I’ve looked up a few definitions of what a Ponzi scheme is. This one is from an excellent source. The Securities and Exchange Commission defines a Ponzi as:
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.
Does Social Security constitute a Ponzi based on that definition? I think it does.
There are two ways to look at this:
I) If there are no changes in the current laws regarding Social Security does the projected future financial results support the conclusion that it is a Ponzi?
II) If changes are made to Social Security will the consequence of those changes result in the conclusion that it is still a Ponzi?
(I) is easy to answer. Based on the SEC definition, Social Security is a Ponzi. If you want proof of that go to the Social Security Trust Fund May 2011 report to Congress. On page 10 (of the report) you find the following chart. Somewhere around 2036 (I think much sooner) SS benefits will be cut by 25%. That is the law as it is written today.
Conclusion: Anyone under 45 today is paying for something that they should expect to get 75 cent on the dollar. Clearly a Ponzi.
To answer (II) requires that one make some assumptions regarding what changes to SS are coming. I rely on the recommendations from a variety of sources. Both Republicans and Democrats (including the President) have supported the recommendations made by the Fiscal Commission report. SS has it’s own set of recommendations. “Independent” private groups have made their thoughts public. While it is not clear what (if any) changes are coming at SS, the following covers the options that are being given serious consideration:
1) Gradually raise the age limit to 70.
2) Gradually increase FICA taxes.
3) Change the formula that indexes SS benefits to inflation. The consequence would be to slow the current projected growth rate of SS payouts.
4) Gradually increase the cap on incomes subject to FICA. (Currently $106,500).
Of all of these options the one that has had the most support is to gradually increase the age limit to 70. What does that do for SS on the charge that it is a Ponzi?
Assume I am 65 and getting $2,000 a month from SS. On paper I should die at age 77. By the numbers I will get 12 years of benefits.
Now assume that the age limit is extended to 70. Assume further that this will be effective is 15 years. Based on what we know today the average life expectancy of a 65 year old male will be 13 years in 2026.
This means that a person who reaches age 65 in 2026 will not get benefits for another 5 years (70). That same person will die at age 78. They will get benefits for only 8 years while I get mine for 12. I will get benefits for 50% longer than they do.
Conclusion: Anyone who is under 50 today is getting screwed when that age limit goes up. For those folks, SS meets the definition of a Ponzi.
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Raising FICA makes things worse. Not only would younger workers pay more into the system as a % of their income, they will get benefits for a shorter period of time.They pay more for less when taxes are raised
Conclusion: Increasing FICA taxes is a solution that forces the conclusion that a Ponzi is afoot.
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Changing the COLA formula has lots of support from the “deep thinkers”. I agree that if this were done it would have a very significant consequence to SS over a 30-40 year period.
The desired effect is to reduce the inflation adjusted cost of benefits. I get $2,000 a month. We know what that buys today. In 30 years a retiree will get $4,000 a month, but because of the changes to COLA that $4,000 will have a purchasing power equal to only $1,000 today. This is the objective of the proposed changes.
Conclusion: Changing the COLA formula devalues future benefits versus those receiving them today. Anyone under 40 is going to feel the full brunt of this. For them, SS is a Ponzi.
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Increasing the wage cap is just another way of increasing the current tax burden on workers. Yes, this increase will be targeted to those who make a decent buck, so this is a popular approach. The consequences will be felt by about 10% of all workers.
Conclusion: For those in this group the consequences of #’s 1,2 and 3 are just magnified. I don’t feel sorry for those high-income earners but it’s certain that this group is facing the biggest Ponzi of them all.
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SS is, and always will be, an inter-generational transfer of wealth. By itself that does not have to mean it is a Ponzi. If the total population were symmetrical across all age groups the inter-generational impact would be both fair and reasonable. But that is not what we have in America today. We have a stable population that is rapidly aging. Given that dynamic anyone who is under 55 (and especially those who aspire for a high lifetime income) are going to get hit with the biggest inter-generational wealth transfer in history. For all in that group, SS is a Ponzi. They will pay in more than they get back. The extent that each age group is impacted varies. Those who are not yet born are the ones who will feel this the most.
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I’m not sure if Rick Perry is crazy or just crazy smart. There are 50 odd million Americans who are getting SS checks. That’s a hell of a lot of voters. That’s why SS is called the third rail.
But if Perry asked himself, “How do I win this election?” He could well answer with a strategy that relied on young people who would cheer/support him. He could also look to all those swing voters under 55 who pay a fortune in SS and will not get their fair share back. It's an odd political alliance. But it just might work. Mr. Romney seems to be doing well with the seniors. But he falls flat when he gets to a campus. The base that Perry is chasing after is the same one that got Obama elected.
Note:
In my definition of a Ponzi there has to be intent to defraud. I’m not sure that this condition has been met. Every year for the past five the SS Trust Fund has told Congress that significant changes must be immediately implemented. SSA has not mislead anyone, so no fraud from them. The deciders who looked at these reports and chose to ignore what has been written are probably not guilty of fraud either. But they sure were remiss in their responsibilities.
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Do non-existant entities dream?
Do robots dream of electric sheep?
Bruce,
You err in looking at this from a standpoint of logic and reason. Perry doesn't dislike SS because it's a ponzi or because he cares about the American public. Big government (Perry) dislikes SS because they've spent the excess funds and don't want to pay it back. SS is a just another issue with which to divide and screw the American people.
God that hurt. Bring on the pain. Let's get this done and come out the other side healthy. I have done this on the individual and couple level and while I am not perfect, I promise, it works.
Bingo. The politicians loved SS while it was piling up surplus and giving them free money to play with. This debate started the very instant SS began to drain money away from the politicians.
Not really. GWB proposed giving folks a choice to opt-out of SS in early 2006...just sayin' go check it out.
He wanted to 'privatize' it. What do I mean? You check it out.
Bruce, are you going to blog on SS everyday now? Is this the only topic you've got? Taken as a whole your argument boils down to repeating "ponzi" over and over. You've got exactly nothing. Quote any figures you like. The actuary over at SS says the retirement plan is OK. Compared to him you know exactly nothing.
If you keep this up you'll be reduced to being a gadfly and, just maybe, an embarrassment, just like Leo.
" The actuary over at SS says the retirement plan is OK"
Thanks for the belly laugh dude. Ben Bernanke says "subprime is contained" also. "The check is in the mail" also.
The SS actuary is not a political animal. Unlike Rick Perry he cannot just run his mouth for the sake of attracting votes. If he did his society would censure him. There is actual science in his judgment.
Back when 'W' was trying to 'privatize' SS 'W' tried to muzzle the actuary, because 'W' didn't like what he was hearing. 'W' didn't succeed.
You're speculating about things you know nothing about.
Dude, I would assume you are trolling for a reaction except that you post really cogent stuff sometimes. They are putting IOUs into the account and they are taking the money and spending it for other stuff. As of this year, for the first time, they are paying out more than is coming in.
You need to point me at a whole lot more to help me see it the way you do.
No disrespect intended, I AM JUST TIRED TO HELL OF BULL SHIT.
I'm not trolling for a reaction. The issue is too complicated to put in one reply. I've literally written a book on this already.
First there is equity. People have put 15% of their wages in this, some for 40 years.
Second, the SS actuary says the system has minor problems 20-30 years from now, and when the boomers are gone it is completely in balance again. So any talk of not getting benefits is so much baloney. And your kids and grandkids will get their benefits. I don't care what statistics are quoted by amateurs.
Third, politicians loved SS when it was providing extra funds for them to play with. The instant that reversed, this debate began. This is really what this is all about.
Fourth, if the funds aren't there (and they are) then I say declare the USA in default and attach Federal governments assets (grazing rights, mineral rights, gold, etc.). Under any economic scenario, this account can be settled in full.
There's a lot more, but my fingers have had it.
It would be nice if people would drop the "IOU" meme. That's bullshit, Ms. They are formal debt.
http://www.ssa.gov/oact/progdata/specialissues.html
SS witholdings = current taxes to fund current expenses. How does that situation meet the SEC definition of a Ponzi scheme? For SS, there are no expected returns based on current contributions. Nobody "investing" in SS today is expecting any investment returns in the future, because nobody understands that SS contributions are an investment. Everbody understands that SS contributions are a tax to fund current expenses.
Now - do people worry whether there will be anybody paying into SS when it comes time for them to retire, so they will get at least some retirement benefit?? You betcha. But, with regard to SS, there is nobody worrying whether they will get their principal back, much less the interest payments promised.
Yeah. I think SS is a ponzi scheme.
actually, maybe everyone on ZH, but if you take the way most politicians talk about social security (people have "earned" this money, so it's theirs -- which is true enough, they did earn it, only it was paid right away to someone else ), as being close to what people actually think or can be made to think it is (remember, politicians' livelihoods depend on their being right about what most people think or can be made to think), then most people think or have been taught to think, that they've earned their social security and will get it back some day, plus maybe a little extra, for as long as they live, so help them God.
That is what makes Perry's very public assertion pretty astounding to me politically (however distasteful the rest of his politics may be). Whatever else may be wrong with him, good for him for saying things so there may actually be open (well, what passes for open) talk about what it is, how it got here, and how it and its sibling programs can or can't be fixed going foward.
it's also the most hypocritical "trust" fund ever devised.
I vote for this change instead:
**Let me take my 12.4%+ and have it be required to go to some sort of personal retirement (i.e. - my self directed IRA, SEP, 401k, ROTH, etc.).
Let me take my 12.4%+ and have it be required to go to some sort of personal retirement
GW tried to do something like that in 2006. He got NO support from the re pub. party leaders, the Dem's demagogued it as a terribly risky. The MSM backstopped the Dem's by covering the story as if nothing was wrong with SS, it was just fine waaaaaaaaay into the future as far as the eye could see.
I just assumed GW was a corporate whore trying to herd our money to the slaugher to be harvested for bankster bone-uses on Wallstreet and dismissed this effort as another of his crimes. Good God, could that boy have been trying to do the right thing on this issue. Holy Shit!
Banks played "screw your neighbor". Wall street Played the songs "love the one your with" and " love ya two times".
SS was merely a deminishing return theory of making Paul (who works) to pay Peter,(who is retired) The scale is out of balance and creating a little issue, or many billions.
Imagine if you could save a portion of your earnings every month and as that savings grew it would retain it's purchasing power and remain unmolested by and even unknown to the government.
What store of value meets this criterea? Hmmmmm.
why do you think we bought the afghan poppies? "unknown" to the government.
Fine cuban cigars, if you do it right.
I am not certain, but I think you are mistaking the intent of Social Security. This was a program to allow every one in our nation a chance to live at the poverty line after they were forced to quit working.
It was not an investment scheme to make money. I don't want to be mean or anything, but have you any access to history regarding the industrial revolution to the post WW2 era? You might go back to Dickens and understand child labor and slave labor. Are you just without a conscience?
>Are you just without a conscience?
Statists don't have a conscience: they have no qualms about commiting thefts.
I wonder how many sick children have died after forced social security withholdings pushed their family over the edge. In exchange they might get something 50 years from now.
>You might go back to Dickens and understand child labor and slave labor.
Isn't regularly taking part of someone's paycheck, while threatening to cage them, a form of slavery?
What most zero-hedgers know about the history of labor in USA would fit on the head of a pin. Of course most of them probably never have had to do any labor.
I can give you a long list of "manual labor" jobs I have held: dry wall, painting (admittedly most of my construction experience has been finishing end work), yard service, maid, washing cars, bar tending, waitressing, appliance repair, many different kinds of sales positions. More I won't talk about. I am a professor now. While I cannot say that my Ph.d. is in labor history, I have been exposed to a bit. Your post assumes way too much. I am certain I am not the only one.
You insult those you purport to defend. We are here, and we are pissed.
Do you take it back?
What you know about most Zero-hedgers would probably fit on the end of your prick. Which I'm sure is very small.
You should re-read the article as it is simply indicating that you will put more money into the system than you will get out. The current generation on SS is barley making ends meet and they get more out of the SS system than they put into it.
What does SS have to do with child labor laws and slave labor, are you indicating that these laws were dependent on SS?
The entire problem with SS is that it used a higher mortality rate. It expected most of us to be dead before we could collect it, and those that did would not be drag on the system because on average they would not collect for long. Adjustments to the retirement age is simply another way to make sure more of us are dead before we can collect, and those that survive will collect for less years. Although this maybe "a program to allow every one in our nation a chance to live at the poverty line." It was also a program DESIGNED to allow the lucky few survivors to get a percentage (the government was always suppose to get its percentage) of a benefit contributed at the expense of the rest of the population. The rest of the population did not protest because they expected to be one of the survivors but instead they died, and when the current generations complains about the fraud people like you call them unconscionable.
"It was not an investment scheme to make money."
Ever heard of buying power?
Implicit in a Ponzi scheme is that the investor has the power to opt out which you do not with SS..
If you're a Federal or State employee, you can opt out of SS. Actually some aren't eligible for SS since they get "golden parachute"-like pensions.
Uh, no.
The 'opt-out' window was closed in 1984.
The major causes of aging and death are being researched and therapies being introduced at an ever-increasing pace. Sometime around the Kurzweil Singularity (circa 2035?) the population may have more than 1 year of productive life added each year (the Methuselarity). The problem with SS isn't its finances in the long run, it is the philosophical premises it is based on and the economic consequences of those premises. The only way to make SS work in the long run is to acknowledge it as a social welfare program and fairly means and fitness test for it. I am 50, and I think many my age and younger share my assessment.
US population is at stasis -- not going up or down. Read AMERICA ALONE. Bad news for SS and people on it, over time.
When the boomers begin to kick, US popuation will decline, unless illegals swarm to what now are US shores. Won't need SS and likely new residents aren't goint to stand for it.
Immigrants, legal or not, are here for what they get for themselves, not what they can give to "old people".
And anyway, old people aren't the whole story of social security -- a big part of the problem is that when the ADA was enacted, the system sank under applications for very young people who will be on SSI for their lifetimes. (One example: My neighbors' strapping 24-year old could work but doesn't because he got on SS during a time when he drank cases of soft drinks each week and ate bags of packaged junk so had a bi-polar problem that's gone now, since he stopped ingesting crap, but he continues to receive benefits. He's 24 and doesn't work so has no job stress; produced an out-of-wedlock child and she's on SS too -- you do the math.)
The US birth rate's not high enough to keep US pop. from declining when the biggest part of the population (boomers) decline, and new "Americans" aren't likely to want to keep paying for old folks. Soooo, social security looks like a loser, like it or not. Better sooner than later, kill it now. What money there is or will be, will have many better uses. Instead of throwing EVERYONE on SS at 65, let them continue working, lower their taxes so they can save something for retiremet if they decide to retire, but keep everyone working productively as long as possible.
US population is at stasis -- not going up or down. Read AMERICA ALONE. Bad news for SS and people on it, over time.
When the boomers begin to kick, US popuation will decline, unless illegals swarm to what now are US shores. Won't need SS and likely new residents aren't goint to stand for it.
Immigrants, legal or not, are here for what they get for themselves, not what they can give to "old people".
And anyway, old people aren't the whole story of social security -- a big part of the problem is that when the ADA was enacted, the system sank under applications for very young people who will be on SSI for their lifetimes. (One example: My neighbors' strapping 24-year old could work but doesn't because he got on SS during a time when he drank cases of soft drinks each week and ate bags of packaged junk so had a bi-polar problem that's gone now, since he stopped ingesting crap, but he continues to receive benefits. He's 24 and doesn't work so has no job stress; produced an out-of-wedlock child and she's on SS too -- you do the math.)
The US birth rate's not high enough to keep US pop. from declining when the biggest part of the population (boomers) decline, and new "Americans" aren't likely to want to keep paying for old folks. Soooo, social security looks like a loser, like it or not. Better sooner than later, kill it now. What money there is or will be, will have many better uses. Instead of throwing EVERYONE on SS at 65, let them continue working, lower their taxes so they can save something for retiremet if they decide to retire, but keep everyone working productively as long as possible.
So now we have to examine SS in light of the "Kurzweil Singularity"? I put that right in there with flying cars and artificial intelligence. Why don't you guys debate whether or not the Vulcans had a government sponsored retirement plan? Did Issac Asimov like SS? Beats me.
LOL.
If it were voluntary you might get to sidestep some of the Ponzi definitions. Terrible return on investment in the long run. I would SOOO rather have the money to save...say as shiny stackables...than as some untrustworthy Trust fund. Bah...just another tax for my generation.
Billy I had the same observation as you. He says there is no "intent to defraud", but my counter to that is there is also no CHOICE on whether or not to "invest" in social security. The fraud is in the very nature and structure of the system of confiscation and redistribution. The fraud is that "they" claim to have set this system up for OUR benefit. Perhaps that was the intent in the 1930's but now it is just another friggin' tax. The only way to make it fair is to make it voluntary and private. Return my money to me, and let me open a self directed IRA with it. Cease any payroll deductions for FICA and Medicaid too while you're at it.
By the way, when does MY labor translate into MY money. Because isn't being forced to work without compensation slavery??? But I only ever get to see about 65% of what I earn. The tax fairy beats me to it every time. So if the payroll taxes (including FICA) come out of my check, is it fair to say it was MY money? If not, then they must admit that they have enslaved us via payroll deductions. If so, then when does my legitimate claim to it end? Can we legitimately sue the SSA for fraud? After all, if they had a contract (Bonds for example) and only delivered on 75% of it wouldn't they be in default. If I have no legitimate claim, then what is the piont of any of this. Let's call it what it is, theft. Let's say we will stop making payments to anyone under 50 and take all the SS funds and pay off the debt with it. Oh, wait, they already put it in the general fund and spend it to reduce the amount of debt issued??? So there is no fund? Where is the money then? There is no money!?!?!?
FACE IT FOLKS, WE ALL KNOW SS IS A COMPLETE RIPOFF!!! Anyone who says it isn't is a LIAR, just like Perry said. I'm not much of a fan of Perry (yet?), more of a Ron Paul guy, but at least when Rick Perry says what we all know people's ears perk up. Ron Paul says something and the media bury it.
Sorry for the rant, didn't mean to...never do, it just happens...
Rant on. Facts are facts, not bullshit.
IMHO the intent to defraud part comes into play when politicians steal the surplus every year yet say the program is still solvent.
Lots and lots of green arrows and such for you. I am so hopping pissed mad. If they did not steal the money and do other stuff with it, Bruce may not even be asking this damn question. THE MONEY WOULD BE THERE.
This topic, like no other, gets me hopping mad.
I give and try to tell myself it is the old peoples' charity. I could stomach this if they LEFT THE DAMN MONEY ALONE INSTEAD OF STEALING IT AND LEAVING IOUS.
I don't have names with enough venom. AUUUUUGH!
I'll be 67 in November. I DON'T WANT CHARITY!!!
I want to keep my own money and do what I want with it and I want everyone else to do the same.
PLEASE kill social security---if nothing else it's an obnoxious drag on younger families' ability to take care of themselves.
Ms, what distinguishes debt held by the SSTF from that held by China is everyone's easy assumption that the SSTF is going to get ripped off--by selective default--while China is not. The money is "gone" for both . . . but that's how goverment debt works when the money is spent and the debt not retired.
I hear a bunch of bombastic pre-school boys making authoritative declarations that the "money is spent," "it's a ponzi" and the debt is "just IOU's." Pretending that their unyielding stance and blind certainty make their position unquestionable. And they impress one another a lot. I'm reminded of the burbing and farting contests of childhood.
It's a crock. One spectacularly popular among the finance crowd . . . who stand to gain either by not having to cover that portion of their national indebtedness or by shitting on people they hate.
Nothing more clearly reveals the fundamental sociopathy of finance people better than this subject. I wish they were a different species from the banksters. As they so fervently imagine themselves to be.
But this incessant bullshit demonstrates otherwise.
It's apparently an attractive brew though.
Social Security as explained to me...
Thanks. I told you I like your posts. I will stay open and try to listen more deeply. The underlying assumptions (SS not paid, China paid) are indeed ones I have not examined.
There's one we don't hear too often--"I'll rethink my position." Especially on this subject!
Hey, you made my day, Ms!
http://www.ssa.gov/oact/progdata/specialissues.html
Isn't being forced to work without compensation, slavery? Yes.
65%
You aren't Warren Buffet's Secretary are you? j/k
What about the people who are on ss for helth or what ever. I read some place that, that number could be in the mm of people under 65.