I received a few great comments. Since a lot of these responses were too long to re-comment, here they are.

#1 by JJ Skittles on October 15, 2009 – 1:32 pm

Interesting thoughts, and interesting site! I’d like to see your opinions a little more frequently, and I’d be curious to hear your opinion on how Social Security is similar or different than a Ponzi scheme. Are we just using today’s money to pay for yesterday’s workers, praying the money won’t run out, or is it more complicated?

Thanks for the kind words! See below for my thoughts on comparing Social Security to a Ponzi scheme. I think it’s more complicated than praying the money doesn’t run out since Social Security is run by the same people who run the printing press!

#2 by Scott on October 15, 2009 – 3:00 pm

SS is not a ponzi scheme for a number of reasons:

1) A ponzi scheme enriches all of the people who pay in an equal return (unless they are the one’s that get nothing back–i.e. they got in too late.) SS will give the highest contributors a lower return (about 1% APR I believe) while giving people with lower contributions much higher returns and people who become disabled huge returns.

Scott – Social Security might not be a Ponzi scheme by definition, but it’s pretty much the same thing. Close enough that I’d still call it a Ponzi scheme. However, I agree with most of your arguments.
1) A Ponzi scheme doesn’t need to pay each person an equal return. Although it’s often the case, it’s not a necessary condition. It would be interesting to see the expected APR of SS – especially if the odds of survival until payment are accounted for. I’d actually expect it to be much less than 1%, I’d expect it to be negative.

2) Ponzi schemes do not force you into them. This is why SS “contributions” should be called taxes, because the correlation between contribution and benefits is poor.

2) Same as Point 1, voluntary is not a necessary condition, although it often is the case. Like any Ponzi scheme, SS relies on the assets of new investors to make payments for the old investors. Since the SS trust fund is full of IOU’s, it relies on new money. I agree with your point about calling SS a tax and not a contribution. We all know what would happen if somebody decided that they no longer wanted to contribute.

3) Ponzi schemes don’t bet on people dying before they become too much of a burden on the system. The only reason SS is collapsing is because the average life-span has increased more than the people who made it thought it would. Essentially SS was a bet that enough people would die before they collected more benefits than the “contributions” would cover. Ponzi schemes ALWAYS collapse because they don’t last long enough for death to be a significant factor.

3) Ponzi schemes don’t bet on people dying, but SS wasn’t supposed to either. People dying early is just an added benefit! Even if it were the case that SS is a bet on people dying early, SS would still fail. As could be expected, the government was unable to properly assess increasing life expectancy. If a non-government entity were to make the same mistake, it would fail. Other companies don’t have access to the beautiful money-spouting machines that the government does.

4) I doubt SS will die, politicians will find a way to increase “revenue” by stealing more money; and decrease benefits by only reducing to those people they feel don’t “need” their money back. Unless the whole country collapses, SS will just become more and more like welfare, only for the disabled (and that doesn’t take much to qualify for under SS) and the elderly.

4) I’m not too sure on the life expectancy of Social Security, but I believe that it will survive. It won’t be the same beast as we know it, but it will survive in some form as long as the same federal government does. I agree with most of your point except with the piece on reducing benefits. SS taxes will go up, but I’d be surprised to see a decrease in “benefits”. It’s more likely to just become an entitlement program where the government prints enough money for any “benefits” not covered by the existing funds.

#3 by cdg on October 15, 2009 – 5:50 pm

The annual social security benefits increase (as well as adjustments to various income tax rates) is based on an artificial “cost of living” index, which is NOT representative of true costs. It is particular hurtful to those who rely on social security and disability benefits. Their basic costs (food, utilities, rents, medical) have sky-rocketed this year, while the government reports demonstrably fictitious inflation rates.

cdg – Your complaint should be with the way that Social Security payments are calculated, not with the $250 payment. I agree that CPI is often a horrible one-size-fits-all approach to estimating changes in cost of living. However, as per the current law, CPI is the only factor in Social Security payments. You should be a happy a clause was written in saying that payments can’t be reduced!

I think the underlying problem is not that people need the SS money because they are relying on SS. The problem is that the government has created a system where people are no longer able to provide for themselves.  With the SS safety net in place, the people that would otherwise be able to provide for themselves often choose not to. Rather than spending and planning accordingly throughout their lives, people are free to spend away and not save. Why depend on savings when the government will bail you out? It’s a very similar symptom of what happened to the banks.

The Democratic majority in Congress voted themselves a large raise last year, citing increased costs as their rationalization. Of course, they use a different cost-of-living index than the Social Security Administration and the IRS. The latter two use an index which is much lower than the actual inflation rate, so that Congress can pretend that benefits and tax rates are indexed, without impacting government revenues.

Comparing the wage raise in Congress to the lack of a wage raise in SS is an interesting point.

Obama (and others) have acknowledged the inaccuracy of the COLA by suggesting another $250 payment to cover increased costs. It won’t even come close to covering the true increase in the cost-of-living for seniors, but it’s better than nothing. It can be paid for by reducing government spending in other areas (for example, goverment staff including “czars”, endowments for studying porcine flatulence, and $2,000,000 trips to NYC for dinner and dancing.

Social security is a Ponzi scheme, but we still owe something to those who were forced by the government to participate.

Obama wasn’t acknowledging the inaccuracies of COLA by suggesting another payment. He was acknowledging his desire to have another four years. I agree that there are many places where government can cut spending, including the unconstitutional czars and outrageous expenses, but those savings won’t come anywhere close to paying off the almost 100 trillion in liabilities the government has built up. Imagine if they used the same GAAP that they required all public companies to use… instead of the 1+ trillion deficit, we’d be looking at 10+ trillion. Not that the word trillion means anything anymore.

I completely disagree with your argument that “we still owe something to those who were forced by the government to participate”. I don’t owe anything to them. I didn’t promise to provide their retirement payments – although I’ll probably be forced to anyway.