Sunday, January 25, 2009

Social Security a Ponzi Scheme?

There is a common argument against Social Security that I addressed in another thread elsewhere and decided to reproduce here:

"If your parents and grandparents invested the money they put into SS into conservative funds they would have three times the income when they retired"

You could say the same about your welfare taxes, and it would be just as irrelvant. SS isn't an investment program or a pension, so it is inappropriate to compare it to them. It is a form of social insurance, a welfare program for old people if you like. As welfare programs go, its one of the more defensible. After all, we all get old, and those that don't aren't in a position to complain.

The comparison of social security with ponzi schemes is ignorant, and those who claim knowledge of actuarial science says otherwise are bloviating out of their bungholes. The very fact that we actuaries (ACAS, MAAA, 1994) study SS and attempt (succesfully to date) to keep it solvent proves its not a ponzi scheme, since one of the things that make ponzi schemes what they are is a complete disregard for the solvency of the program. They begin with a business plan certain to fail. That is simply not true of SS.

Now it is true that many politicians talk about SS as if it were a pension plan (if they say "trust fund", turn your skepticism way up), and we should all be more vigilent in holding their feet to the fire for doing so. But, with apologies to Quentin Tarantino and Samuel Jackson, that's not remotely the same thing as a ponzi-guy like Madoff lying to investors. It's not in the same ballpark, its not the same leage, it's not even the same fucking sport. The sport here is people ideologically predisposed to oppose government programs grasping at straws to attack social security.

SS paid a group of retirees the moment it was created. No ponzi scheme ever did that.

6 comments:

Luke said...

My wife used to say that whatever we paid in SS taxes was worth it to not have her mother move in with us!

I do wish they would stop the "trust fund" scam, which was a Reagan-era tactic to shift more tax burden on to low-to-mid income workers. Let's just make it a current revenue program and drop the tax to an appropriate level. That would be an immediate stimulus where it is needed most. Or, phase out retirements benefits in favor of comprehensive disability, including long-term care. (LTC is going to be the real shocker with the boomers.)

I used to work with actuaries when I wrote life insurance software. They were a fun bunch, about as nuts as software developers.

ScienceAvenger said...

Luke,

Yes, the Reagan plan treated SS like a pension instead of a government program, and now they have IOUs instead of money, and the government just has more debt. It shouldn't be this difficult.

Bill Woessner said...

The very fact that we actuaries (ACAS, MAAA, 1994) study SS and attempt (succesfully to date) to keep it solvent proves its not a ponzi scheme

Social Security has been kept solvent by increasing the tax rate 520% since inception, increasing the tax base 141% beyond inflation and cutting benefits by increasing the full retirement age.

It's pretty easy to keep your Ponzi scheme going when you can continually force people (at gunpoint) to invest more and more money with you. It's even easier when you can unilaterally decide to lower the promised returns.

ScienceAvenger said...

Bill, you undercut your own argument. The changes to the social security program that keep it solvent is proof that it is not a Ponzi scheme. Whether it is voluntary or not is completely beside the point.

Bill Woessner said...

The changes to the social security program that keep it solvent is proof that it is not a Ponzi scheme.

How's that? You say you have a background in mathematics, so let's see that "proof".

Are you claiming that Social Security is not a Ponzi scheme because it's solvent? Madoff's Ponzi scheme was solvent right up until the time that he was arrested. He wasn't caught because his Ponzi scheme wasn't solvent. He was caught because his sons turned him in (quite possibly to cover their own butts).

Or are you claiming that the government's ability to unilaterally increase the tax rate, increase the tax base and lower benefits is what disqualifies Social Security from being a Ponzi scheme? I guess I can give you that, even though it's a completely arbitrary distinction. After all, if Bernie Madoff were able to force every worker in the United States to invest increasing amounts of money with him while simultaneously lowering his investors' returns, I suspect his Ponzi scheme would still be solvent.

ScienceAvenger said...

Bill,

It's not a matter of math, it's a matter of English. From Dictionary.com:

Ponzi - a swindle in which a quick return, made up of money from new investors, on an initial investment lures the victim into much bigger risks.

None of that applies to social security - it's not a swindle (that is, deception is not integral to it), there are no investments, and therefore no returns, quick or otherwise, and no investment risks. It's a government program, the same as welfare or crop subsidies or any other: taxes are collected from some, benefits paid to others.

I suspect from your use of language (the "at gunpoint" phrase is a red flag) that you are one of the people I mentioned at the end of my original piece, ideologically predisposed to oppose government programs grasping at straws to attack social security.

That's poor strategy, certain to lose you credibility in the marketplace of ideas. Better to attack it for what it is, a government social insurance program that has been mismanaged and manipulated by politicians (lockbox my ass) that needs to be righted.