonds in the Social Security trust fund.

He obviously felt the United States doesn’t have to meet its obligation to the working people of America the way it meets its obligations to ultra-wealthy bondholders.

His suggestion that the U.S. government might not be willing to repay its debt obligations was remarkable and for a time completely disrupted global financial markets.

http://www.dollarsandsense.org/archives/2010/0111orr.html

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Richard Heckler 2 years, 7 months ago

Charles Krauthammer does not provide one ounce of hard evidence that anything he said is true. I speculate him to be among the Bush family of Wall Street profiteering bank robbers who would profit IF trillions of insurance dollars found their way to Wall Street banks.

The Bush/Cheney home loan scam was like a Ponzi scheme as was the Reagan/Bush home loan scam. These are the characters pushing another multi trillion $$$$ scam.

It was put to me that taking Social Security at 62 was fiscally smart because it takes about 17 years to get your money back. Beyond that it is a great payback from Social Security Insurance which indicates it is a worthwhile endeavor.

A $12,000 annual supplement is okay. Something to enjoy. That must be why all regardless of wealth put in for their Social Security Insurance. It isn't only the poor and middleclass who gladly accept this $12,000 a year not by a long shot.

Not only that if there is a serious problem with Social Security Insurance we the people and congress have at least 25 years to fix it.

Face it folks Wall Street is high risk and is truly only for those who can afford to lose money. Wall Street has found itself losing money for decades at a time. Would the retirement funds be there when one retires? There is no way to know.

Social Security has been quite an impressive success.

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Richard Heckler 2 years, 7 months ago

This should be a concern I would think...

How would the rest of the U.S. economy be affected if the private accounts replaced the current system?

Put simply, moving to a system of private accounts would not only put retirement income at risk—it would likely put the entire economy at risk.

http://www.dollarsandsense.org/archives/2010/0111orr.html

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yourworstnightmare 2 years, 7 months ago

Another key feature of a Ponzi scheme is that is all investors suddenly wanted their investment back, the scheme would not be able to deliver.

I am not sure this is true with SS, but it is definitely true with the stock market. If all stock market invesors wanted to cash out, would there be the funds available to do this? In other words, could all companies pay cash for the stocks that their investors hold? I think not.

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yourworstnightmare 2 years, 7 months ago

A Ponzi scheme is defined by an investment from which the payouts come from the money invested or from the money invested by others.

I suppose SS does technically fit the description of a Ponzi scheme. The key difference is the beneficiary of the Ponzi scheme. With Ponzi and Madoff, the beneficiary was the person who started the scheme, with some payments to the early investors. With social security, there is no single beneficiary. All of the money goes to those who paid in, and none goes to a single individual or group of individuals.

The stock market is also a Ponzi scheme, with the difference being that stocks and investments can rise (and fall) in price.

So yes, SS is technially a Ponzi scheme, but without a Ponzi or Madoff.

Good luck, right-wingers, selling your message that SS is equivalent to schemes set up by Ponzi and Madoff.

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uglyrumor 2 years, 7 months ago

You PAID into SS. If you want to take money out of your own pocket you are either an idiot or out of touch with reality, oh wait your just a Republican. Republican= poor people who defend rich people untill the bitter end. It's a class war alright, on you. Wake up

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Eybea Opiner 2 years, 7 months ago

Here's a little exercise I would suggest everyone near retirement age try. I did it shortly after I began to draw SS at age 62.

  1. When you receive your statement of contributions from SS, add them up to see how much you have contributed over your lifetime. In my case that was something around $45K.

  2. Estimate how much you will receive from SS for the rest of your life. This can be tricky, because you can't know exactly how much benefits might increase, nor do you know exactly how long you will live. Do your best. In my case I estimated I'd receive about $350K in benefits.

Sounds pretty good not considering had I died just before or just after retirement all my contributions would be for naught as far I and my family, are concerned.

  1. Now take your yearly SS contributions and increase them each year by a percent representing a reasonable return on your investment. I arbitrarily picked 6%. Some years would be much better, some much worse.

In my case, my contributions over 45 years of contributions (many years as a kid making very small contributions) would have grown to over $2,000,000. I could be drawing 4 times the amount of my SS payment and still leave an estate of approximately $2 million to my heirs when I die.

Note that none of the above gives any consideration to the amount paid into my SS account by my employers.

Had I been given the choice, I would have eagerly opted to put at least part of my SS tax into my own, self-directed private retirement account. Today, I believe I'd be much better off. (Yes, even with the disasters of 1987, and of the recent debacle.

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bobberboy 2 years, 7 months ago

P.S. Signed - "The Great Silent Majority"

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bobberboy 2 years, 7 months ago

I don't really give a &^%$ one way or another just so long as I get my SS when I retire. I paid into all my life and if it's not there something's gonna burn !! You ai'nt seen a stink anything like the one that's commin down !!

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tbaker 2 years, 7 months ago

For those that appreciate factual information, see for yourself what happened in Chile a few years back when they had to face the reality of their pay-as-you-go Social Security System going bankrupt. Google: chile social security

How about some more factual info about the employees of Galveston County, Texas who saw a chance to opt out of Social Security back in 1980. To the person, each of them is way better off today. Google that story for some great news about their dollars and "good" sense.

Make no mistake good readers, the Spambot's goal isn't whether or not people who need it have money to live on in their golden years, it's protecting and preserving another arm of big government. Lets assume the IOUs congress wrote the social security program are actually worth something. Where do you think they will get the money to pay them? Its all the same pot. We will get stuck with either higher taxes or more deficit spending / borrowing. The IOUs are worthless. Face it, congress saw the excess revenue and they looted it. Its gone. All thats left is the promise of future tax collection. Hey 20-somthing crowd: You better get two jobs becuase my 50+ self plans to live longer after I start drawing Social Security than the number of years I spent paying into it.

Social Security was NEVER designed to be a national entitlement system. It is yet another example of a badly-needed safety net for a small minority of severely needy people that has been turned into a delux hammock for everyone whether they need it or not.

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Richard Heckler 2 years, 7 months ago

No one forces any 24/7 poster to read other posts of 24/7 posters. We 24/7 posters make the choice to do so.

It is the information that is important. I have never claimed that I produced these facts. These facts never get presented by the likes of Charles Krauthammer whom so many never question.

I have credited Dollars and Sense many many many times over the years as some of you 24/7 posters know. So long as the likes of Charles Krauthammer and other sources of misinformation provide distorted viewpoints this info from Dollars and Sense is always pertinent to the discussion.

Dollars and Sense is a worthwhile source of information for which I am thankful for. I subscribe to Dollars and Sense. I sometimes provide Dollars and Sense as Christmas gifts.

My brief summation is the likes of Charles Krauthammer and other anti social security thinkers distort Social Security Insurance and its' positive impact on the economy and the many many many millions of families that are thankful this insurance was available to them.

Charles Krauthammer never states that his position could place the entire economy in jeopardy or that it will add big big big numbers to the national deficit. Nor does Charles Krauthammer and the like reveal switching to private accounts could cost the nation $4 trilllion so in essence Charles Krauthammer is lying in some respects.

Nor does Charles Krauthammer reveal that Social Security Insurance adds nothing to the deficit.

Surely you 24/7 posters do not believe that we are the only ones that read these online posts. Quite the contrary. In fact some readers appreciate factual information.

99.999% of online posts are never substantiated.

Meanwhile: http://www.dollarsandsense.org/archives/2010/0111orr.html

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Flap Doodle 2 years, 7 months ago

Thank (insert deity name here) for the character limit on each LJW post! Otherwise, we'd be looking at the entire dollarsandnonsense website on this thread.

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Richard Heckler 2 years, 7 months ago

Even if the Social Security system isn’t going to go bankrupt by 2029, 2042, or 2058, won’t the Social Security trust fund begin cashing in the IOUs from the federal government as early as 2018?

The contributions to Social Security will become less than the benefits paid out in 2018, based on the trustees’ overly pessimistic assumptions. But that doesn’t mean that the Social Security Administration will need to start selling bonds.

The interest income from the existing bonds will be sufficient to make up the difference until 2028. If the trustees’ pessimistic assumptions are true, they will need to start selling bonds in 2028 and the trust fund will be reduced to zero in 2042. At that point, as I mentioned above, the Social Security system would simply revert back to pure pay-as-you-go, operating just as it did successfully from 1936 to 1983.

http://www.dollarsandsense.org/archives/2010/0111orr.html

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Richard Heckler 2 years, 7 months ago

We don’t have to look to other countries to see the results of a shift to private accounts. That experiment has already been tried in the United States, and it failed.

England initiated private accounts in 1984 that failed miserably. Is it likely that private accounts would fail in the United States?

The British experiment with private accounts has indeed failed to provide an adequate and stable retirement income for the majority of citizens. The United Kingdom is now trying to figure out how to switch back to a defined-benefit system of retirement insurance. The problem is that the trillions of pounds that were diverted into the stock market can’t be brought back into the defined-benefit system.

Chile’s system is one that former President Bush often mentioned to justify his push for private accounts. One of Bush’s advisors on Social Security was Jose Pinera, who designed the system in Chile for the Pinochet military dictatorship. Under that government, workers were encouraged to opt out of the system of pension insurance and into private accounts.

Over the past 25 years, the return on stocks in Chile has averaged over 10%—a higher return than we can expect in the U.S. stock market over the next 25 years. Yet, even with that extremely high rate of return, the average Chilean retiree relying on private savings will receive a benefit less than half as large as someone who had remained in the old system, and those benefits, unlike those of the old system, last only 20 years. If a retiree is “unlucky” enough to live longer than that, he will simply run out of retirement income.

Those in the old system not only receive a higher benefit, but the benefit lasts as long as they live and continues to provide benefits to their surviving spouse.

The United States’ Social Security system is the most efficiently run insurance program in the world, with overhead of only 0.7% of annual benefits. For every $100 paid into the system, $99.30 is paid out in benefits to retirees. In the British and Chilean systems, at retirement, workers convert their private accounts to annuities provided by private insurance companies.

In the United States, overhead for annuities provided by private firms average about 20%; for every $100 paid in, $20 gets siphoned off. And almost no annuities are indexed for inflation.

There is a third important experiment with “private accounts” to consider: the United States’ own experiment with defined-contribution retirement plans. Since 1975, corporations have been phasing out their old defined-benefit pensions and replacing them with private savings accounts such as 401(k)s. In 1975, 39% of private-sector workers were covered by defined-benefit pensions, and only 6% by defined-contribution savings plans. By 1998 the share covered by real pensions had plummeted to just 18% and the percent relying on private accounts had risen to 38%.

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Richard Heckler 2 years, 7 months ago

The opponents of Social Security will stop at nothing in their long crusade to destroy the most efficient retirement system in the world. Opponents have taken two tracks to attack Social Security.

The first is to claim the system as it is will fail, and the second is to claim that privatization is a better way to provide for retirement security. The first claim was the favorite from 1935 to about 2001.Then the privatization claim became the vogue. Now the first is back on the table.

With corporations routinely defaulting on their pension promises, more and more workers must rely on their individual wealth to make up the difference. The stock market collapse at the turn of the millennium wiped out much of the financial wealth of middle class Americans, and the collapse of the housing bubble has wiped out much of their remaining wealth.

Making any cuts to Social Security now, either by raising the retirement age or cutting benefits, would have a huge impact on their remaining retirement income and are not necessary to “save the system.” In fact, to make the most of the modifications currently being proposed by Obama's commission would be the height of folly.

The president understands that Social Security hasn't contributed a dime to the deficit. It has a $2.6 trillion surplus. It can pay every benefit owed to every eligible American for the next 25 years.

More info not rhetoric: http://www.dollarsandsense.org/archives/2010/0111orr.html

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tbaker 2 years, 7 months ago

Pay-as-you-go social security systems destroy the link between contributions and benefits, between effort and reward. Everyone tries to minimize what he puts into the system while trying to maximize through political pressure what he can get out of it. That's why pay-as-you-go plans are going bankrupt all over the world, and it is why ours is going bankrupt.The flaw in our Social Security system is inherent. It cannot be fixed by breaking promises and increasing taxes and reducing benefits. The numbers will not be changed by politics. Back in 1980 when this was still allowed, the employees of Galveston County Texas were given the option to opt-out of social security. Take a look at what happened: http://www.ncpa.org/pub/ba514

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Jimo 2 years, 7 months ago

"This is one Ponzi scheme that can be saved by adapting to the new demographics."

A. Stating that SS is a "Ponzi scheme" reveals two things: 1. The speaker doesn't know what a "Ponzi scheme" is and 2. The speaker is of limited intelligence.

B. There's nothing financially wrong with SS that lifting the income cap on taxation doesn't instantly and dramatically cure. Even today--despite massive Tea Party efforts to educate themselves about taxes and budgets (efforts that are self-evidently failing)--few people know that special people ("job creators") like me get a sudden income boost when we've finally achieved the magic six figure income level for the year and are freed from the onerous burden of paying any more of the taxes that the rest of you continue to billed. I used to make less and so the date came late in the year. I thought of my temporary pay boost as a Christmas savings plan. Now, the date appears earlier and earlier to become almost a Christmas in July.

C. Like so much else in this country today, this "problem" continues to exist not because we don't have any answers but rather because the GOP needs a crisis atmosphere to overcome public objections to their extremist agenda. Its not easy to persuade the average Joe that eating discount catfood himself while the well-off chow down caviar is a fair and balanced outcome. But the warmongering Kraut labors on with his immoral agenda anyway.

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Ron Holzwarth 2 years, 7 months ago

Liza Minnelli fans, take note. This is what it's all about:

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beatrice 2 years, 7 months ago

I strongly believe the Republicans should run on their anti-Social Security platform.

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ivalueamerica 2 years, 7 months ago

Once again, the same old thing.

The GOP finds a good sound bite, no matter that it is false.

The GOP machine is a master at using the sound bite as the DEMS still try to work with facts and logic.

The sad thing is that we, the people are growing more and more ignorant over time and rely on these soundbites over facts....meaning the GOP Congress we have now, the extremest controlling Kansas is our fault for being stupid and believing sound bites over reason and facts.

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Richard Heckler 2 years, 7 months ago

Young people say they want more control over their Social Security investments. How do you explain the purpose of Social Security to today’s young workers?

The best way to explain Social Security is to say what it is. It’s an insurance system that protects your income when you retire or face disability, and provides income to your children if you die.

Former President Bush wanted you to look at Social Security as an investment, but it is not. It is a form of insurance that guarantees you a constant stream of income in retirement or in case of disability, adjusted to protect against inflation, for as long as you live.

Social Security can be compared to other types of insurance such as home insurance. You insure your home because if it should burn down, you would not be able to afford to rebuild it with your personal income alone. If your house never burns down, you will pay into the insurance fund and never get a penny back. But fire insurance isn’t a “bad investment” because it isn’t an investment at all. You are purchasing security.

Unlike fire insurance, Social Security inevitably gives most of us our money back. But the fact that we get money back does not change the fact that Social Security is a form of insurance, not an investment. Only the richest of the rich can afford not to have insurance and to rely solely on their own savings and investments to fund their retirement or risk of disability.

Young people must also understand that financial investments are inherently risky.

Many investments fail, and when they do, you lose all of the money you invested.

Today’s 25-year-olds have only seen the stock market go up, except for two (very large) drops. But you don’t have to go back to the 1930s to see a different picture: If you put money into the stock market in 1970 and waited until 1980 to take it out, you would have lost money.

There is absolutely no guarantee that stock speculators will see the high returns those who support private accounts are falsely promising.

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Richard Heckler 2 years, 7 months ago

How would the rest of the U.S. economy be affected if the private accounts replaced the current system?

Put simply, moving to a system of private accounts would not only put retirement income at risk—it would likely put the entire economy at risk.

The current Social Security system generates powerful, economy-stimulating multiplier effects. This was part of its original intent. In the early 1930s, the vast majority of the elderly were poor. While they were working, they could not afford to both save for retirement and put food on the table, and most had no employer pension.

When Social Security began, elders spent every penny of that income. In turn, each dollar they spent was spent again by the people and businesses from whom they had bought things.

In much the same way, every dollar that goes out in pensions today creates about 2.5 times as much total income. If the move to private accounts reduces elders’ spending levels, as almost all analysts predict, that reduction in spending will have an even larger impact on slowing economic growth.

The current Social Security system also reduces the income disparity between the rich and the poor. Private accounts would increase inequality—and increased inequality hinders economic growth.

For example, a 1994 World Bank study of 25 countries demonstrated that as income inequality rises, productivity growth is reduced. Market economies can fall apart completely if the level of inequality becomes too extreme.

The rapid increase in income inequality that occurred in the 1920s was one of the causes of the Great Depression. And the rapid increase in inequality under the Reagan and two Bush administrations was one of the causes of the current “Great Recession.”

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Richard Heckler 2 years, 7 months ago

What impact would the conversion to private accounts have on the national debt?

The government would have to borrow an additional $4 trillion over the next 20 years to make up the money that would be drained out of the system by private accounts. Former President Bush and Congress racked up an average $793 billion deficit each year Bush was in office.

Social Security privatization would raise the size of the government’s deficit by another $300 billion per year for the next 20 years. This does not seem to bother Republicans, as long as they are in power. In fact, by the time the second Bush left office, the national debt had grown to $12.1 trillion.

Over half of that amount had been created by Bush’s tax cuts for the very wealthy. Another 30% of the national debt had been created by the tax cuts for the wealthy under Presidents Reagan and George H.W. Bush. Fully 81% of the national debt was created by just these three Republican Presidents.

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Richard Heckler 2 years, 7 months ago

Until 1984, the trust fund was “pay-as-you-go,” meaning current benefits were paid using current tax revenues. In 1984, Congress raised payroll taxes to prepare for the retirement of the baby boom generation. As a result, the Social Security trust fund, which holds government bonds as assets, has been growing. When the baby boomers retire, these bonds will be sold to help pay their retirement benefits.

If the trust fund went to zero, Social Security would simply revert to pay-as-you-go. It would continue to pay benefits using (then-current) tax revenues, and in doing so, it would be able to cover about 70% of promised benefit levels. According to analysis by the Center for Economic and Policy Research, a 70% benefit level then would actually be higher than 2005 benefit levels in constant dollars (because of wage adjustments). In other words, retirees would be taking home more in real terms than today’s retirees do.

The system won’t be bankrupt in any sense. On this point, President Bush was “consciously misrepresenting the truth with the intent to deceive.” That is what the dictionary defines as lying.

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Richard Heckler 2 years, 7 months ago

Have opponents actually lied to the public about Social Security?

Yes. Former President George W. Bush repeatedly claimed that those who put their money in private accounts would be “guaranteed a better return than they would receive from the current Social Security system.

But every sale of stock on the stock market includes the disclaimer: “the return on this investment is not guaranteed and may be negative” for good reason. During the 20th century, there were several periods lasting more than ten years when the return on stocks was negative.

After the Dow Jones stock index went down by over 75% between 1929 and 1933, the Dow did not return to its 1929 level until 1953 = 24 years.

In claiming that the rate of return on a stock investment is guaranteed to be greater than the return on any other asset, Bush was lying. If an investment-firm broker made this claim to his clients, he would be arrested and charged with stock fraud. Michael Milken went to jail for several years for making just this type of promise about financial investments.

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Richard Heckler 2 years, 7 months ago

Keep in mind Charles Krauthammer supports USA global military domination which is evidence of irrational thinking.

Charles Krauthammer - Washington Post Writers Group is a member of the Bush family of politicians who want to turn these trillions of dollars to Wall Street. Wall Street has turned out quite a number of ponzi schemes over the years which have cost USA citizens their jobs, their homes,their retirement plans and maybe some turned to suicide.

Charles Krauthammer calling Social Security Insurance a ponzi scheme makes him look quite dumb.

A Ponzi scheme is based on fraud. The operators of the scheme deceive the participants, telling them that their money is being used to make real or financial investments that have a high return. In fact, no such investments are made, and the operators of the scheme are simply paying high returns to the early participants with the funds put in by the later participants.

A Ponzi scheme has to grow—and grow rapidly—in order to stay viable. When its growth slows, the early participants can no longer be paid the returns they expect. At this point, the operators disappear with what’s left of the participants’ funds—unless the authorities step in and arrest them, which is what happened with Charles Ponzi in 1920 and Bernard Madoff this year.

No one has lost one dime on Social Security Insurance since the inception. In fact millions have enjoyed the supplement. Take for example the victims of the Reagan/Bush home loan scam,Bush/Cheney home loan scam,ENRON investors,Dot Com investors and the 11 million Bush/Cheney put out work will be damn glad Social Security Insurance and Medicare Insurance are on the planet.

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Ron Holzwarth 2 years, 7 months ago

The phrase "in 20 years" occurs twice in the column.

That means one of two things.

1) That things will continue on as they have in the past. That is why so many people invest into Ponzi schemes. That is, it's been going on this way and will continue to do so because it always has. That means that the writer used one of the same concepts to sell the story that the Social Security system appears to be doing.

2) The writer is able to accurately predict the future. That's amazing.

One big change that has been being made to the Social Security system for many years now that most people don't seem to be aware of is that the COLAs have not been keeping up anywhere near with inflation.

A problem began to develop in the 1990s, and so the definition of inflation was changed. It's all about core inflation, I don't want to rehash it here. Apparently that was done so that the government doesn't have to pay out so much in COLAs, the public won't realize what's going on, but mostly in order to make it appear that T-bills are much more valuable than they actually are.

Sure, there will be changes made to the Social Security system someday. But they will be rather slow and ponderous, or it's also possible that they will be very quickly changed by reality, rather than by any considered action by the government.

Here is a very real problem: Senior citizens as a group are a very big voting block, and the percentage of them that actually do go out and vote is among the highest of any group. Very few of them are going to vote for a candidate that is going to reduce their benefits. The problem is that if a politician loses that voting block, he's not very likely to win the election.

I believe that the present system of understating inflation will continue, but that's not enough to solve the problem long term. Means testing and raising the retirement age is very likely to change it enough to push the problem on down into the next few generations.

Of course the Social Security system is going to end one day for one reason or another. The end of the world, World War III, or the collapse of the US government are all possibilities. Every republic that has ever existed has failed sooner or later. I believe that the Romans have lasted the longest so far, with about a 1,000 year history. But some will take issue with that very quickly, and point to some of the Asian countries. But those are monarchies and not republics, and most of the dynasties didn't last in a continual succession for a thousand years. I believe, but am not sure, that that the longest lasting monarchy was the Peacock throne of Persia, which lasted about 2,000 years.

There is only one way for a democratic republic such as the USA to survive long term. And that is for enough citizens to very well educate themselves on the issues and then:

Vote very wisely.

Very few do that. Do you?

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BornAgainAmerican 2 years, 7 months ago

As always, Krauthammer is spot on. The Republicans have offered plans that will save SS and Medicare. The Dims are playing politics with Mediscare and their objections to SS changes. It seems they are in favor of maintaining the status quo and letting these programs die an abrupt, natural death. Who is being inhumane here? The Rs who want to save these social programs with changes or the Ds who would maintain the current programs and cause extreme hardships for seniors when these programs ultimately and abruptly collapse?

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OutlawJHawk 2 years, 7 months ago

Wow. This piece was right on. I am enlightened for reading it.

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scott3460 2 years, 7 months ago

Handing the program over from the government (us) to the thieves (banksters on Wall Street) is clearly not the answer, yet the solution favored by the right wingers whose policies have created and sustained the current economic difficulties.

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